Features: CCCFA

New affordability and suitability regulations

Lee Kerr of Sanderson Weir looks at the incoming regulation and the effects that will be felt by advisers.

Advisers will have already noticed that lenders are asking them to make increased inquiry into their clients’ financial positions and the reasons behind their application for finance. This is being driven by new CCCFA regulations coming into force on December 1, 2021. These include minimum standards of inquiry to ensure any new consumer loan is both affordable and suitable for the borrower. The new regulations will be implemented alongside amendments to the Act and a revised Responsible Lending Code.

Affordability and suitability assessments are nothing new. However, the new regulations mandate specific inquiries a lender must make and how the resulting information is assessed, verified and tested.

Consequence for advisers

The consumer finance law amendments do not directly subject advisers to increased obligations or liability and lenders remain responsible for ensuring compliance with their responsible lending obligations. They are, however, likely to be reviewing existing adviser mandates – do not be surprised if lenders strengthen advisers’ minimum standards of practice.

The new regulations should not intrude into an adviser’s relationship with their clients, and nor should they. Lenders are entitled though, to treat information provided via a broker as if it has come directly from the borrower. In saying this, lenders will likely require brokers to implement and maintain appropriate policies and procedures to make the necessary inquiries on their borrower clients and correctly record this information.

The regulations are clear that certain income and expense information must be collected in order for the lender to satisfy its responsible lending obligations. Further inquiries into the borrower’s objectives in seeking finance are also required. It is likely that lenders will vet your application forms to ensure that the required information on a borrower’s objectives, income and expenses are collected in sufficient detail.

Insufficient collection of the required information will result in the application being declined, or circuitous requests for more information. To this end, advisers should be communicating with their clients at the earliest opportunity that relatively intrusive inquiries are now required and that a lender will not proceed without sufficient information about their income and expenses, and their objectives in seeking finance.

Prescriptive inquiries required

Firstly, the scope and method of inquiries that are reasonable will be set by the lender based on the individual circumstances; increased inquiry will be required for complex or uncommon agreements, high-cost credit contracts and where the borrower is considered vulnerable.

Secondly, the lender is required to keep a record of the suitability and affordability inquiries and their results. Lenders may mandate how advisers record, store and share this information.

Suitability

Lenders are now required to make reasonable inquiries into a number of aspects of the borrower’s requirements and objectives. Advisers will already be making inquiry into a number of these; standard aspects like the total amount of finance sought, term and the purpose for which the loan is intended to be used.

However, some of the required inquiries may be new to advisers. Lenders are now required to make additional suitability inquiries including:

• whether the borrower wants fees and charges under the loan agreement to be financed and accepts the additional costs of financing those (ie interest on those fees) or whether they want to pay these fees and charges upfront

• in a refinancing situation; the borrower’s objectives in refinancing and whether the borrower is aware of, and accepts the additional costs that could be charged to the borrower as a result (ie potential break, broker and legal fees, etc).

Affordability

As part of its compliance with lender responsibilities lenders must now comply with minimum requirements for the scope and level of inquiry into the borrower’s income and expenses.

Income

To estimate a borrower’s likely income a lender (or adviser) must ask the borrower about each source of income and then verify that income based on reliable evidence.

Alternatively, a lender can estimate income based on recent and reliable information the lender holds about the borrower’s income then get this confirmed by the borrower.

In each instance evidence is required – in many cases this involves collecting payslips or invoices.

Lenders are then required to ask the borrower about potential changes to income.

Expenses

Lenders are required to estimate likely relevant expenses, collecting sufficient detail to minimise the risk of relevant expenses being missed or materially understated. Lenders may soon require advisers to ensure their application forms, policies and procedures are robust enough to correctly collect and record this information.

Lenders must ask the borrower about certain relevant expenses including all fixed financial commitments (accommodation costs, insurance, school fees), debt, etc repayments, living expenses (including utilities, food, personal expenses, child care and transport) and regular or frequently recurring expenses that are to remain. The lender must also obtain at least 90 days of a borrower’s transactional banking records. Where the results of the inquiries are in conflict with verification evidence collected the lender may make further inquiry on the borrower or adviser. ✚