Category: Banking Culture

ASIC consults on proposal to intervene to stop consumer harm in short term credit

ASIC has released a consultation paper (CP 316) on the first proposed use of its new product intervention power. On this inaugural occasion, ASIC is looking to address significant consumer detriment in the short term credit industry.

Under their recommended Option 1: ASIC would use their product intervention power to:(a)make an industry-wide product intervention order by legislative instrument under s1023D(3) of the Corporations Act to prohibit credit providers and their associates from providing short term credit and collateral services except in accordance with a condition which limits the total fees that can be charged; and(b)if a new model, which seeks to circumvent the industry-wide product intervention order, evolves in response to the prohibition, amend the existing order or introduce a new order to address that model. 71

In ASIC’s view, Option 1 is preferable because:(a) the product intervention order will prevent the use of the short term lending model which is causing significant consumer detriment; (b) it will prevent other credit and collateral services providers from adopting this model; (c) it promotes protection for consumers who require small amount credit contracts but who are provided with short term credit (and services agreements) in reliance on the short term credit exemption; and (d) it is a more comprehensive and timely response than the other options.

The product intervention power allows ASIC to intervene where financial and credit products have resulted in or are likely to result in, significant consumer detriment. The new product intervention power is an important addition to ASIC’s regulatory toolkit. It reinforces ASIC’s ability to directly confront, and respond to, harms in the financial sector.

ASIC considers that significant consumer detriment may arise in relation to a particular model designed to provide short term credit at high cost to vulnerable consumers. These consumers include those on low incomes or in financial difficulty.

In its first proposed deployment of this power, ASIC is targeting a model involving a short term credit provider and its associate who charge fees under separate contracts. When combined, these fees can add up to around 990% of the loan amount.   

While ASIC is presently aware of two firms currently using this model – Cigno Pty Ltd and Gold-Silver Standard Finance Pty Ltd – the proposed product intervention order would apply to any firm using this type of business model.

Announcing the consultation ASIC Commissioner Sean Hughes said, ‘Sadly we have already seen too many examples of significant harm affecting particularly vulnerable members of our community through the use of this short term lending model. Consumers and their representatives have brought many instances of the impacts of this type of lending model to us. Given we only recently received this additional power, then it is both timely and vital that we consult on our use of this tool to protect consumers from significant harms which arise from this type of product.’

‘Before we exercise our powers, we must consult with affected and interested parties. This is an opportunity for us to receive comments and further information, including details of any other firms providing similar products, before we make a decision’.

ASIC seeks the public’s input on the proposed intervention order by 30 July 2019. Submissions should be sent to: product.regulation@asic.gov.au.

ASIC anticipates making a decision on whether to make a product intervention order in relation to short term credit during the course of August 2019.

All intervention orders subsequently made must be published on ASIC’s website, and a public notice issued in relation to the intervention.

Download

CP 316 and draft instrument 

Background

On 4 April 2019 ASIC published a media release welcoming the approval of new laws to protect financial service consumers (refer: 19-079MR).

ASIC also published a media release on 26 June 2019 confirming that it initiated consultation on the administration of its new product intervention power (refer: 19-157MR).

ASIC was unsuccessful in civil proceedings in the Federal Court in 2014 involving an earlier use of this short term lending model by two entities Teleloans Pty Ltd and Finance & Loans Direct Pty Ltd (refer: 15-165MR).

ASIC’s MoneySmart website has information about payday loans and alternatives and where to find free help with managing debt.

APRA Caves Again

The Australian Prudential Regulation Authority (APRA) has released its response to submissions on proposed changes to the application of the capital adequacy framework designed to support the orderly resolution of a failing authorised deposit-taking institution (ADI).

APRA released a discussion paper in November last year proposing that the four major Australian banks be required to increase their Total Capital by four to five percentage points of risk weighted assets (RWA) over four years. APRA expected the banks would meet the bulk of this requirement by raising additional Tier 2 capital. For small to medium ADIs, extra loss-absorbing capacity would be considered on a case-by-case basis as part of the resolution planning process.

The changes would increase the financial resources available for APRA to safely resolve an ADI, and minimise the need for taxpayer support, in the unlikely event of failure. They also fulfil a recommendation from the 2014 Financial System Inquiry that APRA implement a framework for minimum loss-absorbing and recapitalisation capacity. 

