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MELBOURNE PUBLIC HEARING1Written opening statements or other documents which2participants wish to provide or refer to will be treated as an addendum3to their submission and will be published on our website. Participants4are required to be truthful in their remarks. A person who appears at5this hearing must not give information that is false or misleading. I also6want to remind everybody here today that we will not be taking7comments from the floor. For the smooth running of these hearings and8to avoid disruptions, we ask all those in attendance to keep noise to a9minimum. And for those who are not called as participants who wish10to provide further information or feedback to ASIC or on our proposed11guidance about these hearings, we ask that you please speak to the ASIC12staff at the registration desk.13And one final comment on the submissions more generally. I14indicated earlier that we have received 72 submissions. There are15indeed some matters raised in the submissions that we factually,16fundamentally or otherwise disagree with, but we do not intend to17address or respond to all of these matters in these hearings. We may18refer to some of these matters as relevant and important to today’s19discussion, but I want to emphasise that our silence on a matter raised20must not be inferred as acceptance of it. Similarly, statements may be21made throughout the course of today that are contrary to our22understanding or indeed our view. Our purpose through these hearings23is to listen and not to make decisions. Our position on these matter,24where relevant, will be published in the report that outlines our response19/08/20197Transcript has not been verified for accuracyIntroduction

MELBOURNE PUBLIC HEARING1to submissions made through the consultation process and our updated2guidance.3Now, finally some quick housekeeping matters. We ask that4everybody in attendance please switch off or put on silent any mobile5phones or other devices. In the event of an emergency requiring the6evacuation of this building, please follow the instructions of the7wardens and head towards the green exit signs at the back of this room.8Your emergency assembly point is on the corner of Little Collins Street9and Exhibition Street. And if you believe that you need assistance10evacuating, it’s important that you advise the wardens, who will be able11to assist you. If otherwise you require assistance, please speak to one12of our staff members at the registration desk outside the hearing room.13Without any further introductory remarks, I would now like to14welcome the representatives from Consumer Action Legal Centre to15introduce themselves and to commence this hearing. Thank you.19/08/20198Transcript has not been verified for accuracyIntroduction

MELBOURNE PUBLIC HEARING1CONSUMER ACTION LAW CENTRE2MR BRODY: Good morning. My name is Gerard Brody, the CEO at Consumer3Action Law Centre, and with me is Amanda Storey, our Director of4Legal Practice, and Brigette Rose, our Senior Policy Officer. Consumer5Action is an independent not-for-profit consumer organisation with6direct experience of people’s experiences through our phone advice7lines and casework. Our financial counsellors run the National Debt8Helpline in Victoria and our lawyers provide legal advice through our9legal helpline and in representing clients.10Our primary point today is that the regulatory guidance should be11based on what the law actually says and help clarify aspects of what is12meant to lend responsibly. While the law is principles-based, it appears13to us that the recommendations offered by lenders, including most of14the major banks, reiterate that a principled approach to responsible15lending is not working. More clarity and detail is required.16However, as noted by Commissioner Hayne in his interim report17in the royal commission, responsible lending isn’t about loan18serviceability and a lender’s credit risk appetite. These assume a19proportion of borrowers will default. It’s about compliance with the20legal requirements to ensure a credit contract is not unsuitable for the21individual consumer, that it is affordable for the consumer without22putting them into substantial hardship and it meets their requirements23and objectives.19/08/20199Consumer Action Law CentreTranscript has not been verified for accuracy

MELBOURNE PUBLIC HEARING1That’s our primary concern with the decision of the Federal Court2last week, that it seems to suggest that the law doesn’t require lenders3to look at the position of the individual applicant in front of them. To4look at that applicant’s requirements and objectives and whether the5repayments will cause hardship for that particular applicant. We look6forward to answering your questions.7MR HUGHES: Thank you, Gerard. And welcome to you and your colleagues.8At the Sydney hearing on Monday last week, we heard from a number9of lenders that the question of the customer’s financial situation should10be focused more on income and indebtedness than on expenses, which11can be subject to change. Can you give us your views on the balance12of those two issues?13MR BRODY: Our position is that to understand someone’s financial position,14you necessarily have to look at what income indebtedness as well as15living expenses. And to understand, you know, whether it is possible16in that particular consumer circumstances that there is room to cut down17on expenses. That may be a possibility for some applicants but it may18not be for other applicants. And to understand that, you need to look at19their expenses, you need to have a conversation with them about their20financial position. Amanda has a bit of case study that I might ask her21to [indistinct]22MS STOREY: Yes. I wanted to touch on one of the witnesses, that is also our23client, Robert Regan, who gave evidence about ANZ’s home loan. And24he was given a 50,000 home loan that was secured against his19/08/201910Consumer Action Law CentreTranscript has not been verified for accuracy

