With plenty of major lenders in the Australian finance sector having already fallen foul of regulators, there is continually less surprise when another goes into the mire.
The industry now under investigation relates to car finance. The Australian Securities and Investments Commission (ASIC) has raised concerns that lenders are pushing car loans on those who lack the means to pay them back. If a customer defaults on a loan, then some agreements exist where the dealership or company in question would be able to reclaim the car in the same way as a house foreclosure. The lender would repossess the car and then sell it.
This problem is like that of the Australian property market, which has faced criticism in some quarters as lenders offer loans that stand little chance of proper repayment. If too many individuals default on loans at the same time, then this could create a huge capital shortfall when set against forecast margins, which can lead to a lack of solvency at the lender’s end. The finance of motor vehicles is worth $8bn in Australia.
ASIC stepped in to investigate when it discovered a loophole that permitted companies to give out loans without receipt of a credit license.
Alarm bells began ringing for ASIC as early as 2016, when it lambasted BMW Australia Finance for offering car loans to customers who had already either defaulted or fallen into financial hardship because of loans that were not suited to their needs.
Michael Saadat, ASIC’s Executive Director of Financial Services, said that this was the catalyst for the investigations that have been taking place over the last few months. The original scandal led BMW to remediate customers to the tune of $77m.
Saadat said that ASIC found ‘that BMW was not meeting its responsible lending obligations properly and providing loans to consumers who could not afford them.’ He added that the company offered financing for lower-priced cars as well as expensive ones.
The loophole in question is based on an exception called ‘point-of-sale,’ where a car dealership can give out loans for vehicles without holding an official Australian Credit License (ACL). The problem remains to this day even after the Royal Commission’s interim report, which came out at the tail end of 2018, flagged it.
Saadat said that this circumstance should not be an excuse for dealerships to meter out ill-suited financial products. He noted that ‘consumers shouldn’t be given a loan that they can’t afford to repay.’
BMW had an ACL but still went against regulator wishes for responsible lending, particularly regarding the loophole that it used to ignore how the ACL said that it should be operating. The dealership sold the loans, but a different arm of the business approved them.
Saadat said that enforced action may well be necessary to hold those responsible to account. He added that any lender that does not meet ASIC’s compliance laws will face some form of judgement. A full report on the issue is due later this year, and more companies may find themselves under the spotlight.