NCCP responsible lending obligations explained

Where the duty comes from

The responsible-lending obligations arise from the National Consumer Credit Protection Act 2009 (NCCP Act). This legislation places requirements on credit licensees, which includes both credit providers and those providing credit assistance, such as brokers.

ASIC’s Regulatory Guide 209 clarifies how ASIC understands and expects these obligations to be met. Credit licensees should refer to this guide for detailed information.

Mortgage brokers are also subject to a best interests duty, established under section 158LA of the NCCP Act and effective from 1 January 2021. ASIC’s Regulatory Guide 273 provides guidance on fulfilling this duty.

The three responsible-lending steps

The National Consumer Credit Protection Act requires credit providers to follow a three-step process when assessing a consumer’s suitability for a credit contract. These steps are designed to ensure consumers are not placed in a situation where they are likely to experience financial hardship. The steps outline the obligations on credit providers to understand a consumer’s circumstances and to assess the appropriateness of the credit being offered.

The first step involves making reasonable inquiries about a consumer’s financial situation, requirements and objectives. The second step requires credit providers to take reasonable steps to verify the information obtained during the inquiries. These verification steps are necessary to ensure the accuracy of the consumer's stated financial circumstances.

Finally, credit providers must assess whether the credit contract is ‘not unsuitable’ for the consumer. What constitutes ‘reasonable’ inquiries, verification steps, and assessment varies, and is scaled to the size, complexity and risk of the credit being provided.

Best interests duty for brokers

Mortgage brokers have a legal obligation to act in the best interests of the consumer when providing credit assistance. This duty requires brokers to consider the consumer’s individual circumstances and financial situation. This obligation is separate from, but operates alongside, other responsible lending obligations. director duties self-check

Brokers must prioritise the consumer’s interests even when those interests conflict with the interests of the broker, the broker’s licensee, or a related party. This prioritisation is a key element of fulfilling the best interests duty.

ASIC Regulatory Guide 273 provides guidance on how to demonstrate compliance with the best interests duty. This includes providing an appropriate range of credit products for comparison, documenting the reasons for recommendations, and generally preferring the lowest cost option for the consumer unless other factors clearly outweigh that consideration.

Penalties and ASIC enforcement

Contraventions of the responsible-lending obligations outlined in the National Consumer Credit Protection Act (NCCP Act) can result in civil penalties. These penalties are imposed for failures to comply with the obligations.

The Australian Securities and Investments Commission (ASIC) has previously taken enforcement action regarding responsible lending, pursuing cases against significant lenders. This demonstrates the seriousness with which ASIC views compliance with these obligations.

To mitigate the risk of penalties, lenders should maintain a robust compliance framework. This includes establishing and maintaining a documented assessment process, retaining contemporaneous evidence of inquiries and verification activities, and implementing effective internal review procedures.