31st Annual Credit Law Conference - Regulatory Update

Speech by Commissioner Sean Hughes at the 31st Annual Credit Law Conference, Thursday 9 December 2021.

Good morning all, thank you for having me, and allow me to acknowledge the Traditional Custodians of the lands I am on today, the Gadigal people of the Eora Nation. I pay my respects to their elders past, present and emerging, and extend that respect to Aboriginal and Torres Strait Islander peoples joining the forum today.

It is always a pleasure being a part of the Annual Credit Law Conference – an institution within the sector. I’m sorry not to be standing before you in Sydney as we all would have hoped.

At last year’s conference I talked about unprecedented business interruption. But if 2021 has taught us anything, it’s that new global health, economic and socio-political shocks could emerge at any time. Change will continue to challenge us. But no doubt you will have also witnessed in your own workplaces some extraordinary examples of agility, flexibility, and responsiveness in recent times.

So, permit me to dive directly into the deep-end of trying to review 2021.

A large portion of this year was spent supporting industry as it adapts to a series of significant Hayne Royal Commission reforms. A raft of new legislation came into effect in early October, with ASIC publishing its compliance stance of  a reasonable approach to transition in these still relatively early stages. I will touch upon some of these reforms later, but I’d like to acknowledge that the speed of change and the required investment in technology was driven by your need to service your customers whenever and wherever they were.

And I’d like to begin my address in earnest at the junction where innovation and collaboration meet.

COVID-19 Hardship

ASIC has been working closely with the credit sector to determine how best to address both industry challenges and consumer concerns during what – most will undoubtedly agree – has been a difficult two years. We wanted to understand how lenders are assisting consumers experiencing financial difficulties due to COVID-19.

While most consumers who deferred repayments on their residential mortgages last year have returned to making normal repayments, some continue to struggle. We encourage lenders to continue working with these consumers to find appropriate solutions – and we are encouraged by the many lenders that have done so over the past 18 months.

Many have used this pandemic period to closely scrutinise their processes for responding to consumers experiencing financial difficulties, which in many cases has led to improvements across various lenders’ business practices:

  • Some lenders have sought to make hardship assistance more accessible for consumers and  also streamlined hardship assessments.
  • Many providers have turned the lens inwards, focusing on improving communications materials and upskilling their staff so that they can have better conversations with consumers.
  • And there are those who are using innovative practices like data analytics to improve consumer outcomes, such as identifying customers who may be at greater risk of experiencing financial difficulties.

It is heartening to see lenders make improvements to their financial hardship processes, as a response to the pandemic. However, we don’t think that this type of response should be limited to a pandemic, economic crisis, or natural disasters. Where new or modified processes are generating better outcomes for consumers, we strongly encourage lenders to embed them into their ‘BAU’ activities.

And ASIC continues to advocate for consumers to engage with their lenders about the challenges they face. If consumers feel overwhelmed, they should reach out for help sooner rather than later.

Law Reform

As providers have adapted their internal processes and their engagement with consumers, they have also faced a significant amount of law reform and additional obligations coming into effect. These laws strengthen long-term protections for consumers and close some regulatory gaps. As you will all know, it is critical that these laws are not ‘set and forget’, but reflect changing consumer and community expectations, as transmitted through the Parliament. With ongoing experience and engagement, the benefits will accrue over time, and this consumer-first mentality will become second nature for all participants in the financial and credit markets, irrespective of size, scale, channel, or focus.

Design and distribution obligations

One of the biggest and most innovative shifts in financial services law was the introduction of the design and distribution obligations (DDO). This reform recognises the limitations of a consumer protection framework based heavily on disclosure.

The obligations are intended to reduce harms seen from past mis-selling conduct and poor product design. Under the obligations, industry must design fit-for purpose products that meet consumer needs and then reach the appropriate consumers. Firms need to consider how products are marketed, as well as the sales practices they’ve adopted.

Target market determinations (TMDs) are vital because they set the product governance controls that ultimately flow through to distribution. It is important that issuers ensure their target markets are sufficiently granular, having regard to the key features and attributes of their products.

The obligations require firms to monitor consumer outcomes, review that information, and improve upon it. Where problems are identified, businesses need to consider whether changes are required to how their products are designed and distributed.

Initially, a key focus for ASIC is whether providers are using ‘best endeavours’ to comply with their obligations under the regime.

Observations on early credit card TMDs

Looking at credit card issuers, we have already seen changes to their product offerings, distribution practices, and promotional material in light of these obligations. We have provided tailored feedback to some issuers where TMDs have not met our expectations, particularly around the level of specificity and corresponding review triggers. Determinations that rely on consumer preference or intended use of the product are unlikely to result in compliance with the appropriateness requirements, as this is not consistent with the purpose of the provisions to shift onus for appropriate product design and distribution to the issuer.

