QED Risk Services has long been warning the credit industry of the perils of taking the new regulator too lightly.

We were not necessarily pleased to have our opinions vindicated in November when ASIC released its report on how they will interpret the responsible lending requirements.

But ASIC has now reached a new low in “regulation by force”.

QED Risk Services has taken a number of distress calls in recent weeks from finance broker Licensees that have felt the brutal touch of ASIC.  ASIC’s sister regulator, APRA, prefers a more conciliatory approach, sending requests for information and requests for an appointment several weeks out.  Not, it seems, ASIC.

The modus operandi appears to be as follows:

1. send a request for a large amount of information
2. hold the given information for a long period of time with no intervening communication
3. arrive on the Licensee’s doorstep several months later, unannounced with, effectively, a search warrant to immediately commence demanding files

However, the most concerning aspect of this regulatory heavy-handedness is that, from the accounts we are receiving:

• Staff interviews are forcedly held in isolation with no internal management representation;
• Licensees are reportedly being forced to sign off on documents allowing the regulator to share whatever findings they have with any other unrelated third party (eg consumer advocacy groups).

Although our assistance with these Licensees is at a very early stage, it appears that ASIC has adopted the sledge-hammer-to-walnut approach.

Be that as it may, the message is clear:  contrary to the opinions of other industry participants earlier in the NCCP commencement, ASIC is a very long way from playing the “friendly Uncle” and is, rather, using the heaviest of approaches available to a regulator.

Just as QED Risk Services has been predicting (everything we’ve said so far has come true), we can be sure that the next development of these enquiries will concentrate not so much on the conduct under investigation, but the demonstration of compliance with the legislative requirements.

Having “great files” is not good enough.  The expectation is that Licensees have systematic testing of their business vs ALL the legal requirements, that the testing is documented and that the test outcomes result in actions for the business to take to improve its game.

If you are having issues with ASIC or you are unsure as to whether or not you have the right systems in place to counter ASIC’s stance in the market, call Australia’s number one Credit Licensing consultancy group, QED Risk Services on 1300 817 662.

QED Risk Services was recently somewhat shocked to see some of the output from law firms, aiming to assist the credit industry understand the 1 October disclosure document requirements.  With some of these submissions running into 40-plus pages, we don’t think they have been much help.  Indeed, we have received several SOS calls in the past two weeks from brokers saying they’re even more confused after reading some of the legal commentary.

QED Risk Services has, today, released its own guide to the 1 October disclosure requirements.  Although aimed primarily at mortgage and finance brokers (making up the bulk of QED’s ACL clients), the guide will be useful to other participants also.  The guide is available free-of-charge for QED audit clients or for download on QED’s website for a nominal fee of $40.

However, the simple summary of the requirements are as follows:

• Credit Guide:  When to provide it? As soon as it looks like you’re going to provide assistance.  What it contains? “This is who I am, this is what I do, this is what I charge, this is who you can complain to.”
• Credit Quote:  When to provide it? Only if you charge fee-for-service.  What it contains? “This is what I will be doing for you and this is how much I will charge you for that.  Please sign here.”
• Credit Proposal Disclosure Document:  When to provide it? Only when you are about to suggest or assist with a particular product with a particular provider.  What it contains? “These are all the fees involved with the product, both the fees you pay and the others (eg commission) that you don’t directly pay.”

It couldn’t be simpler than that!

At QED Risk Services, we like to think we are making things simpler for the industry as a whole and our clients specifically.  We believe we keep the industry as best informed as possible, without weighing you down with legal jargon and unnecessary references to legislation that you are never going to read.  But if you are one of the few that is interested in this material and you want more meaty detail, we will be only too happy to provide it.

ACL holders must look beyond loan files and monitor a broader range of compliance obligations according to QED Risk Services Director, Greg Ashe.  “The NCCP Act covers a host of requirements of which responsible lending is only one – yet, despite this, most commentary in the industry to-date has centred on the transactional nature of loan files and ignored these wider obligations.”  Section 47 of the Act contains a long list of general obligations, none of which mention responsible lending per se.

QED Risk Services has launched a new online service for small ACL holders, called CompliFast,  to perform their own compliance monitoring quickly, easily and cost-effectively.  The service can also be used to clearly demonstrate compliance to external parties such as lenders and ASIC – particularly useful with the first ACLs coming up to their anniversary and submission of their annual compliance certificates.

“For the finance broker that couldn’t justify bringing a consultant in to audit their business, we thought ‘What if we could create a decision model that would ask the same questions we would ask and, based on the thousands of possible responses, provide the same report our consultants would provide?’

“The result is a state-of-the-art reporting tool that makes it easy for the Licensee to comply with all their obligations – not just some of them – in a way that absorbs the minimum time and dollar resources from their business.”

