HO-HO-HO: ASIC's Christmas Present - RG 209

Following an extensive consultation, ASIC has updated Regulatory Guide 209 (RG 209): Responsible Lending Conduct, to provide greater clarity and support to lenders and brokers in meeting their obligations. Importantly, ASIC has maintained principles-based guidance that supports flexibility for licensees. RG 209 now has;

  • More guidance to illustrate where to undertake more, or less, detailed inquiries and verification steps based on different consumer circumstances and the type of credit that is being sought. The updated guidance includes new examples about a range of different credit products and different kind of consumer circumstances - such as first home buyers, existing customers, strata corporations, high net worth and financially experienced consumers.
  • More detailed guidance about how spending reductions may be considered as part of the licensee's consideration of the consumer's financial situation, requirements and objectives.
  • More detailed guidance about the use of benchmarks as a way to check the plausibility of expenses, as well as additional guidance about the HEM benchmark.
  • Clarity about more complex situations for some consumers - for example, the different situations of consumers such as income from small business, casual employees, new employees, the gig economy, as well as joint and split liabilities and expenses.
  • A stronger focus on the purpose of the obligations. That is to reduce the incidence of consumers being encouraged to take on unsuitable levels of credit and ensure sufficient, reliable and up-to-date information is obtained about the consumer's financial situation, requirements and objectives to enable the assessment of whether a particular loan is not unsuitable for the particular consumer.

Following is a summary of the new and old RG 209 focussing on reasonable inquiries and verifications most relevant to brokers in their daily operations.

In late January 2020 there will be more operational guidance and key compliance touch points.

If you are really wanting some reading over Christmas, here is the link to the ASIC web site.

https://asic.gov.au/regulatory-resources/find-a-document/regulatory-guides/rg-209-credit-licensing-responsible-lending-conduct/

RG 209 - What has changed?

Even though there are a number of updates in the new RG 209, the segment in regard to making reasonable inquiries and verifications is most relevant to brokers in their daily operations. The new RG 209 provides more specific guidance in regard making reasonable inquiries and verifications in contrast to the old RG 209.

There is detailed guidance on how to make reasonable inquiries and verification in regard to Income, Outgoings/living expenses and Assets. In the old RG 209, there were minimal guidance on outgoings/living expenses but in the new guidance, there are more detailed examples and on the means by confirmations could be conducted.

The following provides a comparative summary between the old and new RG 209 in regard to making reasonable inquiries and verifications.

Income

Old

The old RG provided examples of the types of information you could use to verify a client's financial situation for

PAYG employees

  • Recent payroll receipts/payslips; and
  • Confirmation of employment with the employer (subject to the requirements of the Privacy Act 1988).

For self-employed clients

  • Financial statements;
  • Business bank account statements;
  • Recent income tax returns;
  • A statement from the person's accountant setting out details of the consumer's financial position; and
  • Business Activity Statements.

For all clients

  • Credit report; and
  • Information/reports from other credit providers (subject to the requirements of the Privacy Act 1988).

Bank account or credit card records held by the credit provider (e.g. expenses can be verified by examining account statements over a period of time), and other information held about an existing customer

New

Need to enquire about the income, frequency and source of income and changes that are reasonably foreseeable. It must be determined that the income is consistent and it is likely to remain at the level for the term of the home loan. The source of income must be verified by the following:

For PAYG ('pay as you go') employees:

  • recent payroll receipts/payslips;
  • confirmation of employment with the employer (subject to requirements of the Privacy Act 1988 (Privacy Act));
  • recent income tax returns; and
  • bank statements recording incoming payments.

For persons receiving government benefits:

  • CentreLink statements and bank account statements

For self-employed consumers:

  • recent income tax returns;
  • Business Activity Statements;
  • a statement from the consumer's accountant setting out details of the consumer's actual or likely income levels;
  • financial statements for related business entities;
  • business account statements; and
  • bank statements recording incoming payments.

Outgoings

Old

Must make reasonable inquiries about the consumer's financial situation to find out about the particular consumer's current situation. Therefore, must obtain information about the consumer's actual income, expenses and other circumstances that are likely to affect their ability to meet the financial obligations of the proposed credit contract.

