The ongoing Financial Services Royal Commission has placed financial brokers’ duties towards their client into stark focus. Allegations have been heard of brokers enticing customers into unsuitable loans due to their own commission, holding conflicts of interests, and charging excessive fees to their clients. While the Commission is ongoing, it is prudent to analyse existing law to determine consumers’ pre-existing legal rights. This article will therefore examine the existing law applicable to a broker’s decision to approve a client’s request for a loan. It will do so by first examining who qualifies as a ‘credit assistance provider’ under current legislation before delving into financial brokers’ duties.
Definition of a ‘Credit Assistance Provider’:
Under s 113 of the National Consumer Credit Protection Act 2009 (Cth) (‘the Act’), a financial broker is called a ‘credit assistance provider’. The definition of a ‘credit assistance provider’ is extremely broad, with this definition encompassing anyone who suggests a consumer apply for a loan, an increase to a loan or a lease; anyone who suggests a consumer stay with an existing loan provider; or someone who assists consumers apply for a loan, an increase to a loan, or a lease. Any person who fulfils these requirements, whether officially a financial broker or not, is subject to these legal obligations.
Obligations to Verify a Client’s Financial Position:
According to s 115 of the Act, a credit assistance provider must not provide finance unless they have fulfilled the following duties, which are utilised to produce a preliminary financial assessment under sections 115 and 116 of the Act:
- A duty to make reasonable enquiries about the borrower’s requirements and objectives;
- A duty to make reasonable enquiries about the borrower’s financial situation; and
- A duty to take reasonable steps to verify that financial situation.
These obligations form part of a credit assistance provider’s ‘responsible lending conduct’. Fulfilling these obligations must be an in-depth process. It cannot be reduced to mere box ticking or merely ‘telling’ the loan applicant instead of enquiring about the relevant information: ASIC v Channic Pty Ltd (No 5)  FCA 363. The necessary depth of enquiry differs based on the customer’s experience and the loan’s complexity: ASIC Regulatory Guide No 209, p. 13. Credit assistance providers must also have in place adequate processes to ensure these duties are being met.
Duty to Enquire about Borrower’s Requirements and Objectives:
There is no prescriptive requirement outlining exact steps needed to fulfil this requirement as it will vary from case to case. However, in Regulatory Guide No 209 ASIC provides some examples that may be necessary in the circumstances. These include enquiring about: the amount of credit required, the timeframe the credit is required for, the purpose for which the credit is being supplied for, whether the customer is seeking additional products or features, and whether the consumer is aware additional fees may be applied. The description provided by the credit assistance provider in their assessment must be sufficiently specific and consistent with the credit being sought to allow a true determination of their position: ASIC v Cash Shore Pty Ltd  FCA 926.
Duty to Enquire about Borrower’s Financial Situation
This obligation requires the broker to find out about the borrower’s current financial situation through obtaining information about their current income, expenses, and other relevant information to determine their financial situation. There is a wide range of information that may potentially be deemed ‘relevant information’ a broker must enquire about depending on the borrower’s circumstances: ASIC v Cash Shore Pty Ltd  FCA 926. These can include the borrower’s expenditure on alcohol, gambling, and takeaway; credit history; age; dependents; geographic remoteness; foreseeable risks to the borrower’s financial situation; and assets: ASIC Regulatory Guide No 209. These must be undertaken to ensure the borrower will be able to meet all loan requirements including repayments, fees, charges and transaction costs.
Duty to Verify the Borrower’s Financial Situation
A broker cannot rely on information provided by the applicant and must take independent steps to verify this information. Verification requires brokers to take positive steps, including requesting documents such as PAYG Summaries, credit reports, and bank records to determine if they match information supplied by the consumer. In addition, brokers must make further enquiries in cases where information is inconsistent, or where information is outside the standard range expected for the consumer. There is also an increased duty to verify where income-supporting documents are easily falsifiable, and there is actual or constructive knowledge the documents provided may have been falsified: ASIC v ANZ  FCA 155. However, these obligations do not mean a bank has to disbelieve all customers’ information and go behind it: Alana-Karene Ellis v Credit Union Australia  FCCA 549. Where borrower’s have a long-term association with a bank or broker the obligation to verify their financial situation is significant diminished: Alana-Karene Ellis v Credit Union Australia  FCCA 549.
For more information about Financial Services Law check out our Resource Centre. If you believe you have suffered a loss as a result of financial brokers’ duties being violated please get in contact using the form at the bottom of this page.
This article was authorised by Warwick Heeson.