MELBOURNE PUBLIC HEARING1previously unencumbered home. The royal commission found that his2expenses were underestimated by half. But, critically, he also had very3significant withdrawals leading up to the loan, which were evidenced4in the bank statements. And the commission found that they assessed5the income by verifying the statements but looked at none of the very,6very large withdrawals. And, so, if the focus were to shift as the lenders7propose, to just income indebtedness, this situation would definitely8arise again. And the evidence from Robert was that he went quite9quickly into quite severe financial hardship, he relied on charities for10food. And that’s just not acceptable.11MR HUGHES: Thank you.12MS CHESTER: So on the issue of expenses then, we hear from some lenders –13not all the lenders, but some lenders – that using bank statements is14quite manual, it’s intrusive, and not highly automated, and a suggestion15that valuable insights can’t be really gleaned from them. It would be16good to get a sense of what other risk factors you’d identified based on17consumer experiences and the case studies that you got that you think18could be gleaned from some review of, perhaps not forensic, but some19review of bank statements.20MR BRODY: Yes, there is a range of things that can be gleaned by looking at21bank statements that, I firstly would say that it’s important to look at22overall expenses and just do a simple mathematical calculation of23income and outgoings to determine to see if there’s any really an24amount to be able to service the loan.19/08/201911Consumer Action Law CentreTranscript has not been verified for accuracy

MELBOURNE PUBLIC HEARING1But beyond that, I think the bank statements also provide a range2of potential indicators of issues that affect that consumer’s financial3situation and whether repayments will cause substantial hardship. So,4for example, if the bank statements disclose that there is regular5over-drawing of an account, that might be an indicator. If there are6regular gambling transactions, that itself might be an indicator. Or in7the case, for example, that Amanda talked about, unexplained, large8withdrawals, that also might be an indicator, that would invite a lender9to take further inquiries and steps to verify and understand that10applicant’s financial position in more detail.11MS STOREY: I would also add, if there are debits that are coming out from,12say, debt collection agencies, that would suggest that that borrower has13been in a position of arrears potentially recently and also with the point14of with SACCs in particular, you do actually need to look at whether or15not there have been withdrawals from other payday lenders in order to16comply with the law as well.17MS CHESTER: So, I guess from what you’re saying, a little bit more of a18risk-based assessment through the lens of the consumer, similarly19we’ve had feedback in some submissions and indeed we heard in the20hearings in Sydney last week, the concept of inquiry and verification21being scalable based on a risk-based assessment. And an example there22was scaling up the assessment for the size of the credit, so greater23inquiry and verification around, say, a mortgage versus that of a 10,000,24 20,000 credit card.19/08/201912Consumer Action Law CentreTranscript has not been verified for accuracy

MELBOURNE PUBLIC HEARING1It would be good to get your assessment based on the experience2that you had through the debt hotline and helpline and other case studies3that come your way with legal advice in terms of what are the most4problematic forms of credit, looking at it again through the lens of the5consumer. And if we’re taking a risk-based assessment, how would you6view different forms of credit and requirements under responsible7lending obligations?8MR BRODY: Well, the first thing to say is we wouldn’t agree that the size of9the loan is the sole indicator about whether more inquiries and10verification steps should be taken and we support the existing guidance11and directory guide and in fact small amounts of loan, like small amount12loans can actually be more impactful for a consumer’s financial13position, including causing substantial hardship.14We did conduct a bit of analysis of our calls to the National Debt15Hotline over a two year period, leading up to June, 2019, and in fact16unsecured credit is the primary reason people call. So, out of 18,73017files where financial difficulty was recorded in the call notes, 37 per18cent of those had related to a credit card debt, 20 per cent with a personal19loan and 12 per cent with both.20Credit cards themselves can be, you know, a real problem with21people because of the very design of that product in the fact that the22minimum repayments can be set at a very low level and people can be23paying, you know, complying with the terms of the product but paying24large amounts of interest over time, causing them financial difficulty.19/08/201913Consumer Action Law CentreTranscript has not been verified for accuracy