New

Information about client's current Outgoings and the reasonably foreseeable changes to these outgoings must be assessed to determine how much of client's income is available meet the loan obligations and if there is a shortfall whether the client is able and willing to reduce his expenditure to meet the loan obligations. It also must be determined how much of the income the client is able and willing to reduce or forego (if necessary), taking into consideration:

  • Existing debts and liabilities that a client cannot choose to reduce or eliminate; and
  • Essential items such as expenditure is essential to a person living and participating in modern Australian society

The verification of the information about the amount and frequency of payments for Outgoing which are fixed or recurring expenses (amount does not change significantly for a known period) through contracts, invoices or accounts, or bank statements recording relevant transactions, for example:

  • housing (rental, council rates);
  • communication expenses (telephone/internet plans);
  • child support and spousal maintenance;
  • insurance; and
  • regular school fees/child care.

Verification of Outgoings for the variable (amount and/or frequency subject to change). The usual usage and amount, frequency of payments must be confirmed against contracts, invoices or accounts, or bank statements recording relevant transactions, for example:

  • utilities (water, electricity, gas); and
  • regular entertainment or recreation services (pay-tv, sports activities, telephone/internet costs outside plan schedule, gambling accounts).

Outgoings shared with another person

Reasonable information must be obtained to confirm the proportion of outgoings the client is responsible for. Verification must be done to confirm that the pattern of outgoings in the client's transactions statements supports the statements supplied.

Assets

Old

The general position is that the financial obligations must be met by income rather than equity. You must have regard to income produced by an asset and assess information to determine whether any expenditure is necessary to maintain the asset. It must also be considered whether the assets are readily accessible to meet repayments.

New

The general position that consumers should be able to meet the financial obligations from income rather than equity in an asset, remains and that assets are an important part of the client's overall financial situation. If regard is given to income produced by an asset, it will be important that to obtain information about any expenditure that is necessary to maintain that asset (i.e. net income must be considered, not gross income). However, in the new RG 209 it is recognized that sometimes assets might be available to be sold to enable the consumer to meet their financial obligations. Additional information will be needed to determine whether the consumer is expecting to use assets in this way and if so, whether those assets will be sufficient to ensure the financial obligations do not need to be met from outgoings the consumer is less likely to be unable or unwilling to reduce or eliminate.

Overall financial situation

Old

In the old RG 209 there was not much guidance on the process for making an overall financial situation assessment.

New

The Overall financial situation must be assessed through regular and variable income and spending patterns through transaction account statements (both for deposit accounts and credit accounts). In order to accurately determine the overall financial situation of the client, the broker has to:

  • Identify existing debts/liabilities and the corresponding amount and frequency of required payments;
  • Identify types of usual expenditure, amount and frequency of payments;
  • demonstrate savings and positive management of debts, such as full monthly payment of credit card balances; and
  • identify some 'red flag' circumstances, such as regular overdraw fees and default fees on existing debts/liabilities.

Preliminary Assessments

In the old RG 209 there was only guidance on the expectation in relation to the preliminary assessment, but the new RG 209 provides an example of a written assessment to illustrate the kind of information that ASIC considers is useful to meet the objectives of responsible lending.

Reasonable Inquiries

ASIC also provides guidance on what is considered "reasonable inquiries" into a client's requirements and objectives. In the new RG 209, broker's obligations to meet the "reasonable inquiries" term have been expanded to provide further clarification and examples through decided court cases. The inquiries brokers should be making into a client's requirements and objectives are:

a) the amount of credit the client needs, or the maximum amount of credit sought;

b) the timeframe for which the credit product is required;

c) the purpose for which the credit product is sought;

d) whether the client seeks particular features or flexibility, the relative importance of different features to the client, and whether the client is prepared to accept any additional costs or risks associated with these features; and

e) whether the client requires any additional expenses, such as premiums for insurance related to the credit, to be included in the amount financed, and whether the client is aware of the additional costs of these expenses being financed.

The information needs to be sufficiently specific and the brokers must understand what is important to the client/s. For example, in the case, ASIC vs The Cash Store (2014), "it was considered that general descriptions of the purpose of a loan (e.g. 'personal' or 'living expenses') would not be sufficient". This means that the brokers need to elaborate and keep records on each field relating to the client's requirements & objectives, rather than single-word answers or brief summaries.