ASIC defends principles-based approach to RG 209

Speaking at the parliamentary joint committee on corporations and financial services hearing on its oversight of the Australian Securities and Investments Commission (ASIC) and the Takeovers Panel on Tuesday (19 November), chairman James Shipton and commissioner Sean Hughes defended ASIC’s role in setting standards for responsible lending.

In what was, at times, a heated conversation, the committee members probed ASIC on its consultation on responsible lending guidance and its impact on borrowing, given uncertainty at a lender and borrower level.

Echoing sentiments made by Mr Hughes in several speeches in the last week, the ASIC commissioners dismissed suggestions that the regulator’s responsible lending guidance (RG 209) has been the cause of slower turnaround times in the consumer lending space and noted that the interpretation of the law is down to those in the legal profession.

Mr Shipton told the committee in his opening statement: “We will be releasing updated guidance on the responsible lending obligations (RG 209) by the end of this year.

“This is all about providing clarity to lenders and borrowers alike, and building on existing guidance to narrow points of uncertainty, clarify small-business lending, and restate the basic obligations and purpose of the law. A law that requires lenders to assess whether applicable consumer loans are ‘not unsuitable’ by specifically requiring them to conduct: (i) reasonable inquiries and (ii) verification. These are the statutory building blocks that we are obliged to work with.”

He continued: “Our main tool in relation to the administration of this law [the National Consumer Credit Protection Act 2009] is the guidance… It is guidance only and does not have force of law. It is, in effect, a statement of how we see the operation of the legislation. And, at the end of the day, every conversation around responsible lending ends to go back to the wording of the legislation as set by Parliament all those years ago. That’s the tailway tracks, the tram tracks, in which we operate, and the financial institutions operate. So our main tool is updating the guidance.” 

Mr Shipton later told the committee that ASIC expected to release the final guidance “within weeks”, following a “very rigorous” process – covering public hearings, public consultation, roundtable discussions and first-hand research.

“The whole point of this process is to build on the existing guidance, highlight where there are areas that need updating, and then build on those points so that there is a continuum of the guidance moving forward. That continuum provides certainty; it builds on existing understandings; it clarifies or narrows points that need further delineation and therefore goes to the ultimate certainty and confidence by lenders.”

What the new guidance may include

The ASIC chair told the parliamentary joint committee that “more contemporaneous” guidance was particularly needed given the increasing number of online lenders, the upcoming open banking scheme and increased data, the evolution of business practices, updates to technology, and automatisation of systems.

Commissioner Hughes elaborated that the “greater use of technology and technological tools to verify borrower information in real time” and have it “fully verified using technology solutions within 58 minutes” was an advancement that was not available when the NCCP was written 10 years ago.

Another area that required updating, ASIC revealed, include guidance around the expense benchmarks used to verify borrower expenses – such as the Household Expenditure Measure (HEM) – particularly given the fact that the some categories of expenses are not included in HEM, such as certain medical costs, superannuation contributions and mortgage repayments, he said.

Other areas to be updated include clarifying where the responsible lending guidance does not apply (such as small-business lending) as well as when the guidance does apply outside of mortgages (such as for credit cards and unsecured personal loans).

The chairman noted that there had been some requests for more prescriptive guidance around responsible lending, while others had favoured a less restrictive approach.

Mr Shipton reiterated that ASIC’s new guidance will therefore be “principles-based” rather than dogmatic, and “provide discretion by financial institutions and lenders, to be able to exercise their good professional discretion in determining these areas”, given that there is “always going to nuance” and “unique situations” in providing finance.

He concluded: “There will never be a set of rules or guidance written which will be able to precisely convey and allow for every precise circumstance. That’s why principles-based guidance is important. That’s what we’re going to, that’s what we’re going to be aiming to do.”

[Related: ANZ still grappling with ‘nuanced’ lending environment]