ASIC has opened consultation on the much-awaited revision of Regulatory Guide 209. It is believed that banks have been quite instrumental in finally forcing ASIC’s hand. In short, the industry wants more direction and less prosecution.
This has prompted several different discussions, the main one being the difference between rule- based regulation and principle-based regulation. Unfortunately, nearly 20 years ago ‘clever’ financial institutions around the world prompted a culture amongst financial regulators of moving away from hard rules.
Institutions could tick the boxes on the rules and meanwhile smashing the spirit of the law. Consequently, regulators moved to a culture of principles, whereby they give you a loose set of principles to follow and it’s up to the participants to decide what those principles mean. What this means is that regulators are incredibly reluctant to go back to any kind of checklist approach for ‘how to do’ Responsible Lending.
That said, the consultation paper that has gone out from ASIC shows that, ASIC is clearly thinking how it might be able to create a compromise. So, while brokers and lenders might be disappointed, they equally might get some rules to follow.
Another item which we think is significant is that statistical benchmarks such as HEM are specifically being contemplated for inclusion in the new RG 209. QED’s Director Greg Ashe has long cautioned the industry about completely throwing out benchmarks as a useful tool for verification of living expenses.
Greg recently presented at to the Responsible Lending and Borrowing Summit held in Sydney where he put forward two main themes. One was that there will always be some circumstances where comparing an individual borrower to their peers is an appropriate means of taking reasonable steps to verify their living expenses. Another theme that Greg put forward was that in concentrating too much on the words in the law i.e. in this case, “THE Consumer”, we run the danger of forgetting what the ultimate outcome is, which is to ensure that we don’t put a consumer into a credit commitment they can’t afford.
Therefore, don’t focus so much on the consumer and that HEM is not about “THE Consumer”, that is merely the journey that gets us towards the end goal. The focus should be on the actual goal, which is to ensure that we don’t put people into contracts they can’t afford.