Following extensive engagement with a range of stakeholders, APRA has announced an approach that will meaningfully lift the loss-absorbing capacity of the four major banks. 

APRA will require the major banks to lift Total Capital by three percentage points of RWA by 1 January 2024. APRA’s overall long term target of an additional four to five percentage points of loss absorbing capacity remains unchanged. Over the next four years, APRA will consider the most feasible alternative method of sourcing the remaining one to two percentage points, taking into account the particular characteristics of the Australian financial system. 

APRA amended its initial proposal in response to concerns raised in a number of submissions about a lack of sufficient market capacity to absorb an extra four to five per cent of RWA in Tier 2 issuance and the potential to excessively increase bank funding costs. A number of respondents provided useful market capacity analysis in their submissions. APRA also had extensive dialogue with ADIs, arrangers of Tier 2 issuance in global markets, and significant investors in Tier 2 instruments. Following this consultation process, APRA expects the issuance of an additional three percent of RWA in Tier 2 instruments can be achieved in an orderly manner, and be maintained through varied markets conditions.

APRA Deputy Chair John Lonsdale said the measures were an important step in minimising the risks to depositors and taxpayers should Australia experience a future bank failure.

“The global financial crisis highlighted examples overseas where taxpayers had to bail out large banks due to a lack of residual financial capacity. Boosting loss-absorbing capacity enhances the safety of the financial system by increasing the financial resources that an ADI holds for the purpose of orderly resolution and the stabilisation of critical functions in the unlikely event that it fails.

“Although APRA’s proposed response may increase funding costs for Tier 2 instruments issued by major banks, overall funding cost increases can be expected to remain small.  Having taken into account feedback on market capacity, increasing Total Capital requirements by three percentage points by 2024 (instead of the four to five originally proposed) will be easier for the market to absorb and reduce the risk of unintended market consequences.  

“By lifting their Total Capital by three percentage points of risk-weighted assets, we estimate the major banks will cumulatively strengthen their loss-absorbing capacity by $50 billion. APRA looked closely at alternative approaches used in other jurisdictions but concluded that increasing the issuance of existing capital instruments was more appropriate taking into account the distinctive characteristics of the Australian financial system,” Mr Lonsdale said. 

APRA estimates the increase in Total Capital requirements will have a small impact on overall funding costs – less than five basis points – an estimate well within the range of analysis conducted by the Reserve Bank of Australia using historical market data

APRA finalises amendments to guidance on residential mortgage lending

The Australian Prudential Regulation Authority (APRA) has announced that it will proceed with proposed changes to its guidance on the serviceability assessments that authorised deposit-taking institutions (ADIs) perform on residential mortgage applications.

In a letter to ADIs issued today, APRA confirmed its updated guidance on residential mortgage lending will no longer expect them to assess home loan applications using a minimum interest rate of at least 7 per cent. Common industry practice has been to use a rate of 7.25 per cent.

Instead, ADIs will be able to review and set their own minimum interest rate floor for use in serviceability assessments and utilise a revised interest rate buffer of at least 2.5 per cent over the loan’s interest rate.

APRA received 26 submissions after commencing a consultation in May on proposed amendments to Prudential Practice Guide APG 223 Residential Mortgage Lending (APG 223). The majority of submissions supported the direction of APRA’s proposals, although some respondents requested that APRA provide new or additional guidance on how floor rates should be set and applied.

Having considered the submissions, Chair Wayne Byres said APRA believes its amendments are appropriately calibrated.

In the prevailing environment, a serviceability floor of more than seven per cent is higher than necessary for ADIs to maintain sound lending standards. Additionally, the widespread use of differential pricing for different types of loans has challenged the merit of a uniform interest rate floor across all mortgage products,” Mr Byres said.

“However, with many risk factors remaining in place, such as high household debt, and subdued income growth, it is important that ADIs actively consider their portfolio mix and risk appetite in setting their own serviceability floors. Furthermore, they should regularly review these to ensure their approach to loan serviceability remains appropriate.”

APRA originally introduced the serviceability guidance in December 2014 as part of a package of measures designed to reinforce residential lending standards.

