Speech by Sean Hughes, ASIC Commissioner, at the Australian Retail Credit Association Conference, 13 November 2020.
Check against delivery
Thank you for the introduction Mike and good morning everyone.
I would like to acknowledge the Traditional Owners of the lands upon which we meet; and pay my respects to Elders past, present and emerging.
I am delighted to be speaking to you on the third and final day of the ARCA Conference. It hasn’t escaped my notice that today is Friday the 13th. So if anything goes wrong with technology today, including this live feed, you’ll know why.
In this speech, I want to look back over some of the developments for both ASIC and the industry during this year, and to look forward to what is on the horizon for next year.
2020 will undoubtedly be one of the most memorable in our lives. Etched into our history alongside other major world events such as natural disasters, wars and terrorist attacks.
Those of us who can look back on this time and remember inconveniences and even boredom can count themselves lucky. Many more will know real hardship and anxiety.
For those of us still secure in our jobs, our home life and working lives became intertwined this year like never before.
I hope 2020 will be defined NOT by what we lost to this virus, but by how we responded to it.
As you all know, in the past month ASIC has been dealing with some particular internal disruption and leadership change, not just the external disruption caused by COVID-19.
Last month the Commission accepted responsibility for certain failings of process and governance arising from findings of the Australian National Audit Office and the Auditor-General in the course of the completion of our FY 20 financial statements.
We fully support the independent review that is being undertaken at the request of the Treasurer and which will report to the Treasury. We will embrace its findings and make the necessary changes to ensure it doesn’t happen again.
I am confident that with the benefit of the findings and recommendations of the independent review, we will move forward stronger than ever.
Amid these challenges 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.
With that in mind:
- The first thing I will update you on is ASIC’s response to the pandemic including our revised priorities and progress on Royal Commission matters.
- Second, I will cover some of our current priorities in the credit industry including hardship, predatory lending and debt management practices.
- And finally, I will touch on what is on the horizon for 2021 – namely ongoing credit reform and design and distribution obligations.
1. ASIC’s response to the pandemic
Alongside all those around us in industry, government and the broader community, ASIC adjusted to respond to the impact of the pandemic.
Like others, we saw remarkable workforce transformation during this time. Across the country ASIC’s 2,000-plus employees transitioned to working from home remotely within a matter of weeks and continued business-as-usual.
In mid-April, ASIC announced it would temporarily change its regulatory work and priorities to allow it and regulated entities to focus on the impact of COVID-19.
This included the deferral of some activities and redeployment of staff to address issues of immediate concern, including maintaining the integrity of markets and protecting vulnerable consumers.
In May we provided relief to facilitate virtual shareholder meetings and extended the period for lodging financial reports.
We responded rapidly to the needs of companies to raise capital quickly by giving temporary relief to enable certain ‘low doc’ offers to be made to investors, even if they did not meet all the usual requirements. These initiatives assisted Australia’s capital markets to remain strong and efficient and resulted in listed companies raising over $31 billion since the pandemic began.
In June, we clearly articulated our COVID priorities in our Interim Corporate Plan. We reiterated the same five priorities in our full Corporate Plan in August.
- Maintaining financial system resilience and integrity.
- Protecting consumers from harm at a time of heightened vulnerability.
- Supporting Australian businesses to respond to the effects of coronavirus.
- Continuing to identify, disrupt and deter the most harmful conduct.
- Continuing to build our organisational capability in challenging times
A key consideration that we called out in our Corporate Plan is the extent to which we are supporting the long-term recovery of the Australian economy, in all the work we do.
In response to the pandemic, we established three internal working groups to respond to scams, unlicensed advice and misleading advertising.
In the credit and banking space, we paused several pieces of work as the effect of the pandemic deepened.
The aim was to push back the timeframes on our regulatory work to allow you in the industry to deal with your own immediate priorities and those of your customers.
The ePayments Code review was one of those items of work that we deferred. ASIC is reviewing the Code to assess its fitness for purpose, noting significant developments in financial technological innovation and the need to ensure the Code is simple to apply and easy to understand. We are aiming to publish ASIC’s second consultation paper on the Code around, or not long after, the end of 2020. This will provide detail and seek feedback on the proposed changes to the ePayments Code. Our intention is still to issue an updated ePayments Code by the middle of 2021.