QED CompliFast can be accessed at www.complifast.com.au

We have noted recently that some industry commentators and consumer groups have been advising ACL holders to be wary about the kind of advice that they provide to their clients.

While these comments may be well intended, some of them have been factually incorrect.

Many broking businesses also offer consumers assistance and advice with the purchase of investment properties. This does, indeed, fall outside the authorisations of an Australian Credit Licence. Of course it does! Credit Licensees are authorised to do one of only three things:

1. engage in credit activities as a credit provider (lender);
2. engage in credit activities other than as a credit provider (everyone else); or
3. both.

At the other end of what the federal regulators oversee is Australian Financial Services Licensing.  AFS licensing authorises licensees to provide services in relation to specific financial products.

And that’s important because, guess what – real estate is not a financial product! Give a consumer advice about investing in property and that is not financial advice.

But there are some other things to note about this type of advice:

1. Some of the services we have seen in this space border on taxation advice – a service that is separately regulated;
2. Some States and Territories have their own legislation about this type of advice; and
3. There are industry bodies that attempt to quasi-regulate the industry.

So it’s not necessarily open slather and businesses providing these services need to be wary.  However, QED Risk Services main message here is that advice on property investment is not covered by ASIC regulations.

Is this a good situation?  Probably not.  To the average person in the street, advice of this type would ordinarily be considered to be “financial advice”.  But for the time being at least, it is patently untrue to say that brokers providing this type of advice are straying into “financial product advice”.

If you are unsure about your business activities in relation to federal regulations, don’t hesitate to contact QED Risk Services to discuss your needs.

Some industry stakeholders have recently commented that all ACL holders, right down to sole traders, need their own “credit policy”.

At face value, QED Risk Services absolutely agrees with this statement. However this is about where our level of agreement stops.  All policies need to be specific to the size and type of the business that they are for.  Certainly, it would be inappropriate for a broker to adopt the “credit policy” of a Bank as their own.

Licensees must have a policy statement that expresses how they will address the responsible lending obligations.  QED Risk Services provides its clients with comprehensive policies, tailored to that business.

However, for example, a broker’s responsible lending policy could be as simple as the following statement:

We have an obligation to ensure we go through the following process when assessing a consumer for credit:

1. Make reasonable enquiries about the consumer’s requirements and objectives and about their financial situation;
2. Take reasonable steps to verify their financial situation; and
3. Based on the above two activities, ensure that any credit with which we assist the consumer is not unsuitable for them

Unsuitable simply means that the credit contract did not meet the consumer’s requirements and objectives or that the consumer could not reasonably be expected to meet the obligations of the credit contract without substantial hardship.

To help us meet this obligation, we have the following tools in place:

1. A consistent and thorough fact find that helps us to ascertain (and demonstrate that we ascertained) the client’s needs and their financial situation;
2. A list, which we review six-monthly, of the types of income verification that we will require from every client, regardless of what an individual lender will request;
3. The recorded utilisation of a serviceability calculator, whether our own or the lender’s, that clearly shows the consumer’s financial position versus the credit contract obligations and, if necessary, accompanied by file notes that explain other facts pertinent to the client’s financials that may not have been included in the calculation itself;
4. A checklist that appears on every file ensuring that all the above tools have been fully utilised in the assessment process.

These procedures and samples of our credit assessment activities are reviewed at least quarterly as a part of our compliance testing programme.

Such a document should contain samples or templates of the checklists and other documents mentioned above; and active, regular compliance testing on your business must, of course, be performed.  QED Risk Services can provide all Credit Licensees with these tools and services.  See here for further details.

QED Risk Services has become one of Australia’s best known consultancy groups in the credit industry.  The team’s many years of experience in the credit industry has been instrumental in assisting nearly 200 businesses, of all shapes and sizes, to gain their Australian Credit Licence in 2010.

Throughout this work, QED Risk Services realised that there are a large number of brokers and broker-businesses in the industry that, for various reasons, either do not want their own ACL or are not quite ready – but, at the same time, are not altogether keen on becoming a Credit Representative with their aggregator.

To accommodate this segment of the industry, QED Credit Services has been granted its own ACL, allowing it to appoint Credit Representatives to provide credit assistance to consumers on its behalf.

Brokers that meet QED Credit Services’ strict approval criteria will be able to be appointed as Credit Reps and be free to aggregate with whichever approved aggregator they please.  QED Credit Services will educate brokers about their compliance obligations and will then monitor brokers to ensure their business remains compliant.

QED Credit Services Director, Greg Ashe, said “There’s been some hesitation about these third party models, because it’s a little bit ‘outside the square’.  But we believe it’s actually a win for all industry participants.  The broker gets what they want and the other links in the chain, lenders and aggregators, get the security of an extra layer of compliance monitoring that wasn’t there prior to 1 January.  We charge a flat fee for the service that we provide and all other existing commercial arrangements between lenders, aggregators and brokers remain unaffected.”

