Last week the government released a consultation draft of the updated Responsible Lending Code, which provides non-binding guidelines for lenders on their obligations under the Credit Contracts and Consumer Finance Act 2003 (CCCFA).
Submissions on the draft revised Code are due by 15 January 2021. The draft indicates that the revised Code is intended to be finalised by February 2021, and will come into force on 1 October 2021.
We highlight some of the key changes below:
Suitability and affordability assessments
Under the CCCFA, lenders need to make “reasonable inquiries" to ensure that loans are suitable for the particular consumer borrower, and that the borrower can afford to repay the loan. The revised draft Code cross-refers to detailed new regulations prescribing the “reasonable inquiries" which must be made by lenders when assessing loan applications and agreeing material changes to loans.
For suitability assessments, the draft recommends that lenders engage in “iterative" inquiries, including discussing available products with borrowers, working with the borrower to refine their objectives, and confirming that the product is likely to meet those requirements.
For affordability assessments, the draft recommends the use of “buffers", including testing affordability using higher interest rates to mitigate the risk of rate increases, or longer terms than the borrower has requested. Helpfully, the draft also states that “Subject to requirements in the regulations to verify particular information about income and expenses, lenders may rely on the information provided to them by the borrower unless the lender has reasonable grounds to believe that the information is not reliable." This appears to reinstate, in a qualified way, a similar provision that had been repealed from the CCCFA in December 2019.
Where the borrower shares expenses with another person (for example, a partner or spouse) the draft recommends apportioning those expenses where appropriate, taking into account relevant information provided by the borrower and considering whether the expenses are likely to change over the relevant period.
The draft also recommends that, where a lender deals with a borrower through a financial adviser, the lender should require that financial adviser to have appropriate policies and procedures to verify information from borrowers, and to train their staff on the Code and lender responsibility principles.
There are extensive new recommendations around the procedures for dealing with unforeseen hardship applications by borrowers (apparently reflecting the greater attention these processes have received during 2020).
The recommendations include training staff so that they can recognise key signs of current or potential repayment difficulties, and ensuring that staff are “empowered" to discuss repayment arrangements with borrowers. Lenders should also encourage borrowers to apply for statutory relief for unforeseen hardship where they are eligible for that relief.
Foreign language advertising
Under the recent amendments to the CCCFA, from October 2021 lenders will need to take reasonable steps to offer borrowers information about their agreements in another language if the lender has advertised in that language in the previous six months, and if doing so is necessary to ensure that the borrower can reach an informed decision whether or not to enter into the loan. The draft helpfully indicates that this requirement will only apply to “systematic advertising" which it explains as public advertisements such as newspaper advertising, but not individual discussions.
The draft recommends that, where this requirement is engaged, lenders should offer information about the key features of the agreement in the advertising language (for example, by offering translations of those key features, or referring the borrower to interpreters or translation services at the lender's cost).
Overall, the draft revised Code adds some helpful clarification on several issues, but will also add further layers of compliance requirements at a time when many lenders are already working hard to implement multiple and detailed recent statutory amendments (outlined in our previous updates here and here). While the Code's recommendations are non-binding, evidence of compliance with the Code is treated as evidence of compliance with the mandatory lender responsibility principles, and diligent lenders will accordingly seek to follow the various recommendations.
The changes summarised above are a selection only, to illustrate some of the key proposed recommendations. If you would like further details, or assistance in making submissions before 15 January 2021, please get in touch with the authors or your usual Bell Gully advisor.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.