Mr Byres said: “The changes being finalised today are not intended to signal any lessening in the importance APRA places on the maintenance of sound lending standards. This updated guidance provides ADIs with greater flexibility to set their own serviceability floors, while maintaining a measure of prudence through the application of an appropriate buffer that reflects the inherent uncertainty in credit assessments.” 

The new guidance takes effect immediately.

Copies of the letter and the updated APG 223 are available on the APRA website here.

Aussies’ awareness of changes impacting credit health still a work in progress

Research from credit information website, CreditSmart.org.au, has revealed that one year on from the adoption of Comprehensive Credit Reporting (CCR), most Australian consumers are still unaware of the changes that are impacting their credit health, and may not know how it can impact their future credit applications.

The research found that in the last 12 months, only one in four consumers checked their credit report. More worryingly, consumers who are struggling with their credit health said they were just as likely to seek advice from credit repair or debt management services as they would from their lender or free financial counsellor.

“Consumers are still largely unaware of credit reporting, what information is contained in their credit report, and what that means about their borrowing behaviour and overall credit health,” said Mike Laing, CEO of the Australian Retail Credit Association (ARCA), which founded CreditSmart.

“Our research has found that while awareness has actually increased 11% from last year, less than 1 in 3 consumers are aware that credit reporting has changed. Importantly however, awareness is higher among those with a real need to know – with one in two consumers who are planning to make a significant purchase in the next 12 months being aware of the changes,” added Mr Laing.

The rollout of comprehensive credit reporting has accelerated rapidly in Australia since last year, with more data shared than ever before. By September this year, comprehensive credit information for 80% of consumer loan accounts will be available.

“CCR allows lenders to share and view more detailed credit information about consumers to provide a clearer view of a consumers’ credit history. This is a positive move for consumers who have a strong history of making payments on time.” added Mr Laing.

Consumer awareness highest for users of riskier credit products

According to CreditSmart, credit cards make up the majority of accounts currently in the CCR system at around 87%, followed by mortgages at 9%.

Yet, people who hold these mainstream types of accounts are the least aware of the changes to credit reporting and may not be aware of the value it adds to their credit history, if they have a strong record of making payments on time.

It was also found that those consumers with products that are sometimes seen as riskier, such as leases for household goods (61%), cash loans (54%) and payday loans (79%), plus personal loans (55%), are all far more aware of the changes to credit reporting[1] This could indicate the users of those products have been given more information about the changes, or that they have taken more time to understand the changes.

Consumers using these riskier products also rated their credit health as significantly worse than users of home loans and credit cards.

Interestingly, Buy Now Pay Later (BNPL) users have relatively low awareness of credit reporting changes despite significant numbers rating their credit health as poor.[2]

Consumer awareness a work in progress

Awareness of credit reporting changes is not the same as understanding the detail behind their credit report, according to Mr Laing.

“It is easy to understand how consumers may become confused about what’s important when it comes to credit reporting and their credit health. There’s a lot of information out there and it’s important to bring it back to a simple, straightforward message.

“We want consumers to be aware of the importance of their credit history to their credit health – and how that history may impact their financial future. The steps are to understand how the credit reporting system has changed, to get your credit report to see your credit history and to manage the credit that you have responsibly” added Mr Laing. For more information on the changes to credit reporting and where to get your free credit reports you should go to www.creditsmart.org.au, which provides clear information on the credit reporting system to assist consumers to optimise their credit health.    

NZ Reserve Bank On Bank Capital

The New Zealand Central Bank is steering a path quite different from the RBA with a move to lift bank capital to much higher levels, in the interests of protecting households and businesses in New Zealand.

The costs, they say, are worth the benefits! Indeed the recent IMF report on NZ endorsed their approach.

Australian Banks operating in New Zealand are resisting according to the AFR – “Australia’s banks would have to raise at least $NZ20 billion ($19.1 billion) to satisfy New Zealand capital requirements, leading the big four to threaten a rethink of their business models if the proposals get the green light”.

But of course banks in Australia need higher capital buffers despite what the local regulators may say. NZ is on the better path.

As part of this journey, the New Zealand Reserve Bank released submissions along with a Summary of Submissions (PDF 399 KB) on the latest consultation paper in its Capital Review, which proposes several measures to ensure a safer banking system for New Zealanders.

