A question that probably springs to mind when you think of ASIC is 'what is the regulator focusing on right now?' In a speech given to the MFAA on 14 May 2014 Deputy Chairman Peter Kell addressed that very question.
ASIC's areas of focus in relation to consumer credit are:
- Advertising
- Responsible lending
- Loan fraud
- General obligations relating to conflicts of interest
- Property investment and lending through SMSFs
Advertising
ASIC's focus on ensuring that credit advertising is not misleading will not come as a surprise to many. ASIC has been increasingly active in this space over the last 12-18 months.
Misleading, deceptive and unconscionable conduct is prohibited under the Australian Securities and Investments Commission Act 2001's consumer protection provisions. As well as financial services, these provisions also cover credit activities.
ASIC acknowledges that advertising has a valuable role in assisting consumers to be more informed but it can also have a detrimental effect on customers and potentially the industry if the advertising is misleading.
Importantly ASIC has said that it is looking at taking more civil penalty actions for misleading advertising.
RG 234 Advertising financial products and advice services (including credit): Good practice guidance is a good place to start when reviewing any advertising material.
Responsible lending
ASIC has published a number of reports on responsible lending over the last few years, and will soon publish its report on lenders' responsible lending conduct focusing on 'low doc' home loans.
Following what ASIC has learnt about industry practices through those reports it offers the following compliance tips:
- Give the consumer a copy of the suitability assessment at the same time as making an application for, or offer of, credit. Some licensees believe that this reduces future disputes with clients.
- Maintain good records which demonstrate an understanding of the consumer's requirements and objectives including the relative priority of the objectives.
- Make inquiries about, and take reasonable steps to verify, the consumer's variable expenses. Don't just rely on benchmark figures. Every consumer is different. Make the time to find out those differences.
- When making suitability assessments, use adequate buffers that take into account fluctuations in the consumer's expenses and income, as well as increases in interest rates.
Please check out our mindmap below on Responsible Lending:
Loan fraud
ASIC has a no tolerance position for loan fraud involving false loan applications and related documents. Several infringement notices have been issued and licensees as well as individuals have also been banned from the industry. Of the 42 persons banned since the introduction of the National Consumer Credit Protection Act 2009 (the Credit Act), almost half have been in relation to instances where false documents were provided to lenders.
General obligations relating to conflict of interest
Under the general conduct obligations in the Credit Act licensees must ensure that consumers are not disadvantaged by any of conflict of interest that may arise in relation to credit activities engaged in by the licensee or its representatives.
ASIC has initially been focusing on flexible commissions in the motor vehicle finance industry. This focus has led to a study of issues in relation to add-on insurances sold when a car is purchased. So far the study has identified the following issues:
- When purchasing a car, consumers are not focusing on insurance.
- Premiums are usually charged as a lump sum and may be added to the car finance amount.
- Loans terms may be extended significantly in order for consumers to be able to afford the add-on insurance product.
Property investment and lending through SMSFs
ASIC has been looking at the one stop shop business models that provide advice on and assist in:
- establishing Self Managed Superannuation Funds (SMSFs)
- sourcing and purchasing residential investment properties
- obtaining finance to purchase the property
The only property financing which is available to SMSFs is limited recourse borrowing arrangements (LRBAs). These borrowing arrangements are more complex than normal borrowing arrangements. Providing credit assistance in relation to LRBA has involves an increased risk of breaching obligations under the Credit Act due to their complexity and there is a risk that financial product advice may be inadvertently given. The provision of financial product advice requires an Australian Financial Services Licence (AFSL) or authorisation under an AFSL.
A final comment
While these areas are currently ASIC's focus, licensees and their representatives are still required to comply with all of the obligations under the Credit Act at all times.
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.
