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3.1 Deposit-taking and credit

The deposit-taking and credit sector comprises credit licensees (credit providers and credit intermediaries), deposit product providers, payment product providers, and margin lenders.

We use the full suite of our regulatory tools to promote fairness and professionalism in this sector, in order to bring about sound consumer outcomes. This includes the use of our new powers, such as our product intervention power, to address undesirable practices and products.

ASIC’s work in this sector during 2019–20 focused on responsible lending and ensuring that consumers are sold products that are appropriate for their needs, as well as responding to the impact on businesses and consumers of the COVID-19 pandemic.

Responsible lending

In December 2019, after extensive consultation, ASIC released updated Regulatory Guide 209 Credit licensing: Responsible lending conduct (RG 209). Our consultation included public hearings in Sydney and Melbourne and roundtables with representatives of consumer groups, non-bank and authorised deposit-taking institution lenders, brokers, small amount credit contract providers, and consumer lessors.

The updated guidance provides greater clarity and support to lenders and brokers in meeting their statutory obligations, as well as the steps lenders and brokers can take to minimise the risk of non-compliance. Importantly, we have maintained principles-based guidance that reinforces discretion and flexibility for lenders.

As well as clarifying the scope of the responsible lending obligations, the guidance sets out the areas that are not subject to those obligations – such as small business lending, irrespective of the nature of the security used for the loan. The update also reflects technological developments, including open banking and digital data capture services.

Key elements of the updated guidance include:

  • a stronger focus on the legislative purpose of the obligations – to reduce the occurrence of consumers taking on unsuitable levels of credit and ensuring that licensees obtain sufficient reliable and up-to-date information about the consumer’s financial situation, requirements and objectives to enable them to assess whether a particular loan is unsuitable for the particular consumer
  • more guidance to illustrate where a licensee might undertake more, or less, detailed inquiries and verification steps based on different consumer circumstances and the type of credit being sought. The guidance also includes new examples about a range of different credit products and different kinds of consumer circumstances.

Following the decision of the Federal Court in ASIC v Westpac, ASIC will review the guidance in RG 209 to ensure that it reflects the Federal Court’s decision.

ASIC’s first product intervention order addresses significant harm in short-term credit

On 12 September 2019, ASIC used its new product intervention power to target a particular class of short-term credit product after an ASIC delegate found that these products result in significant consumer detriment.

Under this lending model, a credit provider issued short-term credit to consumers where the fees were capped at 5% of the loan amount. The credit provider’s associate would then charge significant fees to consumers, under a separate contract, for the application, management and ongoing administration of the loan.

Short-term credit of up to $1,000 was being provided by credit providers and their associates at high cost to vulnerable consumers. The fees under both contracts, and the addition of default fees incurred by many borrowers, could (and, in some cases, did) result in a total cost of up to 990% of the amount borrowed.

Following public consultation, ASIC was satisfied that this class of products resulted in significant consumer detriment. We considered submissions received, data from industry that demonstrated the size and scale of the short-term credit industry, and ASIC complaints data, including over 200 reports of misconduct.

The short-term credit product intervention order prohibits short-term credit providers and their associates from charging fees in excess of the fees prescribed by section 6(1) of the National Credit Code.

The order is valid for 18 months and ASIC can extend it or make it permanent by obtaining the Minister’s written consent.

Cigno Pty Ltd (Cigno), a company affected by the order, sought judicial review of the order. Its application was dismissed by the Federal Court in April 2020.

On 13 May 2020, Cigno lodged an appeal of the decision to the full Federal Court. The product intervention order will remain in force unless a court orders otherwise.

ASIC is continuing to monitor the provision of short-term credit to consumers.

New best interests duty for mortgage brokers

In June 2020, ASIC released guidance about the new best interests duty for mortgage brokers, Regulatory Guide 273 Mortgage brokers: Best interests duty.

Our guidance followed the passage of legislation creating a duty for mortgage brokers to act in the best interests of their consumer and requiring them to prioritise each consumer’s interests when providing credit assistance.

We had consulted on a draft version of this guidance in February 2020, through Consultation Paper 327 Implementing the Royal Commission recommendations: Mortgage brokers and the best interests duty.

The guidance is intended to help industry make changes and improve practices before the new obligations commence. Given the impact of the COVID-19 pandemic, we have provided relief so that industry does not need to comply with the obligations and associated remuneration reforms until January 2021.

ASIC’s guidance sets out our interpretation of the best interests obligations, expectations about how industry should meet the obligations, and our general approach to administering the reforms.

We expect the obligations to help improve the recommendations and communication provided to consumers throughout the credit assistance process and lead to a higher quality of credit assistance being provided.

ASIC’s guidance follows research published in August 2019 (Report 628 Looking for a mortgage: Consumer experiences and expectations in getting a home loan), which found that consumers who visited a mortgage broker expected the broker to find them the ‘best’ home loan, but also demonstrated that brokers were inconsistent in the ways they presented home loan options to consumers and sometimes offered little, if any, explanation of the options considered.

Approval of Banking Code

In December 2019, following extensive consultation, ASIC approved an updated version of the Australian Banking Association (ABA) Banking Code of Practice, which commenced on 1 March 2020.

The updated Banking Code is intended to, among other things, implement the Royal Commission’s recommendations relating to the accessibility of banking products and services and easing the burden on agricultural borrowers affected by drought and natural disaster.

The updates include changes to:

  • introduce the concept of ‘basic accounts’ that have minimum features, including no account-keeping fees, no minimum deposits, free direct debit facilities, and access to a debit card
  • provide eligible low-income customers with access to basic accounts and other low and no-fee accounts, each of which must not feature informal overdrafts, dishonour fees or overdrawn fees
  • clarify the restrictions on non-monetary defaults on small business loans
  • extend protections to guarantors of small business loans – banks will now be required to first pursue the borrower, before the guarantor, in the event of default (previously, the Code limited these protections to guarantors of consumer loans)
  • prohibit default interest on small business loans secured by agricultural and commercial property in the event of drought or natural disaster.

ASIC approved the March 2020 Code on the understanding that the ABA will revisit the Code’s definition of ‘banking services’ and include an amended definition from 1 March 2021. The amended definition will address concerns raised by stakeholders and ASIC about the consequences of the current definition (which refers to the definitions of ‘retail client’ and ‘wholesale client’ in Chapter 7 of the Corporations Act) for small business coverage under the Code.

On 25 June 2020, ASIC approved a variation of the March 2020 Code, proposed by the ABA due to the impact of the COVID-19 pandemic.

The changes acknowledge that in certain circumstances banks may not always be able to meet the timelines for customer communication outlined in some provisions of the March 2020 Code. They provide that banks’ obligations when lending to small business customers – to engage in a fair, reasonable and ethical manner, and to exercise the care and skill of a diligent and prudent banker – will be informed by the circumstances and effects of the COVID-19 pandemic generally.

Buy now pay later arrangements

The buy now pay later sector is an area of ongoing focus for ASIC.

We continue to monitor buy now pay later products and the response by the sector to the COVID-19 pandemic. We will also engage with consumer representatives and closely monitor the use of small amount and alternative credit products, especially by vulnerable consumers.