There was significant and wide-ranging media and public interest in the How much capital is enough? (PDF 545 KB) paper, with written feedback from 161 submitters. Feedback has also been received from analysts and other interested parties who did not make a formal submission.

“The Reserve Bank welcomes the large number of submissions on this consultation, as well as the effort and consideration that has gone into them,” Deputy Governor Geoff Bascand says. “We believe this shows how important this issue is for everyone, and we are pleased that a broader set of stakeholders has taken an interest in the Capital Review.”

In general, submitters support the Reserve Bank’s objective to ensure that New Zealand’s financial system is safe, acknowledging the economic and well-being impacts of banking crises. Many submitters, particularly from the general public, support the proposed higher capital requirements for banks. A number of submitters observe that higher capital requirements could lead to higher borrowing costs for New Zealanders. Some submitters, in particular banks and business groups, question whether the proposed increases are too large and too costly.

Central to the measures proposed in the consultation paper are increases in regulatory capital buffers for locally incorporated banks. The changes include requiring bank shareholders to increase their stake so that they absorb a greater share of losses should their bank fail, improving the quality of capital, and ensuring banks more accurately measure their risk.

Increasing the amount and quality of capital can be reasonably expected to mean that banks can survive all but the most exceptional shocks, Mr Bascand says. “We think the costs of doing so are outweighed by the benefits – someone’s cost is for society’s broader benefit.”

The Reserve Bank is also consulting on changes to the quality of capital, constraints on modelling capital requirements, and the implementation timeline.

It is continuing its stakeholder outreach programme, which includes conducting focus groups to understand the public’s risk appetite, and engagement with iwi, social sector and industry groups, financial institutions and investors. It has also engaged three external experts for an independent review of its proposals.

“The submissions on the proposals are just one part of the review,” Mr Bascand says. “All these inputs will help us to make robust and well-calibrated policies and decisions that best represent society’s interests.”

In this context, Mr Bascand welcomed reports by two key international financial institutions and a major rating agency last week that support the proposals to increase bank capital ratios.

Following its recent mission to New Zealand, the International Monetary Fund has released a Concluding Statement that highlights the need for strengthening bank capital levels and that the proposals appear commensurate with the systemic financial risks facing New Zealand. The Organisation for Economic Co-operation and Development’s latest Economic Survey of New Zealand expects increases in capital will likely have net benefits for New Zealand. And Standard and Poor’s says that the proposals should not have material impacts on overall credit availability.

The Capital Review began more than two years ago, when the Reserve Bank published an issues paper and opened the first of four public consultations. It will publish its response to the submissions alongside final decisions, expected in November 2019.

Implementation of any new rules will start from April next year. There will be a transition period of a number of years before banks are required to meet the new requirements

Associations call for ‘clarity’ on expense verification

The MFAA and the FBAA have called on ASIC to provide the mortgage industry with greater guidance surrounding expense verification, but have urged the regulator not to adopt a “prescriptive approach” to responsible lending, via The Adviser.

The Australian Securities and Investments Commission (ASIC) has published submissions from its first round of consultation regarding its proposal to update its responsible lending guidelines (RG 209).  

In February, ASIC stated that it considered it “timely” to review and update its guidance (in place since 2010) in light of its regulatory and enforcement work since 2011, changes in technology, and the release of the banking royal commission’s final report.

ASIC added that its review of RG 209 will consider whether the guidance “remains effective” and will seek to identify changes and additions to the guidance that “may help holders of an Australian credit licence to understand ASIC’s expectations for complying with the responsible lending obligations”.

In submissions to ASIC, the Mortgage & Finance Association of Australia (MFAA) and the Finance Brokers Association of Australia (FBAA) called for greater clarification surrounding guidelines that relate to the verification of a borrower’s expenses (which was a key point of scrutiny during the royal commission).

The MFAA encouraged ASIC to provide “as much guidance as possible”, and lamented the lack of uniformity in the application of current guidelines.  

“An unfortunate side effect of these changes is that the requirements of individual lenders have changed from being reasonably consistent to being quite diverse,” the MFAA noted.

“This is causing significant cost, confusion and delay for consumers as well as for brokers.

