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Has the Royal Commission damned the HEM?


In the last edition of Connective News, our Group Legal Counsel Daniel Oh provided you with his take on the interim report from the Royal Commission, with a focus on what it said about broker remuneration. In this article, we review what the report had to say about the HEM and living expense assessments and give you our take on how these observations may affect your business moving forward.

Connective requires our Credit Representatives to perform a thorough living expense assessment for every consumer loan, and we updated the Needs Analysis in Mercury to include the LIXI living expense categories in 2016.  We’d like to say upfront that any action that may be taken to enforce this will be unlikely to have a significant effect on your business, as we are already taking care to ensure you meet these obligations.

How are we doing that, specifically?

Under the National Consumer Credit Protection Act 2009 (NCCP), there is not only an obligation to make reasonable enquiries, but to take reasonable steps to verify the information you collect is correct.  For this reason, Connective mandated that our Credit Representatives obtain three months of bank statements and store them in Mercury to prove ‘reasonable steps’ to verify have been taken. We have also promoted this as best practice for our ACL members.

MARS (our Compliance Mercury Assurance Review System) is the system we use to ensure you are meeting your obligations under NCCP regarding living expense assessments and verification. Knowing we are monitoring for any oversights in this respect will help you enjoy peace of mind that your business is protected from risk.

At Connective, we’ve always considered proper living expense assessments and verifications as critical to meeting your obligations under NCCP. It’s unfortunate and disappointing that we’ve been lumped into the general ‘misconduct’ basket along with the banks and brokers who have failed to observe the requirements of NCCP properly.

Does using a benchmark really constitute ‘misconduct’?

Remembering that the Royal Commission interim report is on ‘misconduct’ in the financial services industry, it’s clear that relying on benchmarks like the HEM fails to meet responsible lending obligations under NCCP. Relying on a benchmark instead of performing a thorough living expense assessment and verification now constitutes wilful misconduct. There’s a big difference legally between failing to meet an obligation and wilful misconduct.

The Royal Commission interim report notes:

“Verification calls for more than taking the consumer at his or her word… Verification is often not difficult. Most persons have income deposited to a bank account and there is, therefore, a bank statement showing receipt of the income claimed that will be readily available to the consumer….  And many of a consumer’s main outgoings will be recorded (or at least reflected) in the same bank statement.” (Royal Commission Interim Report page 24).

With regards to mortgage brokers verifying a customer’s living expenses, Commissioner Hayne noted “If the intermediary does owe a duty of that kind to either the borrower or the lender, it is a duty that is often not performed. The fact that so many home loan applications proceed by the lender assuming that the borrower’s living expenses are equal to the HEM measure, not as the borrower declares them to be, can lead only to the conclusion that in many of those cases the broker has not taken any effective steps to inquire into, or verify, the expense information supplied by the borrower.” (Page 58)

Apparently, in as many as three out of four home loans examined in the course of APRAs 2016/17 targeted review into home loan lending practices, the banks assumed the borrower’s household expenditure was equal to the relevant HEM, rather than using a living expense assessment to determine household expenditure.

According to Commissioner Hayne, “It follows that using HEM as the default measure of household expenditure does not constitute any verification of a borrower’s expenditure. On the contrary, much more often than not it will mask the fact that no sufficient inquiry has been made about the borrower’s financial position.” (Page 28)

What action can you take to protect your business?

Failing to take steps to discover and verify their true financial position can potentially cause the customer financial hardship if their actual living expenses are significantly more than what they declared them to be. So, simply put, you must take the necessary steps to determine and verify their household expenditure and financial position!

Over the course of this year, Connective has recorded webinars on how to perform a thorough assessment and verify a customer’s living expenses, and published articles, e-books and guides to make it as easy as possible. Download them from Connective Wiki and share them to ensure both you and your staff are fully informed and correctly assessing your customers living expenses.

If you have any questions or need us to approve any advertising or marketing initiatives you may want to use to combat all this negative media, your Compliance Support Manager is here to assist. Simply click your help icon in Mercury to get in touch.

Watch your inbox for invitations to our ongoing webinars about the Royal Commission findings and Combined Industry Forum response, so you can stay on top of the latest developments. If you have any feedback for our response to the Royal Commission, email Dan Oh at and he’ll get back to you asap.