Consumer & Small Business Lending

"Distribution models and product design are key.

"Some of the credit changes (eg commission and additional duties on brokers and removing the point of sale exemption) have the potential to fundamentally reshape the industry. The Government and Opposition potentially have different views on whether these should be introduced incrementally and how quickly, but industry needs to prepare immediately for at least some of these changes. More generally, design and distribution models across consumer and business credit will be subject to new obligations, which will sit beside and interact with the relevant responsible lending obligations. A fundamental review of products, their appropriate target market, and distribution restrictions will be required. In aggregate the result will be transformational change and there will be winners and losers.

"There are no immediate changes to consumer responsible lending practices but keep a key watching brief."


Small Business Lending

Relevance & consequences for industry

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As expected, the Commissioner has recommended that the NCCPA should not be amended to extend its operation to small business lending. This responds to concerns that extending the responsible lending obligations would likely reduce access to and increase the cost of credit for small businesses.

However, the Government’s proposed design and distribution obligations (DDO) and product intervention powers will be extended to all products regulated under the ASIC Act. We expect some kind of consumer and small business test will be adopted, which should be aligned to one of the existing definitions in use.  This means lenders to small business will be required to make a “target market determination”, which must be reviewed, publicised, enforced and monitored. A “target market determination” describes the people that comprise the target market for a product, sets out any conditions and restrictions on the distribution of the product, sets out arrangements for periodic review of the determination and specifies a number of reporting obligations for distributors.

The final report recommends that the definition of “small business” in the Banking Code of Practice be amended, so that the Code applies to any business or group employing fewer than 100 full-time equivalent employees, where the loan applied for is less than $5 million. The effect is that the rights and protections available under the new Banking Code of Practice will be available to more small businesses. It is unclear whether the ABA will act on this recommendation.  We understand the Small Business and Family Enterprise Ombudsman has also requested the ABA consider further changes to the Code.

A national farm debt mediation system is the headline recommendation in a package for agricultural loans.  In addition, banks should not be able to charge default interest on agricultural loans while a natural disaster declaration is in place, and other changes should be made to the way in which distressed agricultural loans are appraised and managed.

What you should do next

  • Lenders should start reviewing their products with regard to the DDOs, considering the appropriate target markets, whether changes are required to cover a range of target markets, what distribution channels continue to be appropriate and what restrictions may be required.

  • Subject to the ABA’s response on the recommendation to amend the definition of small business, signatories to the Banking Code of Practice should consider revising their policies and procedures to ensure that they can accurately identify small businesses that satisfy the new definition.


Credit Distribution and Intermediaries

Relevance & consequences for industry

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Lenders may look for new distribution channels as traditional distribution models for home loans, auto finance and co-branded credit cards come under threat.  

The removal of the point of sale exemption will have a significant impact on the distribution of auto finance, credit card products and consumer leases. We expect that lenders and distributors may look to other distribution models using the mere referrer exemption or a credit representative model. In the retail space, providers of non-NCCPA regulated credit (such as buy now pay later products) may also become more prevalent (both online and instore) if issuers chose not to offer co-branded credit cards instore.

We expect that lenders will also look at new distribution channels for home loans following the banning of commissions paid to mortgage brokers and the introduction of a best interests duty. The new digital banks and those that have invested heavily in their digital platforms may have an advantage if there is a decline in the number of loans originated by brokers. Comparison sites may also see an opportunity to expand.

With the new product design and distribution obligations extending to credit (NCCPA and non-NCCPA), both issuers and distributors will also need to consider whether modifications will be required to products, whether all distribution channels remain appropriate and the kinds of restrictions that will need to be imposed on distributors (and how these will be monitored and managed).


What you should do next

  • Lenders should review their current distribution channels and consider investing in new models or divesting of existing channels.

  • Lenders involved in point-of-sale, or in other areas which may be viewed as analogous to broking, should engage in the legislative process to ensure there are no unintended outcomes.

  • Lenders should start reviewing their products with regard to the design and distribution obligations, considering the appropriate target markets, whether changes are required to cover a range of target markets, what distribution channels continue to be appropriate and what restrictions may be required.


Responsible Lending

Relevance & consequences for industry

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The unsuitability assessment under the NCCPA will not be changed at this stage (including to change the obligation to a suitable rather than not unsuitable threshold).  Banks are already making changes to the collection and verification of expense information and the extent of reliance on benchmarks.  However, legislative changes may be made depending on the outcome of ASIC’s current litigation in relation to mortgages.

Given the commentary in the final report on the verification of borrower expenses, we expect to see a move towards increased use of digital technology to capture customer income and expense data and reduced reliance on the Household Expenditure Benchmark, particularly when the Open Banking reforms commence operation. ASIC is also expected to release a revised Regulatory Guide relating to responsible lending conduct obligations, which we expect will drive further changes in how lenders verify a borrower’s financial situation.

Finally, the decision to apply design and distribution obligations to credit, with target market determinations and distribution restrictions will also interact with responsible lending obligations, and how they will develop going forward.


What you should do next

  • Lenders should review their current systems and processes for responsible lending obligations and consider whether any enhancements would assist with verifying a borrower’s financial situation.  The measures discussed in the report should be considered.

  • Once ASIC releases the revised ASIC Regulatory Guide 209, lenders will need to engage with it and enhance their systems and processes to align with ASIC’s expectations.

  • Lenders should consider the impact of design and distribution obligations, and how they interact with responsible lending.

Authored by: Katherine Forrest, Kate Jackson-Maynes and Mizu Ardra.

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