“This is not a good consumer outcome because it has become very difficult for brokers to be familiar with the requirements of multiple lenders whose credit policies vary considerably.”

The industry association claimed that a disparity in the credit policies imposed by lenders may limit borrower choice by “resulting in brokers dealing with a smaller panel of lenders”.

“It is important that RG 209 provides as much guidance as possible, specifically dealing with the five most common finance types (home loans, residential investment loans, car loans, credit cards and personal loans – excluding small amount credit contracts) to assist consistency in consumer accessibility to these products while supporting the spread of credit access across the market through the enhanced clarity of regulatory expectation,” the MFAA added.

“We envisage that within each of these five loan types, RG 209 should specify ‘base’ inquiries and verifications because current industry standards are often quite similar across the product range.”

The FBAA agreed, calling for “some additional guidance to be provided around expense verification”, but has warned against a move to a more prescriptive approach to responsible lending.  

“Responsible lending is principles-based and intended to be flexible, adaptable and technology neutral,” the FBAA stated.

“There are genuine risks associated with guidance becoming too prescriptive. It would undermine the intentions of the responsible lending framework, stifle productivity and innovation and impede consumer access to regulated finance.”

Public hearing to be held in August

Last week, ASIC confirmed that it will host a new set of public hearings to further discuss its proposed changes to its responsible lending guidelines.

The corporate regulator has now confirmed that the hearings will take place in August and will be held in both Sydney and Melbourne.

ASIC stated that the hearings, which will be live streamed online, are aimed at “testing the views of stakeholders and providing greater understanding of business operations”.

“The responsible provision of credit is critical to the Australian economy,” ASIC commissioner Sean Hughes said. 

“We are taking this opportunity to test views to make sure our guidance remains relevant, clear and timely.

“Public hearings will provide a robust and transparent way to air issues and views raised in written submissions.”

The stakeholders invited to participate in the hearings will be drawn from the groups or individuals who provided a written submission to ASIC on the responsible lending guidance.

Revised Banking Code Of Conduct A Small Win, But…

The ABA made a big splash when relaunching the revised Banking Code of Conduct which starts today, and yes it is a small win for consumers and SME’s. However, we must ask this: since when are such financial service basic hygiene issues as not charging for no service, advising before charging, considering credit card repayment capacity, speaking in plain English and offering suitable low-fee products, seen as so revolutionary?

Frankly put, these are issues which an industry which truly focused on the well-being of its customers would have long ago addressed. They did not, and were dragged towards better outcomes by the Royal Commission and public pressure.

So, yes, important baby steps, but still a massive leap is required to the desired level of customer-centricity. There is nothing bold or innovative here.

Australia’s banks will comply with a strong new code of practice that significantly increases and enshrines customer protections and introduces tough new penalties for breaches from tomorrow.

The ASIC-approved Banking Code of Practice represents the most significant increase to customer protections under a code in the industry’s history.

From 1 July, under the new Banking Code of Practice, banks will no longer:

– Offer unsolicited credit card limit increases
– Charge commissions on Lenders Mortgage Insurance
– Sell insurance with credit cards and personal loans at the point of sale.

Under the code banks must:

– Offer low-fee or no-fee accounts to low income customers
– Have a 3 day grace period on all guarantees to give guarantors enough time to make sure it’s the right option for them
– Actively promote low-fee or no-fee accounts to low income customers
– Provide reminders when introductory offers on credit cards end
– Simpler and fairer loan contracts for small business using plain English that avoids legal jargon
– Provide customers a list of direct debits and recurring payments to make it easier to switch banks.

Australian Banking Association Chief Executive Officer Anna Bligh said customers can expect to see a change to banking products and services immediately.

“We’ve completely rewritten the rule book for Australia’s banks. The Banking Code of Practice has strong protections for customers, serious consequences for breaches and strong independent enforcement,” Ms Bligh said.

“Banks understand they need to change their behaviour and this new rule book represents an important step in earning back the trust of the Australian public.

“The new Code will form part of every customer’s relationship with their bank and will be strongly enforced both by an independent body, the Banking Code Compliance Committee, and the Australian Financial Complaints Authority.

