Speech by Sean Hughes, ASIC Commissioner, at the 30th Annual Credit Law Conference, 26 October 2020.
Check against delivery
Thanks Elise and good morning everyone.
I’d like to acknowledge the Traditional Owners of the lands upon which we meet; and pay my respects to Elders past, present and emerging.
In the 30 years this conference has existed, the industry has seen an array of significant changes and developments including the:
- introduction of the state-based Uniform Consumer Credit Code
- referral of credit regulation to the Commonwealth
- introduction of the National Consumer Credit Protection Act.
And then along comes 2020 – the year of unprecedented business and community disruption.
Just like it has over the past three decades, the industry continues to respond, adapt and evolve. And as regulators, we have an obligation and imperative to remain flexible and nimble to adapt to and move with these changing times.
We too are not immune from disruptive impacts. I’m sure you will have seen the announcement on Friday that Mr James Shipton has stood aside as the ASIC Chair while an independent review arising from an ANAO audit is undertaken and which will report to the Treasury. Deputy Chair Ms Karen Chester was appointed by the Treasurer as Acting Chair on Friday afternoon.
Amid this disruption and the ongoing uncertainty to business and consumers which the pandemic has brought, there is something that cannot and should not change – ASIC’s core purpose. We’re here to ensure confidence in a financial system that – even under stress – can remain fair, strong and efficient.
Confidence is the bedrock of the economic recovery process. This is the purpose of ASIC’s work, both in the immediate context of the pandemic and whatever evolves next beyond it.
While the focus in the current macroeconomic environment is primarily addressed at ensuring credit flows quickly and efficiently to borrowers, consumers still expect to be treated fairly and for their interests to be placed first.
Put simply, fairness is essential to confidence.
There’s a symbiosis between fairness and confidence that will help lead us to economic recovery. Confidence without fairness, is an unstable foundation for economic growth and community prosperity.
This tenet is particularly important at a time when the community is being asked to bear a heavy burden in meeting the economic and social costs of the recovery.
With that in mind:
- The first thing I’ll update you on is where we’re up to on the Financial Services Royal Commission reforms from 2019.
- Second, I’ll cover ASIC’s current strategic priorities and enforcement action.
- Third, I’ll touch on what’s on the horizon for 2021 – namely ongoing credit reform and design and distribution obligations.
1. Financial Services Royal Commission reforms
As many of you are aware, the commencement dates for some Royal Commission reforms have been delayed by six months in recognition of the challenges created by the pandemic.
This includes a six-month reprieve for the commencement of the mortgage brokers’ best interests duty.
RG 273 Mortgage Brokers: Best interests duty
In June this year, ASIC published new regulatory guidance for mortgage brokers and other relevant Australian credit licensees on the best interests duty.
From 1 January 2021, mortgage brokers will be required to act in the best interests of consumers and to prioritise consumers’ interests when providing credit assistance.
Consistent with this legislation, the guidance is high level and principles-based, but also incorporates practical examples.
The purpose of RG 273 is to explain the obligations introduced by the Parliament to give effect to Government policy – it does not prescribe minimum standards of conduct, nor does it impose new or additional obligations from ASIC.
RG 273 contains ASIC’s interpretative views on how mortgage brokers may comply with their best interests obligations at key stages of the credit assistance process. This includes guidance on:
- the effect of the range of credit providers and products brokers can access
- recommending packages of credit products
- the types of records that may be kept for demonstrating compliance.
RG 78 Breach reporting by AFS licensees
The second Royal Commission reform coming down the pipeline is the introduction of breach reporting obligations for credit licensees.
The proposed reforms include requirements for third-party licensees to report breaches by individual mortgage brokers and financial adviser representatives of other licensees. We intend to consult on an updated RG 78 on breach reporting in early 2021.
We’re also going to consult on an information sheet for new requirements for financial advisers and mortgage brokers to investigate misconduct, and notify and remediate affected clients.
Reference checking and information sharing protocol
The Royal Commission recommended that Credit licensees and AFS licensees should be required to comply with a reference checking and information sharing protocol for mortgage brokers and financial advisers, similar to the ABA’s current reference checking and information sharing protocol for financial advisers.
Treasury consulted on draft legislation to implement these recommendations earlier this year. Under the draft legislation, ASIC will have the power to make legislative instruments determining the protocols for reference checking and information sharing about prospective financial adviser and mortgage broker representatives of AFS licensees and credit licensees.
Once final legislation is introduced, ASIC intends to consult with industry to seek feedback on the proposed requirements for licensees under the ASIC protocol. This will include consulting on a draft infosheet, which will provide guidance on the ASIC protocol.
We will be taking industry feedback into account before we finalise the protocol in the first half of 2021, as soon as practical ahead of the October 2021 commencement.
