The Banking Code of Practice is effective July 1 2019.
The intent of the Code is to enhance the rights and protection for customers, small businesses and guarantors. It also comes with stronger compliance and enforcement arrangements. So expect a lot more paper all round and potentially some unintended consequences.
Whilst there are some material differences in interpretation, the major banks are broadly supporting its recommendations and have all made changes to policy.
There are some potential implications for customers, changing how finances can be structured for example.
Lending to Co-Borrowers ("Substantial Benefit")
There are significant changes for lending to co-borrowers.
A spousal relationship on its own will not be considered a sufficient example of "substantial benefit". All applicants will need to show an interest in the use of the loan funds.
NAB will consider whether the co-borrower will receive a “substantial benefit” of at least 25 per cent from the loan. There is also an emphasis to ensure that they understand this position, including the separation of the roles of co-borrower and guarantor for example.
CBA states "a spousal relationship is no longer considered a sufficient example of a substantial benefit". As a result, if the spouse does not receive equal or greater interest in the use of the loan funds, there are significant disclosure and documentation requirements.
Westpac has taken the substantial benefit definition further, stating they will only approve loans to co-borrowers where at least 30 per cent title in security is held. There are however exceptions that will be considered for asset protection or spousal relationship matters.
ING requires you to demonstrate substantial benefit where a co-borrower proposes to own less than 20% of a security property.
This may have a significant impact for mixed purpose borrowing moving forward.
Guarantors
Guarantors must be given a minimum of three days to review their guarantee documents. Effectively a "cooling off" period. Some lenders are also mandating independent legal advice in all cases too.
We see this having an impact where parental support is provided for mortgages, and it is a reminder for advisers to clearly set out the risks for guarantors. In commercial lending, whilst the lending is unregulated we will see a grow "fear" from financiers where they are taking security where there are outside ownership interests.
More Responsible Lending
The expectation is that brokers will look out for any signs of vulnerable clients. For example, people with age-related or cognitive impairments, domestic violence or financial abuse.
There will be a requirement in many instances for brokers to make a declaration that no issues are evident.
This is potentially problematic and there is obviously greater clarification needed, and quickly. MFAA CEO Mike Felton sums it up best; “Brokers have a relationship with, and are the primary contact point for, approximately 60 per cent of all new mortgage customers and accordingly have a significant role to play in protecting vulnerable customers.
“However, mental health and domestic violence are complex areas. Brokers are not trained counsellors and therefore cannot be expected to perform psychological assessments.”
It is a good thing that the expectation of brokers and advisers is that they are cognisant of any hardship issues. Especially if they impact financial advice. Hopefully the industry will find the right balance in the long term.
Fixed Interest Rate Renewal
It will soon become a lot easier to re-set your loan when the fixed interest rate period expires - which will be facilitated via simple electronic renewal process.
A positive innovation for the industry and one we wait to see implemented.
Taxation & Legal
The changes above, especially for borrowing arrangements, may have implications in the future around how lending is structured to best optimise a taxation or legal position.
For example, a common asset protection strategy for borrowers at risk (self-employment or other personal liability) is to have the full ownership of assets such as the home, in the name of a spouse.
Lawyers may have to point out that this could impact the ability to use this asset as security for lending moving forward.
Please contact us for further information.