Market conditions create perfect storm for risky lending

ASIC yesterday published its Corporate Plan 2015-16 to 2018-19 and Focus for 2015-16, in which it warned that it is “critical” that lenders do not put borrowers into unsuitable loans that could lead to them experiencing substantial financial hardship, now or over the longer term.

The regulator said that low interest rates, significant house price growth, strong lending competition, high household debt to income ratios and significant growth in investment housing lending could all facilitate irresponsible lending.

“These conditions could see a rise in the number of borrowers with unsustainable debt, particularly if interest rates increase, unemployment rises or house prices fall,” it said.

"Lenders may fail to lend responsibly in current economic conditions. This may lead to borrowers over-extending themselves when taking out loans."

The regulator’s key activities over 2015-16 include continued surveillance of interest-only loans and broker compliance.

ASIC said it will review “large finance brokers’ compliance with responsible lending and general conduct obligations”.

Payday lending and consumer leases are also on the regulator’s radar over the next 12 months.

ASIC said it would take enforcement action where appropriate, accept enforceable undertakings or issue infringement notices where it identifies wrongdoing.

“For example, failures to comply with responsible lending and general conduct obligations,” it said.

ASIC chairman Greg Medcraft said the behaviour of gatekeepers is influenced by culture, incentives and deterrence.

“Where we find a firm’s culture is lacking, it is a red flag that there may be broader regulatory problems,” Mr Medcraft said.

“Deterrence involves the fear and consequences of getting caught. It includes the internal structures that a gatekeeper has in place to deter employee misconduct.

“As a law enforcement agency, where we see non-compliance, we will continue to act quickly and decisively to promote trust and confidence in the Australian financial system through our ‘detect, understand and respond’ approach.

“We achieve the best risk resilience in the system that we can with the resources we have.”

The Corporate Plan also highlights how ASIC will evaluate its performance over time and strengthen its capabilities to meet future regulatory challenges.

“We are on the cusp of change and our Corporate Plan shows that we are well placed to embrace the likely opportunities to flow from the government’s response to the Financial System Inquiry and the government’s capability review of ASIC,” Mr Medcraft said.