Enforcement and Royal Commission referrals
Before I move onto the second part of this update, I’d like to highlight the progress of some of our enforcement work including the Royal Commission case study referrals.
ASIC outlined in our most recent Enforcement Update for the January to June 2020 period, in the first half of this year, 99 enforcement investigations were commenced and 62 investigations and litigation actions were completed.
The Royal Commission made 13 referrals to ASIC, five of which are currently in litigation, one of which concluded with $57.5 million in civil penalties, and the remainder are under investigation.
Additionally, ASIC to date has either commenced or finalised action in 10 Royal Commission case studies.
2. Present priorities
Let me now turn to our current work. There is much going on so I won’t cover everything. But there are four important areas of work I’d like to highlight:
- Industry engagement on COVID-related issues
- Product intervention on continuing credit
- Enforcement action in the automotive industry
- Debt management firm licensing.
I’m sure the ABA CEO Anna Bligh will go into more detail in her Industry Update, which is up next. But I’d like to highlight a few things ASIC has worked on with industry since the lockdowns began.
The first was back in April, when we responded to a request from the ABA and other credit providers for guidance on the regulatory approach to lending during the pandemic. We published a response to clarify that:
- Responsible lending obligations should not be a barrier to providing appropriate assistance to consumers experiencing temporary hardship; and
- We would be taking a facilitative approach to support lenders to make their best endeavours to comply. Importantly, we have made clear that we will not take action in relation to strict failures to comply where lenders have made reasonable efforts to comply in the circumstances.
Also in April, we published a list of expectations for lenders who are handling requests from consumers for temporary assistance, including loan repayment deferrals.
In August, as parts of the country were emerging from restrictions and some economies began to recover, we released a new publication containing updated expectations for lenders on the expiry of loan repayment deferrals.
We asked that:
- Lenders make reasonable efforts to contact consumers prior to their repayment deferral expiring. This contact should be timely and allow for consumers to have reasonable time to consider their options.
- In circumstances where a consumer cannot return to meeting repayments, lenders should make reasonable efforts to gather personalised information about the consumer’s circumstances. We consider that taking such steps will allow lenders to make a decision about the consumer’s loan in a fair and appropriate manner, including better enabling lenders to offer assistance that genuinely meets the needs of each consumer.
Financial hardship – ASIC’s monitoring
ASIC continues to closely monitor how lenders are assisting consumers experiencing financial difficulties due to COVID-19.
We recognise that right now, as loan repayment deferrals expires, lenders are working very hard to contact consumers who have been affected by COVID-19. If consumers are still struggling, especially in regions or sectors which have been the hardest hit, we expect that lenders are finding appropriate solutions to help them.
Unfortunately, there will be instances in which offering consumers further temporary assistance may in fact make their total indebtedness situation worse. These instances need to be carefully identified by lenders and involve a high level of engagement with those affected. We are encouraging consumers to engage with their banks – early and often – and to seek debt counselling or other advice.
ASIC expects lenders to make all reasonable efforts to work with consumers to keep them in their homes if that is in the consumers’ best interests.
Hardship will be an ongoing area of focus for ASIC into 2021, where the fair treatment of consumers will remain fundamental to reaching good outcomes.
As we continue to monitor lenders’ responses to consumer hardship, we are mindful of the potential for unregulated fringe lenders who are using the pandemic to prey on vulnerable people. In particular, people who are desperate to stay in their homes.
ASIC has zero tolerance for this kind or predatory behaviour, particularly lenders who are offering refinancing options that are nothing more than equity stripping.
If you or your clients see examples of this behaviour, we urge you to come forward and report it to ASIC.
As I said earlier, fairness is essential to and underpins confidence.
To stimulate economic recovery, it’s one thing to have credit flowing quickly and efficiently to borrowers. But if the system isn’t fair, the confidence won’t be there.
We welcome the Government’s reforms to enhance financial inclusion and ensure Australian consumers accessing these products are better protected.
Product intervention on continuing credit
While I’m on the theme of protecting vulnerable consumers, I’ll now turn to our work in the small-amount lending space.
We continue to take action in this area to protect consumers from being sold high-cost unregulated credit.
In September 2019, ASIC made our first industry-wide product intervention order (PIO) in relation to short-term credit, which prevented credit providers and their associates from charging fees and charges which exceed the short-term credit exemption in section 6(1) of the National Credit Code.
Cigno, an affected entity, applied for judicial review of the short term credit PIO in the Federal Court of Australia. The review was dismissed and Cigno appealed to the Full Federal Court. The hearing of that appeal is listed for 19 November 2020.
Shortly after the short term credit PIO was made, Cigno and (another apparently associated entity) BHF Solutions started issuing a continuing credit product that relies on a different exemption in the Code, section 6(5).