We are presently forming our initial views on how best to update the Code, based on a significant amount of stakeholder feedback and suggestions that we have received on various topics over the course of our review. Before we proceed to issuing our second consultation paper, we see great value in engaging once more with various key stakeholders to discuss the workability and appropriateness of our initial views and whether any approaches might give rise to unintended consequences. We see this as an important step to ensure that our second consultation paper presents realistic proposals that we hope all stakeholders, to an extent, can live with and that will generate considered analysis in stakeholder submissions. We intend to recommence this stakeholder engagement in coming weeks.
Deferment of Royal Commission agenda
On 8 May, the Treasurer announced that legislation to give effect to remaining Financial Services Royal Commission recommendations will be deferred by six months.
In line with this, ASIC has granted exemptions so that industry has an additional six months to comply with the mortgage broker best interest duty and related reforms, as well as the design and distribution obligations. Industry must comply with these reforms by 1 January and 5 October 2021 respectively.
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.
Instead, 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
- the types of records that may be kept for demonstrating compliance; and
- recommending packages of credit products.
On packaged products – we note that the reforms apply to each distinct product in the package. That is – there much be a reason why recommending each product is in the best interests of the consumer. Our guidance explores this issue in detail, including some of the practical things that brokers can do and consider to ensure they comply from 1 January 2021.
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.
We will be taking industry feedback into account before we finalise the protocol in the first half of 2021.
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.
We remain committed to using effective enforcement action to address consumer harm and punish wrongdoing.
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 a further 10 Royal Commission case studies.
2. Current 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 would like to highlight:
- Industry engagement and the focus on hardship
- Our use of product intervention powers for continuing credit
- Enforcement action in the automotive industry
- Debt management firm licensing.
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 the pandemic.
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.
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 this year, 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 have AFCA consider their issues or complaints without cost and in a timely way.
ASIC welcomes the announcement made by the Treasurer and we are working closely with Treasury to implement these changes.
3. Looking forward
I’ll now wrap-up my update with a look at what’s on the regulatory agenda for 2021.
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 credit reforms.
On 4 November the Government released for public comment draft legislation and regulations, as well as a draft of the credit standards for non-ADIs. These reforms remove the responsible lending obligations for credit products other than small amount credit contracts and consumer leases, and introduce a set of standards that require non-ADI lenders to assess a consumer’s capacity to repay a loan without substantial hardship.
Additionally, the exposure draft would extend the best interest duty for mortgage brokers to a wider group of business providing credit assistance to consumers, such as finance brokers. The consultation period closes on 20 November.
Buy now pay later
A brief update also on Buy-Now-Pay-Later, which was reprioritised due to the social and economic instability created by the pandemic.
We still plan to issue the Buy now pay later 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 buy now pay later arrangements for certain consumers.
Of course, what Government wishes to do in terms of future regulation, if any, of the buy now pay later 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 2021, 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 mis-selling 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 while 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 customers.
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 their 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.
The importance of data
A final issue which will remain a focus of our work at ASIC is the importance of data.
ASIC’s supervisory work has identified poor data technology systems and associated processes as a key root cause of institutions’ poor practices in identifying and responding to customer complaints, incidents and issues.
Notably, a review of breach report samples lodged with ASIC point to underinvestment in technology systems as a root cause of the reported breaches in a significant number of cases – ranging in estimates of around 40% in some areas (including bank overcharging) to around 70% in others (including insurance overcharging).
ASIC’s work has found significant limitations to the systems inside a wide range of financial institutions. The current state creates operational risks and suggest historical Board and management decisions on the development and maintenance of these systems have not placed the long-term interests of the consumer at the core.
A combination of poor systems and poor governance mean delays in picking up problems and ultimately result in lengthy and costly remediation programs.
Given the year that we have had, I do not say this lightly: investment in getting data and systems right is essential. And it is overdue.
An important observation to share is that lenders with better data and technology capability, for example analytics and AI, were able to respond more quickly and in a targeted, tailored fashion to borrowers needing additional support this year with loan deferrals.
The focus in the current macro-economic environment is primarily addressed on ensuring credit flows quickly and efficiently to borrowers. Customers more than ever are expecting seamless digital interactions with their lenders.
While ASIC’s vision for a fair strong and efficient financial system for all Australians focusses our efforts and frames all we do, it is not about us. It is a vision for all.
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.
No country has escaped the health, economic, and social impacts of the COVID-19 pandemic. And yet, despite enduring Victoria’s lockdown, I do retain hope that a crisis can also bring out the best in people.
As we transition to “COVID normal” we cannot allow this halt in reality caused by the pandemic to mean that we stand still. We must continue to strive to address failings, embrace reforms and improve standards. We must keep moving forward as a regulator, as financial services industry participants and as a community/nation.