Although recent ASIC enforcement action and the Royal Commission have predominantly focused on the lending practices of the major banks, it would be foolhardy to assume that non-bank lenders are not a focus. Patterns emerging teach us that they are the next focus.
How do we know this?
Well, ASIC’s modus operandi is to first investigate potential regulatory issues within big targets - where misconduct is widespread and evidence is easy to find. This serves as a learning exercise, helping ASIC to ascertain the nature and scale of misconduct, and what to look for.
Investigation complete, ASIC generally releases a report on its findings and concerns. You’d expect that diligent compliance teams would read those reports, look within for similar problems, notify ASIC of any breaches and start a clean-up.
That’s what ASIC hopes for too. But, if no one falls on their sword - and the past few years have demonstrated how reluctant licensees are to do so – ASIC brings out the big guns of enforcement.
Naturally, they’ll start with the banks, who’ve proven to be easy to make examples of.
But here’s the rub. By the time that work is nearing completion, ASIC has a template for investigating smaller players. They know what to look for, where to find it, what questions to ask – and they have a standard methodology for doing so.
It goes like this:
If ASIC finds breaches which haven’t been voluntarily reported, enforcement action will follow, as night follows day.
So reading the tea leaves to be found in ASIC’s Corporate Plan for 2017/18 to 2020/21, its Enforcement Outcomes report for Jul-Dec 2017 and the carnage emerging from the Royal Commission, here’s a snapshot of what non-bank lenders should be looking for in their businesses - because if you don’t ASIC will!
Responsible lending is ASIC’s priority
Essentially, ASIC wants to make sure consumers haven’t been put into loans they can’t afford, don’t understand or that don’t meet their needs.
As part of its focus on credit, ASIC will be looking at brokers who do not arrange loans responsibly and lenders who do not lend responsibly.
Brokers are expected to assist consumers to decide whether they can afford a loan, and if they can’t, help them to find a realistic method of achieving their goals. And lenders must not lend to customers if they cannot afford to repay.
ASIC has made it clear that it’s not sufficient to use the HEM as a proxy for actual expenditure. Verified evidence of actual revenue and expenses must be sourced and analysed.
Although home loans and personal loans are not immune, ASIC is especially concerned about interest only home loans, car finance and high risk lending products such as pay day loans and consumer leases.
And it’s taking a particular interest in reverse mortgages. Brokers and lenders must ensure that reverse mortgage borrowers, who are typically older people at or near retirement –understand the costs and implications of taking out these products.The minimum requirement is for these borrowers to be given a Reverse Mortgage Information Statement, and taken through the Reverse Mortgage Calculator in person.
ASIC will take a hard line on unfair or fraudulent conduct
ASIC is preparing to get tough on lenders and lease providers using unfair contracts. It has recently warned lenders to ‘fix up’ unfair contracts immediately or face legal action. Some lenders have already paid heavy fines, refunded repayments, written off debts or contributed to community programs. Others have lost their credit licence.
Lenders are now expected to have systems in place to identify and reduce the risk of loan fraud. This follows some egregious fraud cases - where brokers either turned a blind eye to obviously forged or false documentation, or, worse still, falsified information for clients to increase the likelihood of their application being accepted.
The jury is out on mortgage broker remuneration
It’s a simple truth that commissions and other financially based incentive schemes have a propensity to incentivise brokers to recommend loans. After all, brokers don’t get paid if no loan is arranged.
Frustrated with its lack of progress in encouraging responsible lending practices through enforcement action, ASIC has taken the radical step of recommending that the industry move away from incentives that create conflicts of interest. And it looks like this will be loudly echoed by the Royal Commission.
Credit repair is also a focus
In a move that is widely welcomed by lenders, ASIC is prepared to take action against companies that charge consumers exorbitant fees to clean up their credit history or who put them into insolvency rather than negotiate hardship arrangements.
In the second half of 2017, ASIC’s enforcement actions resulted in criminal penalties, civil remedies, enforceable undertakings and administrative action, demonstrating the breadth of its powers.
If you’re not sure whether your business is at risk, or if you receive an ASIC notice, it’s best to get on the front foot. Having helped many financial advice firms with breach and enforcement matters, The Fold’s regulatory experts can assist you to do so. Contact us, we’re always happy to help.
Author: Claire Wivell Plater