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

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.”