“Whether it’s through your credit card, home loan, small business loan or just day to day banking, Australian customers will see tangible benefits from this new Code,” she said

Financial Counselling Australia Chief Executive Officer Fiona Guthrie said the new Code was a major step up in the protections for customers, particularly the most vulnerable, and was an important milestone in restoring community trust in Australia’s banks.

“Codes like this really can make a difference because they go beyond black letter law and instead reflect the standards that an industry voluntarily commits to,” Ms Guthrie said.

“The banking industry released its first version of the banking code over 25 years ago and it is really pleasing to see that each version – and this is the fourth major revision – contains advances in consumer protection.

“Financial counsellors in particular welcome provisions around family violence, stronger protections for guarantors, better promotion of free or low fee accounts and more proactive approaches to people experiencing financial hardship,” she said.

Banks have trained more than 130,000 staff on the new requirements in the code so it can begin operating from tomorrow (1st July 2019). Information about the Code has been translated into Mandarin (simplified Chinese), Arabic, Vietnamese, Tagalog/Filipino, Hindi, Spanish and Punjabi.

The Financial Services Royal Commission asked for further changes to the Code which will be implemented by March 2020.

For more information on the new Banking Code of Practice visit ausbanking.org.au/code.

ASIC Still Looking At Responsible Lending

In a keynote address by ASIC Chair, James Shipton at Committee for Economic Development of Australia (CEDA) event in Melbourne yesterday, it appears the regulator will hold public hearings about responsible lending practices. 

He said that ASIC was updating its responsible lending guidance, and as part of its consultation, public hearings would be held to “robustly test some of the issues and views that have been raised in submissions”.

This is a follow-up to ASIC’s consultation paper on updating its guidance on responsible lending, which was issued in mid-February 2019.

Interestingly, ASIC has discretion as to whether such hearings would take place privately or publicly. However the regulator is required to have regard to whether it is in the public interest for a hearing to take place in public.

In addition, ASIC also has power to summon witnesses and require the production of documents for the purposes of a public hearing.  It may also refer to a court any questions of law arising at a hearing.

To date ASIC has hardly used it hearings powers but is does appear they intend to utilise these as an aspect of its renewed approach to enforcement in the wake of the Hayne Royal Commission.

We are embedding and expanding new supervisory approaches and promoting best practice and innovation in regulation – particularly through our Close & Continuous Monitoring program (or CCM) and our corporate governance review that is aimed at improving governance practices at the board level.

We are also implementing new and existing reforms and working towards our new obligations and responsibilities in response to the Royal Commission. This includes an expanded role for ASIC to become the primary conduct regulator in superannuation.

CBA Offers Enforceable Undertaking Relating To Customer Personal Information

The Australian Information Commissioner (Commissioner) has accepted an Enforceable Undertaking (EU) offered by Commonwealth Bank of Australia (CBA).

The EU underpins execution of further enhancements to the management and retention of customer personal information within CBA and certain of its subsidiaries.

The EU follows CBA’s ongoing work to address two incidents; one relating to the disposal of magnetic data tapes containing historical customer statements; and the other relating to internal user access to certain systems and applications containing customer personal information. CBA reported both incidents to the Office of the Australian Information Commissioner (OAIC) in 2016 and 2018 respectively and has since been working to address these incidents.

As previously announced, CBA has found no evidence to date, as a result of these incidents, that our customers’ personal information was compromised, or that there have been any instances of unauthorised access by CBA employees or third parties.

CBA’s commitments in the EU announced today include reviewing and implementing further enhancements to:

  • internal privacy policies, procedures and record retention standards;
  • internal user access controls on systems and applications that hold personal information; and
  • the privacy risk management and monitoring processes that apply to service providers to CBA and certain subsidiaries.

The EU provides CBA with 90 days to develop and submit to the OAIC a work plan, and timetable of work that CBA will complete to meet its obligations under the EU.

Commonwealth Bank Group Chief Risk Officer, Nigel Williams, said: “We have offered this EU as a demonstration of our continued commitment to appropriately managing the privacy of customer personal information, and addressing any concerns identified by the Commissioner.

“We continue to take action to address issues, earn trust and be a better bank for our customers. This includes proactively engaging with our regulators to ensure we continue to build better systems, processes and controls to manage the personal information of our customers.”

Further information regarding this EU is available online at www.commbank.com.au/privacyupdate