In July 2020, ASIC published Consultation Paper 330 on its proposed use of the product intervention power which addresses our concerns that the continuing credit product may be causing significant detriment to retail clients,
In September 2020, ASIC also commenced proceedings in the Federal Court against Cigno and BHF Solutions in relation to their continuing credit product. We’re seeking declarations and injunctions for alleged contraventions of the National Consumer Credit Protection Act 2009 relating to unlicensed credit activities.
Example of recent enforcement action
I’d also like to highlight a recent case study in which ASIC took action against a lender in the automotive industry.
In September 2020, the Federal Court of Australia found that Rent 2 Own Cars Australia Pty Ltd failed to comply with the Credit Act by charging some consumers an annual interest rate of more than 48% when purchasing used cars.
We were successful in obtaining injunctions restraining Rent 2 Own Cars from engaging in contraventions of both the Credit Act and ASIC Act.
The matter will be listed for a further hearing to determine the amount of the penalty and duration of the injunctions to be imposed on Rent 2 Own Cars and its directors.
Debt management firms in the spotlight
Another area of concern to ASIC, particularly in relation to vulnerable consumers, is the debt-management sector, which also includes services known as ‘credit repair’.
In 2016, ASIC published research into Australian debt management firms and the risks they present to consumers. The purpose of this report was to contribute to information about this growing sector and policy debate.
As part of the package of reforms announced by the Treasurer on 25 September, debt management firms will be required to hold an Australian Credit Licence when they are paid to represent consumers in disputes with financial firms. This reform is intended to take effect from 1 April 2021.
The Government’s reforms will require debt management firms to meet the ongoing obligations imposed on credit licensees. These obligations include a requirement to meet the ‘fit and proper person’ test, and to undertake their activities ‘efficiently, honestly and fairly’.
ASIC will be able to use its compulsory information gathering powers to monitor compliance with the credit legislation and have recourse to administrative action, where appropriate.
Critically, debt management firms will have to be members of Australian Financial Complaints Authority. This will enable consumers to access affordable and alternative forms of redress through AFCA if issues arise around the service provision.
We welcome the announcement made by the Treasurer and will be working closely with Treasury to implement and oversee these changes.
3. What's on the horizon
I’ll now wrap-up my update with a look at what’s on the regulatory agenda for 2021.
And I’ll start by addressing what some of you may consider to be the elephant in the room.
On the topic of responsible lending, this is very much an ongoing process and entirely a matter for Government to give effect to its policy. We’re working closely and collaboratively with Treasury and APRA to progress the reforms announced by the Treasurer on 25 September. We look forward to seeing the draft legislation soon.
Likewise on Buy-Now-Pay-Later, which was also reprioritised due to the social and economic instability created by the pandemic.
We still plan to issue the BNPL report in the near future. What that report will do is provide insights into the growth and evolution of the industry. It will cover some of the harms that we continue to see, including the cost of the BNPL arrangements for certain consumers.
Of course, what Government wishes to do in terms of future regulation, if any, of the BNPL sector, is a matter for Government. Our job is to put forward the facts, update the observations we made in Report 600 and provide the data to support good policy decisions in future.
Design and distribution obligations
The design and distribution obligations, which now commence on 5 October next year, represent a step-change in financial services regulation, placing greater responsibility on issuers and distributors of financial products to appropriately design and distribute their financial products.
The obligations should reduce harms seen from past misselling conduct and poor product design, including those identified during the Royal Commission.
The obligations embed a consumer-centric approach to the product lifecycle and should assist industry to deliver better outcomes for consumers whilst managing non-financial risks and avoiding costly remediation.
Under the design and distribution obligations, industry must design fit-for-purpose products that meet consumer needs. They will also need to take steps to ensure their products are reaching the right consumers.
This includes consideration about how products are marketed and the sales practices adopted. Where poor consumer outcomes are identified, industry will need to consider whether changes are required to the design of their products and how they are being sold.
ASIC expects compliance with DDO from day one. Not in a ‘tick-a-box’ way, but compliance in a way that meaningfully improves outcomes for consumers. Ultimately, this means firms will need to understand their products and the outcomes they are delivering to consumers. In order to do this, industry needs to invest in the data systems now and ensure that they are properly able to monitor the outcomes of their products come 5 October next year.
ASIC will be releasing its final guidance on these obligations soon.
Which leads to my conclusion.
As we all evolve and adapt in order to ride out this period of unprecedented business disruption, you can expect ASIC to evolve and adapt alongside you.
But one thing remains the same – the expectation of fairness.
Just as it has for the past 30 years – before the internet and indeed ASIC – existed in their present forms.
Effective, adaptive regulation will continue to ensure confidence in a financial system that – even under stress – can remain fair, strong and efficient.