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Compliance Update – Preliminary Assessments and compliance

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Preliminary Assessments and compliance

As you know, the primary obligation under Responsible Lending or RG209 is to conduct an assessment that a credit contract or consumer lease is ‘not unsuitable’ for the consumer.  This assessment is referred to as a ‘Preliminary Assessment’ (if providing credit assistance) or a Final Assessment (if you are the credit provider or lessor).

Before you make a Preliminary Assessment of whether a proposed credit contract or consumer lease is ‘not unsuitable’ for a consumer you must:

  • make reasonable inquiries about the consumer’s financial situation;
  • make reasonable inquiries about the consumer’s requirements and objectives;
  • take reasonable steps to verify the consumer’s financial situation.

To assist you, we provide a number of NCCP templates in Mercury.  By completing the required fields within a Mercury opportunity, you will be able to automatically populate the required information into the Preliminary Assessment template.

We strongly recommend that the assessment shows all relevant details pertaining to the transaction and why you have recommended a particular product or products. From an ASIC perspective, this information should be complete and comprehensive. Remember, you may at some point be required to explain why.

The importance of the Preliminary Assessment is to ensure you make adequate inquiries so that you do not place a client into an unsuitable product. To do so could be a breach of the NCCP (National Consumer Credit Protection Act).  And there are financial penalties which can be quite substantial for a breach.

Reviewing your Preliminary Assessment files

Although Mercury makes it easy for you to conduct and document a Preliminary Assessment, it does not guarantee that the information is complete and comprehensive. It is important that you review the files on a regular basis to ensure the information contained in them is detailed and correct.

When you review your Preliminary Assessment files, please ensure that your assessment contains all the required information listed in the checklist below. The Preliminary Assessment must include the following.

Full current details of the client and proposed transaction, including:

  • Income and expenses details
  • Employment information
  • Property security
  • Product recommendation
  • Funding position
  • Disclosure of any remuneration ie commissions etc
  • Risk Insurance Acknowledgement
  • Product Description
  • Loan Features and terms
  • Fact Find or Client Needs Analysis
  • Product Comparison(s)
  • Borrowing Capacity.

Frequently missed areas

When reviewing Preliminary Assessments, the most common areas which are missed are the income and expenses areas.  How can your Preliminary Assessment be complete if this area is empty? ie – What steps can you show to determine whether a product is not unsuitable? In Mercury you must enter the income and expenses for each applicant under them as the individual.

A number of points to refer to when reviewing your Preliminary Assessments are:

  1. Were adequate inquiries made on the consumer’s financial situation?
  2. Were adequate inquiries made about the consumer’s requirements to include product preferences and objectives? – This could be the Fact Find Questionnaire or Client Needs Analysis.
  3. For a refinance, were sufficient inquires made to understand why a refinance is being requested?
  4. Was the insurance page signed by the consumer to acknowledge this discussion?

Recommendations for action

  1. Make additional inquiries when engaging in switches or loan refinances.
  2. Review financial statements in detail to ensure the consumer is meeting their repayments without difficulty.
  3. Compare the pre-existing loan to that of the new proposed loan to show the consumer the benefits on the new loan or the reasons why the consumer should remain in the current contract.
  4. Make additional inquiries when dealing with consumers approaching retirement age or if the loan term will be significantly past the consumer’s retirement age.
  5. Make additional inquiries as to how the loan will be serviced post-retirement and will the consumer’s ability to repay change without them having to sell their principal place of residence.
  6. Make detailed notes of the transaction from beginning to end outlining any discussion you have had with the consumer about all areas relating to the transaction or reasons why the consumer has sought credit assistance from you.

Further guidance

These are all best practice recommendations which should be built into your file review processes, not only for your own deals but those of your credit representatives.  Ensuring you make adequate inquiries and retain detailed notes on all of the client files will satisfy the responsible lending obligations under the NCCP (National Consumer Credit Protection Act).

Above all, review all of your compliance disclosure documents to ensure completeness of all the points listed in the checklists above to ensure you are compliant with the regulations.  For further guidance and support you can also review our Connective Wiki page by following this link or email and review responsible lending under RG209 on the ASIC site