There’s a common view that Australia is experiencing a ‘tightening of credit standards’ following scrutiny of lenders and brokers by ASIC, APRA and the Financial Services Royal Commission.
This view has found expression in a renewed focus on ‘responsible lending conduct’- and the verification of applicant expenditures in particular.
Firstly, it’s AMM’s view that there has been no ‘tightening’ of credit standards or a change to the standards themselves. The required standards are extensively set out in the NCCP legislation and the accompanying regulatory guide, RG209. It’s how they’re being interpreted that has changed.
Also, a microscopic focus on living expenses, of itself, doesn’t go a long way to meeting the required standards of responsible lending conduct or to the improvement of customer outcomes.
The primary obligation of lenders and credit advisors, as embodied in the NCCP, is to conduct an assessment to ensure that credit is ‘not unsuitable’ for a consumer. This obligation is accompanied by the requirement to make sure that credit meets a consumers’ needs and objectives. These are the core requirements of the legislation; – the other obligations, such as taking reasonable steps to enquire about and reasonable steps to verify certain information are there to support the core obligations.
The singular focus on expense verification falls well short of what is required to achieve optimal consumer outcomes.
The combined industry forum (CIF) has taken steps to define what constitutes a ‘good consumer outcome’. The CIF considers a good consumer outcome to be where; –
“The customer has obtained a loan which is appropriate (in terms of size and structure), is affordable, applied for in a compliant manner and meets the customer’s set of objectives at the time of seeking the loan.”
In the CIF’s most recent progress report they go on to state that the combination of the good customer outcome definition and a “customer first duty” allows an easy to follow principle – put the customer’s interests first.
It is the view of AMM that putting the customer’s interests first, amongst other things, involves a duty to ensure that the customer fully understands everything associated with the credit being sought so that they may know that the credit is ‘suitable’ for them and meets their needs and objectives.
Commonly, there’s a call for ‘increased levels of financial literacy’ to ensure that there’s greater understanding of financial products. Mostly this is a call for broad based financial literacy education, often to be delivered as part of a school curriculum.
Such education is of little benefit in improving customer outcomes when credit is sought, particularly mortgage loan credit. Mortgages are large and complex (and often acquired later in life) and generalised financial literacy education is either forgotten or simply lacks detail and context. There are any number of studies emanating from the United States that attest to this.
Education that improves customer outcomes must be specific to the type of credit being sought and it should be delivered around the time of application. AMM terms this as being ‘proximate to purchase’.
Genuine, targeted education will have the impact of promoting ‘responsible borrowing’. Consumers must be placed in position such that they have sufficient knowledge to make their own decisions after considering advice from a finance professional.
No amount of responsible lending conduct or the ‘best intentions’ of a financial professional will ensure optimal consumer outcomes in the absence of a lack of comprehension.
Borrowers must approach credit responsibly to ensure that credit is provided responsibly.
AMM will be embracing targeted, contextual, ‘proximate to purchase’ education to promote good customer outcomes; putting the customer’s interests first by equipping them with the knowledge to borrow responsibly.
As has been observed elsewhere… Education has a cost – but so does ignorance, and this is no-where truer than in the area of responsible lending and borrowing.