Responsible lending leeway ‘put to the test’ by COVID-19

In December, the Australian Securities and Investments Commission (ASIC) published updated guidance (RG 209) on responsible lending obligations under the National Consumer Credit Protection Act 2019.

ASIC maintained a principles-based approach to its guidance, which it said would “support flexibility for licensees” while also providing greater clarity in response to uncertainty arising from the banking royal commission.

However, the COVID-19 crisis has since raised new questions around the limits to the flexibility offered by ASIC in its new guidance amid growing uncertainty regarding borrower serviceability, particularly for customers employed in high-risk sectors.

This uncertainty has prompted a number of lenders to lower their risk appetites and tighten their credit policies to ensure they remain compliant with their legal obligations and manage the deterioration in credit quality in lieu of expectations of a spike in defaults.

During a panel discussion hosted by the Financial Services Institute of Australia (FINSIA), ASIC chair James Shipton said the current crisis would be a litmus test for the way in which lenders apply their discretion when assessing a borrower’s suitability for a loan.

“Ultimately, we believe that there has always been enough inherent discretion and flexibility in those largely principles-based obligations for lenders to apply their best discretion in different circumstances,” he said.

“In effect, that principles-based obligation is now being put to the utmost test.

“We believe that it still provides enough flexibility for lenders to exercise their good judgement, their professional judgement, in order to make the correct decisions because that correct decision will ultimately be a credit one, and that is a credit and commercial decision by the banks and the lenders, which of course is theirs to make.”

He added: “We believe, particularly with the reinforced clarifications that we’ve had in recent times, that we certainly allow enough inherent flexibility in those principles-based obligations so that lenders can hopefully make the right decisions, considering all the prevailing circumstances more broadly and specifically about the borrower, their customer.”

On enforcement 

Since the onset of the COVID-19 crisis, regulators have provided temporary concessions for lenders providing loan relief to borrowers, particularly those deferring repayments.

However, Mr Shipton has warned that while the regulator’s priorities have shifted in response to the COVID-19 crisis, it would continue to act decisively against institutions that breach their legal obligations.

“We continue to investigate, enforce and prosecute breaches of the law where there is significant risk of consumer harm,” he said.

“This is particularly important at a time when the community is being asked to bear a very heavy burden in meeting the economic and social costs of the recovery.

“Past illegal conduct, including behaviour identified by the Hayne royal commission, must continue to be a priority.”

Mr Shipton added: “Swift action must be taken where firms or individuals attempt to take advantage of consumers at a time of heightened vulnerability and financial strain.”

The ASIC chair concluded by calling on the financial services industry to “live up to the professional expectations of the community”.

“More than ever before, we – and the community – expect financial services professionals to perform their crucial roles competently and conscientiously,” he said.

“That is, with the utmost professionalism.”

[Related: Citi adds new layer of scrutiny to loan applications]