Rather, language used to define the target market should be both objective and specific, keeping in mind that consumers’ likely objectives, financial circumstances, and needs do not always align.Review triggers should reflect the target market, be product specific, and take into account risks to appropriate consumer outcomes. For example:

  • where a credit card has an annual fee, we would expect there to be review metrics associated with low utilisation, and
  • where a balance could be held at a high interest rate, we expect to see persistent debt review metrics.

We expect credit card issuers will continue to refine internal processes and metrics used to review appropriate design and distribution. The use of data to inform decision-making focused on consumer outcomes is likely to be an area of interest for ASIC going forward.

Observations on early BNPL TMDs

Another area of interest not only to ASIC, but to many consumers, investors, and entrepreneurs, is the ever expanding “buy now, pay later” sector.

Earlier this year, we met with the leaders of some BNPL providers to understand how they intend to meet their obligations and to set out our expectations. We have commenced reviewing the TMDs of “buy now, pay later” providers, including following up with those providers we have identified as not having made their TMDs publicly available.

An early observation we are able to share is that some TMDs are too broadly worded and are not tailored to the specific offering and its key attributes. For example:

  • a broad consumer objective or preference alone, such as ‘the consumer is seeking to split their repayments’, is unlikely to be sufficient to define the target market.

Again, a TMD based only on a broad objective or preference is unlikely to contain sufficient information. It is important that issuers ensure their target markets are sufficiently detailed, having regard to the key features and attributes of their products.

In relation to the review triggers, ASIC envisages engaging with some providers to better understand the underlying metrics that would prompt a review. In the example of BNPL:

  • an increase in revenue received from late payment fees.

Our work here is ongoing, and we anticipate engaging with providers to obtain clarity and provide relevant feedback as appropriate.

Buy now, pay later

On the subject of “buy now, pay later”, allow me a brief tangent as I understand there will be an address on that subject later today.

BNPL continues to grow and evolve. With more than 20 providers in the market, even traditional banks have dipped a toe into BNPL offerings.

ASIC is committed to our continued monitoring of consumer experiences across all financial products, including BNPL. But we are heartened by the engagement we have already undertaken as part of TMDs; and we will continue to engage with the Australian Finance Industry Association on their Buy Now Pay Later Code of Practice. 

We are also seeing some new entrants adopting the Banking Code of Practice in respect of their BNPL product, instead of the AFIA Code. Unfortunately, there are providers that are not signatories to either code, which causes some concern.

Breach reporting

Returning to the year of law reforms.

October saw new breach reporting obligations applying to credit licensees for the first time. They were designed to bring greater certainty and clarity to industry on what to report to ASIC, as well as ensuring ASIC receives reports in a timely way.

This will allow ASIC to not only detect significant non-compliant behaviours earlier – and act sooner – but also assist us to identify and address trends of non-compliance across the industry as they emerge. Early identification and reporting of breaches could, we think, ultimately help the credit industry avoid significant delays through complex and costly remediation programs the rest of the financial services sector has encountered under the pre-existing regime.

In turn, licensees and boards will have greater confidence they are doing the right thing not only for consumers, but for the firm, its shareholders and its brand value as well.

In addition, this reform will provide greater transparency with ASIC’s obligation to publish breach reporting data commencing late 2022, which we will consult on in the new year.

ASIC’s guide on customer remediation

In mentioning remediation, ASIC recently released a draft updated and expanded regulatory guide to consult on the way licensees should conduct remediations.

Getting money back into consumers’ hands has never been more important. Proactive remediation upon the discovery of misconduct, or other failures, is necessary for licensees to achieve good outcomes for their consumers and comply with their licensing obligations including to act efficiently, honestly and fairly.

Right now, ASIC is monitoring 64 remediations that will see the return of about $5.4 billion to more than 5.6 million consumers or small businesses upon finalisation. This is not the complete figure - there are many other remediations that are dealt with by firms without any ASIC involvement. Especially in the credit and banking sector, ASIC has observed systemic under investment in systems that have led to significant failures in the delivery of benefits, discounts, or waivers as promised.

Licensees need to prioritise identifying and remediating problems earlier, especially in times of economic volatility. This will lead to better outcomes for customers, benefit licensees by rebuilding trust, and help licensees avoid significant payments and costs associated with remediating legacy issues. Our updated guidance on remediation is designed to work together with the law reforms I have outlined to help licensees achieve this goal.

