Compliance requirements for this obligation will vary depending on circumstance. The relevant factors that determine what must be undertaken include but are not limited to:
- the potential impact on the consumer if they enter into an unsuitable credit contract
- the complexity of the credit contract
- the consumer’s capacity to under the credit contract
- if the consumer if is new or existing customer of the credit provider.
Scalability of reasonable inquiries
The licensee is expected to make less detailed inquiries for a more basic credit contract such as a small person loan (where the loan is small relative to the consumer’s capacity to pay) than for a mortgage (where the amount may be significant and the capacity for the consumer to repay may possibly incur substantial hardship).
Complex credit contract
A reverse mortgage is a more complex credit contract, where the consumer usually intends to repay the loan through the sale of their property subject to the reverse mortgage. Often the consumer is a senior using their primary residence, which may be their only significant asset. An unsuitable reverse mortgage product in these circumstances may potentially result in significantly adverse outcomes for the consumer. Consequently a high standard of investigation and verification would be required to ensure the product meets the consumer’s requirements and objectives.
This would extend to include the consumer’s understanding of the contract and its possible consequences, as well as the impact the reverse mortgage may have on the consumer’s eligibility for Centrelink payments.
The level of reasonable inquiries that will need to be made and reasonable steps to verify the information will also depend on the nature of the service being provided to the consumer.
Scalability and the service provided
A credit licensee providing debt consolidation services, including a review of current debts and how they can best be structured, would need to undertake a greater level of inquiries to ensure they gain a comprehensive understanding of the consumer’s financial situation.
Consumer’s financial situation
You must make reasonable inquiries about a consumer’s financial situation.
It is up to the credit licensee to determine what inquiries are reasonable for them to make to comply with their responsible lending obligations for a given transaction. ASIC have indicated that the kinds of issues that should be considered for a consumer may include:
- current income and benefits, including source – such as nature and length of employment
- fixed expenses – rent, repayment of existing debts, child support
- variable expenses – sources of these expenses such as dependents
- value and nature of assets
- the consumer’s circumstances, including age and the number of dependents
- extent to which existing debts will be repaid from the credit
- credit history
- any significant foreseeable changes – ending honeymoon; interest rate
- geographical factors.
Consumer’s requirements and objectives
You must make reasonable inquiries about a consumer’s requirements and objectives.
This may include:
- the amount of credit required or maximum amount of credit sought – desired credit card limit
- how long the credit is required
- the reason and benefit the consumer is seeking the credit
- if there are particular features or flexibility the consumer would like in the product
- if the consumer understands the cost and any additional risks of these features.
Your compliance with these requirements
Implement adequate processes to demonstrate your compliance with these requirements. You must implement adequate processes so that you can demonstrate that reasonable inquiries about the consumer are being made. These processes will depend on both the business model and credit activities being undertaken.
While some systems currently exist that measure the credit risk of the consumer, adequate processes must also address the consumer’s capacity to repay the credit contract.
Verify information provided by the consumer
You must also take reasonable steps to verify information provided by the consumer. The "reasonable steps to verify" information is also scalable and will be influenced by access to both information and resources.
While the assessment made by a credit assistance provider is considered to be a "preliminary assessment", this does not reduce the responsibility to verify a consumer’s situation. It does, however, recognise that a credit assistance provider may not have access to all of the information that a credit provider does.
Information that could be used by a credit assistance provider to verify a consumer’s financial situation includes but is not limited to:
- recent payroll receipts or payslips and confirmation of employment for PAYG employees
- recent income tax returns, a statement from their accountant and Business Activity Statements for self employed persons.
Additional inquiries would need to be made if the consumer provides information that is inconsistent. This may include information that conflicts with information already held about the consumer or information that appears outside the normal ranges, for example, income well above that expected for a particular occupation.