Last month, ASIC surprised us by releasing its latest update on Regulatory Guide 209. We say "surprisingly" because we don't see how definitive guidance can be delivered until the Westpac case is finalised - but let's just walk over that for now.
So, what has changed as a result of the new RG209? We at QED say NOTHING has changed. None of our long-time clients will read anything in RG209 that is different to what QED has been telling you all along.
However, if you are new to QED and have managed to keep clear of our advice on this over the past ten years, the following information may be useful to you.
This is not to say the new RG209 is useless - far from it. It confirms that which we have always said about responsible lending - but now it explains it better. The guide is much more detailed than previous versions, providing many examples to illustrate ASIC's points.
As predicted by most, the new guidance is still "principles-based", which is to say that it does not provide step-by-step rules to follow or boxes to tick to be sure you're getting it right. The examples used throughout (with one notable exception - see below) are very practical and convey the meaning of the associated guidance. Where the point they are trying to make could go one way or another in practice, they provide more than one example - one that they think would comply and one that they think would not.
There is recognition of a lot of circumstances that the broker industry has been talking about for years, even if the recognition comes with a lot of conditions on how we address these issues. Examples of these include:
- Borrowers reducing their living expenses to afford proposed loan repayments - there is a lot of discussion and coaching about whether some pre-loan expenses can really be reduced or eliminated.
- The genuine need for interest-only loans - remembering these were a "dirty" product a few years ago, ASIC has come to comprehend that there are real reasons to get an interest-only product. Again, lots of coaching around documenting the reasons why.
- How known information about an existing client can sometimes be a substitute for fresh enquiries - if you're refinancing an existing client into a "like-for-like" loan to access a better product and you know that they are comfortably already meeting the existing obligations, you may not need to go into a highly detailed analysis of their financial situation as you would if they were a new client.
- The use of HEM when considering your client's finances - ASIC has faced this head-on and clearly acknowledges the value of benchmarking. However, caution is advised in that HEM should normally be used as a "reasonableness test" and not as a substitute for verification of what your client is telling you. We agree and this is what we have always said. However, there may be other information available with a specific client that does make this okay, such as where the client is telling you something way over HEM and you have no reason to believe anything otherwise. There are times when HEM alone should be okay as a verification point.
Even though the Westpac case is yet to fully unfold - the appeal is set for 25 and 26 February - RG209 still makes a few references to it. However, some of the references are a little confused and selective.
There is one example provided, however, which is a bit comical. In Example 27, a broker assists a consumer and suggests some loans products. To quote the example:
Once the customer has selected their preferred loan, Steve completes a fact find document, which records the customer's stated requirements and objectives and requires information about their income and outgoings.
Hmmm - we're pretty clear that Steve should have done these things before suggesting the loan products!! ASIC got this completely wrong by the law so please don't start to think that it's okay. The NCCP Act is very clear. When you suggest a product to a person, you have provided "credit assistance" and before you provide credit assistance you have to conduct your preliminary assessment.
Certainly, ASIC's approach to consumers in this new RG209 is that consumers can't be relied on to provide brokers with the 100% correct information. This is QED's reasoning as to why getting fact finds signed by the consumer is useless (unless this is a specific requirement of your Aggregator or Licensee). A lot of large groups advocate this and even require it from their Credit Reps. We think that RG209 demonstrates even further that collecting those signatures is a waste of time.
Documentation and Record Keeping
Another of QED's messages is abundantly clear right throughout this new RG209 - meticulous documentation and record keeping is the key to demonstrating your compliance, particularly with responsible lending.
Back to HEM, all brokers should be keeping a running tally of how their client expenses compare to HEM on a portfolio basis. If you are always submitting loan deals with expenses hovering on or about HEM, then you need to take a look at why that is - it should not be the case. RG209 covers this in some detail.
Requirements and Objectives
Finally, there is a lot of material on requirements and objectives. QED still sees a lot of things like "wants to buy a house" or "refinance" under the heading of requirements and objectives. This does not even go close to fulfilling your broker obligations. Objectives are the things that the client wants to achieve - like want to be debt free in 15 years. Requirements are the product features that they need to get them to those objectives - like an offsetting redraw facility.
Not only must you clearly articulate these requirements and objectives, you then need to "close the loop" by listing out the features of the product that you recommended and matching those features to the requirements and objectives that you identified. Again, QED has said this for years and now RG209 says it out loud.
So, again, we do not think that there is anything new in RG209. Everyone is getting hot under the collar about nothing. The only brokers that have anything to be concerned about are the ones that have NOT been listening to QED since the original RG209 in 2010.
Best Interests Obligation
Once again, QED really doesn't think this is anything new and the legislation does not in anyway try to define what it is. The legislation simply says:
The licensee must act in the best interests of the consumer in relation to the credit assistance.
It also goes on to say that, where there are conflicts of interest between the consumer's interests and those of the broker or their associates, then the interests of the consumer must come first. That's it!
So, what might this mean? Well here's a wild stab in the dark - if you truly absorb everything written above regarding RG209, then we fail to see how anyone could consider that you didn't act in the client's best interests.
Once again, though, it's documentation, documentation, documentation. Have the clear and definitive narrative about what you did, how you did it and why you did it. Ensure you have clearly articulated what your client really wanted and how you knew that. Show how what you did was a match for what the client wanted.
Again, this is not really new. The legislation already has a requirement that a consumer is not disadvantaged by the existence of a conflict of interest. ASIC turned that into a wish that Licensees have procedures for managing conflicts of interest. This is no different to that and QED has been educating brokers on this for 10 years.
We hope that this clears up the hysteria for everyone and that you can now all go back to what you were doing - finding the best financial solutions for your valued clients.