Debt management reforms

I’d like to close the law reform portion of my address by reiterating that the protection of vulnerable consumers remains an ongoing priority for ASIC. In 2016, ASIC published research into Australian debt management firms and the risks they present to consumers. We welcomed the announcement by the Treasurer last year to require debt management firms to hold an Australian Credit Licence when they are paid to represent consumers in disputes with financial firms.

As of 30 June 2021, we had received a total of 82 applications for authorisations that covered debt management services. From 1 July 2021, subject to transitional arrangements, providers of debt management services must hold a credit licence with an authorisation that covers debt management services.

Critically, debt management firms must now be members of the Australian Financial Complaints Authority (AFCA). This enables consumers to access affordable and alternative forms of redress through AFCA, if issues arise around service provision.

The reforms also require debt management firms to undertake their activities ‘efficiently, honestly and fairly’.

We are aware from the research we undertook in 2016 that firms offering debt management services may engage in sales techniques that create a high-pressure sales environment and charge high-upfront fees for services that may not be suitable for a consumer. ASIC expects to see improvements in how debt management services are provided to consumers. Importantly, debt management firms must ensure that they are providing services to consumers in an appropriate and fair manner – this includes ensuring that:

  • promotional material does not create unrealistic expectations for consumers, and
  • services offer tangible benefits to consumers.

Glimpse into 2022

ASIC’s Indigenous Financial Services Framework

Let me now look forward to 2022, and start with some work that is of close, personal interest to me – and I am sure to many of you participating today.

ASIC’s Indigenous Outreach Program provides specialist advice, insights, and support to our teams where our work priorities touch on Aboriginal and Torres Strait Islander consumers and communities. This includes where Aboriginal and Torres Strait Islander consumers are affected or impacted by misconduct within the financial system. This also includes broader engagement with industry on unique challenges faced by those consumers and where ASIC can encourage collaboration and innovative solutions.

ASIC has held a range of consultations which have allowed us to build a stronger understanding of the needs and lived experiences of Aboriginal and Torres Strait Islander consumers, and their engagement within the financial system. We are using the learnings from these consultations to develop ASIC’s Indigenous Financial Services Framework.

This Framework will shape how ASIC engages with Aboriginal and Torres Strait Islander peoples and it will provide the opportunity for others to engage with the learnings. We will work together to collaborate where we can drive positive financial outcomes based on the values, priorities, and perspectives of Indigenous Australians.

Going forward, we will engage with financial services providers and industry associations from other sectors as well as Government departments and agencies with shared priorities to improve collaboration, use of data and information sharing. We look forward to finalising the formal ASIC Indigenous Financial Services Framework and I encourage all of you to engage with this work.

Consultation on relief for simple arrangements following a credit hardship notice

Having commenced my address with the theme of collaboration, it seems only fitting to end it there too. ASIC will have released two consultations by the close of this week, seeking feedback into early 2022.

The first – published only yesterday – is looking to consult on whether to extend the written notice exemption for credit providers and lessors who enter into simple arrangements with consumers in hardship.

ASIC currently provides relief to industry in Class Order [CO 14/41] which is due to expire on 1 March 2022. The class order relieves credit providers and lessors from the obligation to provide written notice to consumers about hardship contract variations of 90 days or less. The consultation looks into possible reasons for either:

  1. extending [CO 14/41] until 1 April 2024 without significant changes, or
  2. allowing the class order to expire on 1 March 2022.

Feedback on new intervention orders for short term credit and continuing credit contracts

Our second consultation is due to come out very soon and seeks insights into ASIC’s proposed use of its product intervention powers to address significant consumer detriment in the short-term credit and continuing credit contracts industries. This consultation continues ASIC’s work to address high-cost predatory lending impacting vulnerable consumers.

It will outline ASIC’s proposal to make product intervention orders which prohibit these products from being provided in circumstances which involve unreasonably high costs, in excess of the cost caps in the relevant exemptions in s6(1) and s6(5) of the National Credit Code. I would encourage all interested to review these consultations and contribute.

And while you may all be growing weary at the end of this year with our ongoing engagement and consultations, I’d ask all to keep one clear vision in mind – one we at ASIC strive towards daily – that is to ensure confidence in a financial system that, even under stress, can remain fair, strong and efficient.

I’d stress again that a fair, strong and efficient financial system is not inconsistent with commercially successful businesses. It instead provides an opportunity for ASIC and our regulated community to bring our objectives together for a common purpose: what’s best for the consumer, the community and the economy. Your clients, their trust and their confidence, is what will help rebuild our economy from the shocks of the past two years. And from these challenges, renewed commitment, determination, innovation and competitive energy will, I am confident, emerge. I can assure you of this – ASIC is up for the challenge and the additional effort this will take.

We look forward to working with you to achieve that goal, and I am happy to take your questions. Thank you.

Last updated: 09/12/2021 12:00