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ASIC review of debt consolidation sector highlights weaknesses in industry practice and risks for consumers
13-182MR ASIC review of debt consolidation sector highlights weaknesses in industry practice and risks for consumers
Thursday 18 July 2013
An ASIC review of debt consolidation providers has found that Australian credit licensees which provide these services are at risk of not complying with their responsible lending obligations.
ASIC is concerned about the standard of record-keeping practices in the 82 clients files that were reviewed across 17 licensed providers.
Report 358 Review of credit assistance providers’ responsible lending conduct relating to debt consolidation (REP 358) found:
in 30% of files reviewed, the credit assistance provider failed to record or keep sufficient information to identify the consumer’s pre-existing credit contracts
credit assistance providers in general did not appear to document in their client file whether potential significant risks and costs of debt consolidation had been discussed with consumers
inadequate recording of the consumer's requirements and objectives
inquiries about and verification of the consumers financial situation not being recorded properly
some assessments of loan suitability being made on credit terms that were different from the eventual loan application, and
some assessments of loan suitability where the amount recorded for consumer expenses was contradicted by other information on the licensee's file.
Deputy Chairman Peter Kell said, ‘Consumers that seek a debt consolidation provider usually do so in an attempt to turn their financial difficulties around. However, while debt consolidation services can be beneficial, they are not appropriate for all borrowers’.
Commonly, all existing loans, credit cards and other debts are rolled into a new loan with a longer term (often 30 years) and secured over the family home. Significant risks and costs of this include:
higher long-term costs of repayment resulting from extending the loan term
transferring default risk of previously unsecured debt onto the family home
moving consumers to an interest-only loan without an appropriate exit strategy
leaving pre-existing contracts open, enabling a consumer to redraw on them at a later stage and fall further into debt problems, and
additional costs such as broker fees and new loan establishment fees.
‘Debt consolidation is not a one-size-fits-all solution to financial difficulty. It is essential that providers ensure the debt reduction strategy they are proposing meets the consumer's requirements and objectives and is affordable both in the short and long term. We will continue to monitor this sector closely and will take action where we see adverse outcomes for consumers’, Mr Kell said.
Debt consolidation includes credit assistance activities such as securing new or additional credit for the purpose of using that credit to pay off other pre-existing credit contracts or to reduce the total number of payments being made.
ASIC published Report 119 Protecting wealth in the family home (REP 119) in 2008. This report identified debt consolidation as an area where consumers were vulnerable and could experience very poor outcomes.
Following the commencement of the National Consumer Credit regime, ASIC has been undertaking reviews of such high risk segments of the consumer credit industry to assess how they are complying with the responsible lending obligation.
Responsible lending obligations, contained in the National Consumer Credit Protection Act 2009, require credit providers and credit assistance providers to:
make reasonable inquiries into a consumer’s requirements and objectives
make reasonable inquiries into a consumer’s financial situation
take reasonable steps to verify a consumer’s financial situation
assess whether a proposed credit contract will meet the consumer’s requirements and objectives, and
assess whether the consumer will be able to comply with their financial obligations under the proposed credit contract without substantial hardship.
In February 2013, ASIC updated the guidance in Regulatory Guide 209 Credit licensing: Responsible lending conduct (RG 209) to assist industry in understanding the responsible lending obligations including the new obligations under the Consumer Credit Legislation Amendment (Enhancements) Act 2012.