Call QED Credit Services on 1300 817 662 to find out about how to apply to join the group.

QED Risk Services is  saddened to hear of the untimely passing of one of its most colorful clients.

John Hill was an integral part of the Albury-Wodonga business community.  Together with business partner Alan Mills, they built City Central Home Loans into a thriving enterprise and one of the tightest and sensibly run credit broking shops that it has been our pleasure to encounter on our journey through the land of Australian Credit Licensing in 2010.

The QED Risk Services team would like to offer our sympathies and thoughts to Alan and particularly to John’s wife, Gail and their family at this difficult time.

Although QED Risk Services firmly believes that, pound-for-pound, most industry participants are best served getting their own Licence (especially now, while the requirements are relatively easy to meet), we are keen to emphasise that, if you are not ready to get your Licence yet, why don’t you wait and take care of it after the 31 December madness is over?

Chances are you have at least two options open to you – get your own Licence or become a Credit Rep of your aggregator.

So approach your aggregator and get made a Credit Rep.  Then in 2011 when all the craziness is over and there are more assistance resources available again, then look at getting your Credit Licence.

For our 2010 broker-friends, QED Risk Services will be offering a third option in 2011 – becoming a Credit Rep under QED’s own Credit Licence, which it is applying for in 2010.  This would ideally suit brokers that want strong compliance support and are not keen to become tied into their aggregator for Licensing.  Watch this space!

QED Risk Services has faced minor negative commentary from competitors recently for being either too complicated or too simplistic in its approach to Credit Licensing.  This is the inevitable consequence of trying to take the middle road.

Some small brokerage businesses tell us that they don’t understand why they should have “complicated” policies that appear to describe something too far removed from the reality of their business.  The response here has to always be that, I’m sorry, NCCP has lifted the bar and there are certain things you are going to have to do from now on if you’re serious about being a Licensee.  These things are all things that other, serious businesses do these days, so just join the party and get with the programme.

At the other end, we are aware of criticism that our documentation for our clients does not go far enough.  To this we simply respond that Credit Licensing is not the same as Financial Services Licensing.  Too many parties have come to Credit Licensing late in the piece and have failed to appreciate that this is NOT investment-world.

QED Risk Services has been doing its very level best to meet and mix with the Australian broker community and to try to not only educate them to the areas where they now need to lift their game in terms of their obligations under NCCP; but to understand their world and their needs and not try to overload them with unnecessary lawyer jargon.

At the end of the day, QED Risk Services is about providing practical solutions to regulatory imposts.  Something that we think our natural competitors have failed to appreciate.  The overriding phrase of the NCCP legislation is nature, size and complexity.  We’ve tried to strike a balance and the hundreds of businesses we’ve assisted, we think, appreciate this.

Many credit industry pundits had scoffed at the phraseology adopted by the law-makers with respect to credit.  Whilst the term “not unsuitable” seems unwieldy at first, it turns out to be something of an arrow in the broker’s quiver.

Six months ago, many of QED Risk Services’ credit industry clients were in a panic about the thought of having to provide reams of options to clients and what to do about those difficult clients that just wanted to be set up with the lender of their choosing etc.

However, as we dig deeper into the world of responsible lending, we find that the only test a broker has to meet is that they did not assist a client with a product that was unsuitable for them.

The client can tell you what to do if they want.  No need for complicated “execution only” forms a-la financial planning world.  No, all you need to do is demonstrate that the product you assisted the client with was not unsuitable for them.

Not unsuitable?

On the surface, this is fairly simple and QED Risk Services are finding, in our journey of assisting credit businesses with Australian Credit Licensing, that most brokers are already complying with the spirit of the requirements.

To arrive at a conclusion of “not unsuitable”, brokers need to do three things:

1. make reasonable enquiries about the client’s financial situation, their requirements and their objectives;
2. make reasonable efforts to verify their financial situation; and
3. based on 1. and 2. come to a conclusion on unsuitability.

Not a mammoth task and not totally misaligned with what most brokers do now. However, there is a little sting in the tail.

Preliminary assessment

If a client asks for it, brokers are obliged to provide them with a written assessment of how they arrived at the conclusion that the product was not unsuitable for them.  This is known as a preliminary assessment.  It’s simply a matter of documenting the three-stage process outlined above.

But what QED Risk Services is experiencing is that many brokers think that completion of the lenders’ serviceability calculator will be sufficient to demonstrate the requirements.

In our experience, in most cases this will not be sufficient in itself to meet the broker’s obligations.

QED Risk Services has been giving credit industry clients assistance in developing client-friendly preliminary assessment reports that DO demonstrate the validity of the broker’s assessment in deciding to assist a client with a particular product.

Please see our Services page for more information, consider purchasing our Australian Credit Licensing Application Kit, or contact us directly to discuss the ways in which QED Risk Services can assist you to gain your ACL.