A key note speech given by Peter Kell, Deputy Chairman of the Australian Securities & Investments Commission (ASIC), at the Mortgage and Finance Association of Australia (MFAA) national conference in May 2014 set out ASIC's priorities in the consumer credit area and provided some insight into what this means for industry participants.
Peter Kell confirmed that ASIC's areas of regulatory focus in relation to consumer credit are currently:
- Responsible lending
- Loan fraud
- General licence obligations relating to conflicts of interest, and
- Property investment and lending through self-managed superannuation funds (SMSFs).
While ASIC has previously outlined its regulatory focus in other publications, the speech by Peter Kell provides some specific examples and a better understanding as to the rationale behind ASIC's regulatory focus. The full speech can be viewed here.
In relation to each of the 5 areas of regulatory focus, some of the more interesting observations made by Peter Kell are:
ASIC is taking a proactive role in monitoring advertisements to identify potentially false or misleading representations.
Regulatory Guide 234 (Advertising Financial Products and Advice Services (including credit): Good Practice Guidance (RG234)) is the document ASIC is using as its base when monitoring and assessing advertisements.
ASIC is taking a stronger approach where it identifies misleading advertising. Peter Kell stated that allowing industry to simply correct advertising after the fact does not always provide a sufficient incentive to get it right in the first place. Hence, the greater use on ASIC's part of infringement notices and enforceable undertakings in instances where false or misleading advertising is identified.
Peter Kell also noted that ASIC is looking at taking more civil penalty actions in this area.
2. RESPONSIBLE LENDING
Peter Kell reaffirmed that the focus of responsible lending is about ensuring consumers are not simply put into any loan, but only enter into loans which they can afford given their financial circumstances and broader requirements and objectives.
The existence of a number of reports on different aspects of responsible lending was noted. He also foreshadowed that ASIC's latest report on "review of lenders' responsible lending conduct, focusing on "low doc home loans" will shortly be released.
Peter Kell gave some compliance tips for credit licensees including:
- Giving consumers details of the information relied upon to make the credit assessment. Peter Kell noted that some licensees are already doing this as it minimises the risk of later disputes.
- Ensuring records of the credit assessment demonstrate a real understanding of the consumer's requirements and objectives and importantly noting the relative priorities where there are multiple objectives. Record keeping is paramount.
- More focus on verifying consumer's "variable" expenses, rather than relying upon pro forma standardised expense indices.
- Ensuring the use of adequate buffers, to take account of the fact that consumer's financial circumstances may change.
Realistically, all the above compliance tips probably do no more than re-state what basically are prudent lending practices, but it is good to get an indication of what ASIC regards as important in this area.
3. LOAN FRAUD
Peter Kell emphasised the importance of identifying loan fraud and removing offenders from the market and criminally prosecuting fraudulent operators.
4. GENERAL LICENCE OBLIGATIONS RELATING TO CONFLICTS OF INTEREST
Peter Kell identified that ASIC's current focus is on the motor vehicle finance sector with add-on insurances, where ASIC has identified that flexible commission arrangements can lead to conflicts of interest.
A report on ASIC's findings in this area is likely to be published "in the not-too-distant future". A particular area of concern of ASIC is that loan terms can be significantly extended where insurance is involved, so that consumers can then afford the repayments under the loan with the various add-on insurances.
5. PROPERTY INVESTMENT AND LENDING THROUGH SELF-MANAGED SUPERANNUATION FUNDS
Peter Kell reinforced ASIC's previously published concerns
about this area.
ASIC has recently started taking a closer look at potential risks associated with "one-stop shop" business models where consumers are encouraged to utilise the services of one organisation (group) to:
- Establish a Self-Managed Super Fund (SMSF)
- Source and purchase an investment property
- Finance purchase of the investment property.
ASIC is of the view that there is potential for there to be a
conflict of interest and the giving of compromised advice in that
Additional concerns were also expressed in relation to:
- Potential breaches of credit legislation with regard to SMSF lending
- The inadvertent provision of unlicensed financial advice.
Key note addresses such as the one delivered by Peter Kell at the recent MFAA national convention provide handy insight as to the views of regulators and are often used to foreshadow in greater detail ASIC's regulatory approach and its priorities in this area in the near future.
All credit licensees need to be mindful of these priorities and to review their practices and procedures to ensure that they do not attract the ongoing interest of ASIC.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.