Common approach agreed on financial abuse requirements

After weeks of uncertainty and confusion following the introduction of  the ABA’s new Banking Code of Practice, it has been announced that agreement has now been reached on the draft wording of a broker statement regarding financial abuse in co-borrower applications.

The new code, which came into effect on 1 July 2019, brought in a higher standard of customer care when dealing with individuals and small-business customers – particularly vulnerable customers, co-borrowers and guarantors.

It now requires signatories to “take reasonable steps” to confirm that any co-borrowers on a loan not receiving a “substantial benefit from the loan” (e.g. an equitable interest in the asset or payment of debts) understand the risks involved before approving the loan. 

Moreover, the code states that lenders would not approve a co-borrower loan in this instance unless they are “satisfied that [they] are not experiencing financial abuse”.

Lenders had been making brokers aware of these new requirements – and, in some cases, asking them to complete a financial abuse declaration form, which both the MFAA and FBAA had urged members not to sign due to concerns over potential litigation and professional indemnity insurance breaches.

In a video update earlier this month, MFAA CEO Mike Felton said the industry was “close to finalising the wording of a broker statement around co-borrowers and financial abuse” and that this should “assist in addressing any remaining concerns in this area”.

In a new joint statement, the ABA, the MFAA and the FBAA said that an “important element” of the code is “taking extra care with customers who may be vulnerable”. 

“This is the collective aim of both the banking industry and mortgage brokers,” the statement read.

“To protect the customer, all financial firms, including banks and brokers, should be proactive in looking for warning signs of financial abuse.”

The joint statement continued: “Australia’s banks, through the ABA, have consulted with both the MFAA and FBAA to ensure the rollout of the new code is conducted carefully and brokers are properly supported.

“As a first step in the process, the ABA, MFAA and FBAA have agreed on a common approach to identifying the signs of financial abuse in a co-borrower arrangement.

“This common approach provides better guidance for both banks and brokers to identify any signs of financial abuse.”

While details of the common approach have not yet been publicly released, both the banking and broking industries are believed to be satisfied that the common approach does not place brokers into undue risk from a liability perspective.

This has largely been achieved by moving away from a signed declaration regarding a person’s psychological state, to a confirmation that outlines the broker has not noticed or been told anything that has caused them to believe that the co-borrower is experiencing financial abuse. 

By moving away from a signed declaration to a confirmation, it is believed that the risks of legal exposure will be limited.

Training to be developed and rolled out

While lenders have reportedly been training their staff on identifying financial abuse for several months, work is now ongoing to develop appropriate training for the new “common approach” for the broking industry.

The ABA, FBAA and MFAA statement read: “Australia’s banks, through the ABA and together with the broker associations, are committed to providing training modules to help brokers identify customers showing signs of suffering from financial abuse and, in due course, to expand the training to cover other vulnerable circumstances.

“The ABA is currently in consultation with the MFAA and FBAA about the development and rollout of this module, which will be available for brokers in the near future.”

It is expected that, once finalised, the training will be rolled out by both the MFAA and the FBAA to broker members.

Speaking to The Adviser about the new approach, FBAA managing director Peter White said that the association was supportive of the new banking code but had concerns about the initial implementation of the co-borrower financial abuse approach.

He commented: “Brokers cannot make a determination on someone’s mental state of mind as they aren’t trained psychologists, so we are happy that the new approach doesn’t go down that path.

“We are very happy with the work on re-wording this and very supportive of the agreed draft.”

Mr White suggested that, until the new approach is rolled out, brokers should continue to keep and submit “significant notes” on co-borrower applications, including those stating that they “are not aware of any obvious signs of financial abuse for the co-borrower”.

MFAA CEO Mike Felton also welcomed the progress, telling The Adviser: “The MFAA supports the objectives of the new ABA Banking Code of Practice and recognises the importance of treating vulnerable customers with the extra care they deserve. 

“Whilst we had some concerns with the initial implementation, there has since been significant discussions involving all key stakeholders and we welcome the common approach that has been agreed to identifying signs of financial abuse in co-borrower arrangements. 

“This is an important first step in ensuring banks and brokers are provided with better guidance of what is required under the code and that there is a more consistent approach. It has also been supported by a number of PI insurers, which is pleasing. 

“We will be sharing details with our members later today as well as providing an update on progress of the training module that is being jointly developed.”

[Related: Banks to begin rolling out financial abuse requirements]