Credit makes us and credit breaks us – ancient Roman debtors cut into pieces by their angry creditors under the law of the Twelve Tables knew it, as does ASIC, tasked with regulating the many mortgage brokers, traders, and intermediaries landing somewhere in the middle of credit and debt.
ABC’s Four Corners program last night investigated the pitfalls of using lenders of last resort and the impact of self-described “mortgage trader”, Ian Lazar. Raising serious questions about the conduct of Lazar, the program also suggested ASIC has failed to address the problems facing those caught up in the unlicensed lending market, despite having, as implied on the program, significant powers to do so.
In a statement responding to the program, ASIC said it had already assessed a number of complaints against Lazar and would “carefully assess any further complaints”. But it said:
ASIC has limited resources and we target our enforcement efforts towards matters that have a wider public impact, particularly where they involve retail investors. As a result ASIC generally does not intervene in private, commercial disputes for the benefit of one party.
This is not the first time ASIC’s role has been criticised. In 2011, while accusing Lazar under Parliamentary privilege of defrauding theatrical entrepreneur Kevin Jacobsen, Nationals Senator John Williams said the dispute was a “glaring example of how ASIC can’t be relied upon”.
ASIC’s advice to consumers drawn - or sometimes dragged - into these predicaments, is to remain level-headed and focus on the lending contract. This is good advice – but borrowing in tight situations is often not about level-headedness.
How credit is regulated
ASIC has been responsible for overseeing credit licencees since 2010, when the National Credit Act established a national scheme for all credit providers, finance brokers and other intermediaries.
Since 2003 it had been working to improve standards in the mortgage broking sector, using strategic enforcement action, reviews of consumer problems and working with consumers and industry on codes of practice. So it can’t be said it was unaware of the hurdles it faced.
The National Credit Act calls for those performing a credit service - including acting as an intermediary - to hold a credit licence from ASIC. Applicants must be “fit and proper” and once licensed, avoid conflicts of interest. The definition is wide enough to catch direct, or indirect, assistance to a consumer.
Engaging in credit activities without a licence can incur a civil penalty of up to A$340,000 and a criminal penalty of up to $34,000 and up two years imprisonment, enforced by ASIC.
A person acting as an intermediary in the “chain” between a consumer and lender under a credit contract, or a lessor under a consumer lease, must also hold a credit licence, even if that person has no direct contact with the consumer.
In Information Sheet 101, ASIC explains when conduct amounts to a “referral” in relation to credit activity under the National Credit Act. Important here is when it will not – this is when a referral involves merely informing the consumer that a particular credit activity can be provided, where it can be provided, and any commission payable.
The grey area
Lazar’s description of his activities as “mortgage trading” is not the same as mortgage broking, but the two have a very delicate common denominator – the borrower/consumer.
The National Credit Act is certainly aimed at protecting consumers involved in lending situations. But ASIC has largely ignored the unlicensed lending market, preferring instead to focus its investigations on wayward licence holders, despite periodic public concern about the behaviour of mortgage traders.
Just like the second-tier lending market and mortgage broking, the problems in unlicensed or business-to-business lending involve many aspects which make it hard to simply point to any one cause for the problems that arise.
As the National Credit Act focuses on consumers, ASIC leaves commercial lending arrangements to be monitored by the parties in those arrangements. In certain situations ASIC can use its Corporations Act powers together with the National Credit Act to give it a broad, although not absolute, scope in relation to credit arrangements.
How the regulations are applied is a problem; consumer desperation and gullibility is a problem; inappropriate lending practices and advice is a problem, and as criticism on Four Corners implies, policing by ASIC may be a problem.
Clearly establishing evidence in a world of secret arrangements and little documentation is also a problem. To use its powers under the National Credit Act, ASIC would need identify that the relevant credit arrangements concerned borrowers/consumers who were natural persons, (not corporations or businesses), and this may partly explain why the regulator had not pursued the matters outlined on Four Corners. It should also be noted that where fraud is implicated the matter may more appropriately fall to the police to investigate.
ASIC now needs to use the experience it has accumulated in relation to consumer protection and lending practices, as well as the power it has under the National Credit Act. It is in a good position to make a difference.