MELBOURNE PUBLIC HEARING1So we don’t think that, yeah, that the small amount or the type of the2credit is necessarily the main concern to consider whether there should3be a lesser inquiry for a particular product. I mean, we have released a4report, last week in fact, with some colleagues looking at the way in5which some small loans become a huge problem for customers. For6example, in the context of where they go into arrears and a judgment’s7obtained and then bankruptcy action is taken. We see, we’ve seen time8and time again of people who has had a small amount of, a small credit9card of 5,000 rack up to, you know, a debt of 60,000 once legal costs10and trustee fees arise. So I would not say that, you know, a small11amount of credit is the main reason to be not taking those inquiries.12MS STOREY: And to take that further, that is actually, ultimately leads to sale13and seizure of their home and the borrower becoming homeless and also14their family members as well, and the flow-on effects of if they’ve got15children, for them not be able to go to that school anymore. So the idea16that it’s just a small loan, it’s contained, it’s not what we see with our17telephone advice lines.18MS CHESTER: So in that sense, for a lot of those sorts of smaller unsecured19credit loans, there is a high usage, we’re seeing in the statistics around20the process for assessment being fully automated. How do you see that21in terms of balancing the risk for the prospective consumer and what22could and could not be missed with respect to responsible lending23obligations?19/08/201914Consumer Action Law CentreTranscript has not been verified for accuracy

MELBOURNE PUBLIC HEARING1MR BRODY: Well, I think that, that automated credit decision making models2can be really problematic. I think that they possibly can be built in a3way that is better than others and I guess we’ve seen some really poor4examples where assumptions are made about a person’s ability to, you5know, expenses. So relying on a benchmark rather than people’s actual6position which then doesn’t allow for that inquiry to see if those risk7factors that we talked about before. So I think necessarily an automated8process is, is insufficient to, to meet the requirements of the responsible9lending laws.10MS STOREY: And some of our case studies in our submissions talked about11the circumstance of family violence in particular and so there you’ve12got a particular dynamic where if you have more of a human13intervention and looking at, well, who’s getting this loan, who’s the true14beneficiary of this loan and does this loan meet both the borrower’s15objectives and if it’s fully automated that won’t be detected.16MR BRODY: The other thing to say about automated processes is that, you17know, the law actually talks about inquiries and verifications about18financial position but it’s also a requirement to inquire about borrower’s19requirements and objectives and automated processes or processes20which rely on tick a box approach to what a consumer’s requirement21objectives are, we think that insufficient and actually do not comply22with the law.23requirements and objectives, rather than seeking to understand it.19/08/2019That’s more about determining the borrower’s15Consumer Action Law CentreTranscript has not been verified for accuracy

MELBOURNE PUBLIC HEARING1MR HUGHES: That leads then into the next question around what value you2see the broker relationship providing, particularly in terms of the3preliminary assessment that they undertake. So you can talk to us about4your experience from your client’s perspective of using brokers?5MR BRODY: In terms of the clients that we assist that use brokers, our6assessment would be that brokers are more often than not used to help7people obtain unaffordable credit. People that have difficulty getting8loans may turn to a broker and get access to credit that may cause them9substantial hardship and that’s common in our casework.10MS STOREY: The legal team in particular looks at when it all goes wrong. So,11and when brokers have been involved in those cases in particular, there12is an element of fraud involved or family violence where the, the13brokerage interaction helped perpetrate further family violence.14MR BRODY: And I think when it comes to brokers, we can’t remove the15misaligned incentive that exists in that channel, where brokers get a16commission for placing the loan, they don’t get any payment if the17consumer is ineligible for a loan or they might get a smaller loan then18they'll get a reduced return. So that, it’s provides the incentive for19brokers to prefer their interest over their duty when it comes to20responsible lending. But we would say, and we agree with the royal21commissioner again, that these, you know, there is independent duty for22brokers compared to lenders when it comes to responsible lending.23They are meant to do their own steps as part of inquiry and verification24about financial position. And importantly, brokers are perhaps better19/08/201916Consumer Action Law CentreTranscript has not been verified for accuracy

MELBOURNE PUBLIC HEARING1placed than lenders to do the inquiry about requirements and objectives2because they’re more likely to meet with the customer and so they3should be, you know, having those discussions and understanding what4the borrower’s purpose is when, when taking out a loan.5MR HUGHES:So I think you’re describing what the royal commission6recommended and what the Treasurer has announced today as a best-7interests model. Do you then suggest that the role of the broker should8be to perform a gatekeeper assessment role?9MR BRODY: Yes. I mean, absolutely. The, the brokers do need to, as I said,10because they are likely to be meeting with the client and more likely to11understand their position, I think that the lender ultimately, they have12their duties as well and that perhaps they’re more incentivised than the13broker to ensure that repayments are payable because it’s their loan at14the end of the day. But

reporting, learnings from ASIC's reviews in recent years and . 4. importantly judicial consideration of responsible lending laws al l mean . 5. this update is timely. 6. In February this year we issued Consultation Paper 309, CP 309, 7. Credit Licensing: Responsible Lending Conduct. We've received 72 . 8