ASIC review uncovers 'weaknesses' in debt consolidation industry: Gadens responds

by Mackenzie McCarty19 Jul 2013

An ASIC review of debt consolidation providers has found that Australian credit licensees providing these services are at risk of not complying with their responsible lending obligations.

The regulator says it’s concerned about the standard of record-keeping practices in the 82 client 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.

ASIC deputy chairman, Peter Kell, says consumers seeking 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,” he warns.

Kell says that, 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,” says Kell.

“We will continue to monitor this sector closely and will take action where we see adverse outcomes for consumers.”

Gadens Lawyers partner, Jon Denovan, says brokers are encouraged to review their processes and procedures to ensure they are able to demonstrate that they are meeting their responsible lending obligations.

“ASIC will be more likely to take enforcement action for failure to comply now that the credit providers have had time to implement their practices and procedures. Non-compliance can lead to significant civil and criminal penalties.”

COMMENTS

  • by mac 19/07/2013 10:53:19 AM

    We all know this part of the industry is a dirty game but if someone is about to go down because of excess personal debts which could result in them losing the family home anyway ASIC needs to be clear that they are not saying the consumer shouldn't be allowed to make that dirty deal as a last chance get out of gaol card then hopefully they can refinance back to main stream a few years later. This is the crux of the problem with NCCP it assumes "all" consumers are stupid. Where is the freedom of personal choice in our society.

  • by Daniel Blaine 19/07/2013 11:27:12 AM

    Again another example of ASIC focussing on minor issues while significant matters go unattended. ASIC love this stuff as it gives the appearance of doing something and justification for their existence. Property spruikers go about their business as usual, serial coy director bankrupts rise from the ashes and coys go out of business today & start up again tomorrow. What is the response from ASIC - "we can't do anything - they have filed all the correct paperwork. Anyway we're too busy chase some poor broker or planner regarding file notes!"

  • by Jeff 19/07/2013 11:33:36 AM

    So in essence they are saying let the client go broke, and have to sell their family home now; to avoid them having to extend their loan term, and possibly have to sell it in 20 years time - clients will be rapt.
    Bottom line is they want us to do the business, and have us to blame on the odd occasion where it doesn't work.
    Gradually getting rid of our industry - but be careful what you wish for.