QED Risk Services’ Director, Greg Ashe, the mortgage broking industry’s number one compliance services provider, met with senior managers of the Australian Securities and Investments Commission (ASIC) Credit Licensing team this week. During discussions, Greg asked ASIC if they are heading towards insisting on greater procedural detail from Credit Licence applicants on the verification of living expenses. The response he received was even more detail than expected.
ASIC expects that ALL credit participants will seek bank statements and credit card statements from consumers in order to verify their expenditure, not just lenders.
At QED, we have two main questions that come to mind in this context. Firstly, what will such a requirement do to the efficiencies gained in the credit process over the past 30 or so years? The highly skilled, algebraic automation of credit over this time has meant cheaper credit for consumers and higher returns for bank shareholders.
Secondly, we wonder what perceived benefit would be gained. Despite some difficult times economically in the recent past, loan portfolio default rates are at levels that are considered generally acceptable in the context of the past 100 years. This lack of stress would suggest that consumers are not currently being forced into substantial hardship by current practices.
Chapter 3 of the NCCP Act requires that participants (e.g. brokers and lenders) must “take reasonable steps to verify the consumer’s financial situation.” This requirement does not differentiate between income and expenses. Indeed, Chapter 3 of the Act makes a clear distinction between “enquiries” and “verify”, implying that they are two distinct processes. In the significant 2014 Federal Court case of ASIC v The Cash Store, neither did the judgement differentiate between income and expenses with respect to verification.
For Small Amount Credit Contracts (SACCs – which ASIC insists on calling payday loans) the NCCP Act changed in 2013 to specifically require lenders to seek 3 months’ bank statements from a consumer. This was only for SACCs, not all credit. It now appears that ASIC believes “reasonable steps” means doing the same thing for all consumer lending.
Certainly not all cases are the same. There will be times when a broker needs to do more for reasonable verification, but these cannot possibly be built into a black-and-white procedure. This is the value that brokers add to a consumer. By getting to know the client, the broker understands where the client needs more assistance and care.
However in many cases, the industry widely holds the belief that, in many cases, if a consumer states they spend $X per month and we verify that that amount is commensurate with what we would expect by comparing what the consumer tells us with generally accepted benchmark figures, that is “reasonable steps to verify”.
Apparently ASIC does not share the industry’s view. We are all on notice. To comply with ASIC’s view we will all need to modify our Compliance Programmes to demonstrate the responsible lending obligation is being met in a way that satisfies the corporate regulator.