Collecting your client's true and correct living expenses is an important part of your Responsible Lending obligations.
The Australian Securities and Investments Commission (ASIC) has advised that using benchmark indicators is not consistent with your obligations. As a result, Lenders are moving away from relying on the HPI (Henderson Poverty Index) and the HEM (Household Expenditure Measure). This means that you need to make additional enquiries to meet your Responsible Lending obligations.
Ascertaining client living expenses
The easiest way to collate this information is to use the Needs Analysis in Mercury which has a section specifically devoted to understanding your clients living expenses. Refer to About Questionnaires and How to email a Questionnaire.
As a general rule of thumb, the Lenders will be requesting a breakdown including (but not limited to):
Utilities - gas, electricity, water
Phone and internet changes
Motor vehicle / public transport costs
Insurances - House and Contents, Health, Income Protection, etc
School and education
Any discretionary spending.
Understanding your target client
A common question is where does this stop and start, and to what extent are you expected to verify the information that the client has provided to you?
Remember that you are in the best position to understand your target client. If your client is an early twenties first home buyer, then they may not have dependents and school expenses. But if your target client is double income, middle class with two children in private schools, then you know that their expenses will be higher.
Given your expertise with your target client, you will begin to understand average living expenses for those clients. If they appear to have very low expenses, or conversely, very high expenses, you can initiate an informed and educated discussion about what they included in their monthly figures.
As a Connective Credit Representative, you are required to collect your client's transaction statements. Each file must have three months of transaction statements, regardless of what the purpose of the loan is. You are not expected to cross check each "Coles" debit with the amount that the client has declared on their monthly break down for grocery expenses, however, you need to check that the amount the client has declared is consistent with the type of client.
Isn't this financial planning?
We have often been asked whether this falls into the realm of financial planning? The thing to remember is that collecting information from a client on their spending habits is not providing them with advice. If you were to tell your client how much they should be spending in each category, then that would fall into the realm of giving financial advice.
Discretionary spending and deductions
If you need to have a conversation with your client about their discretionary spending, treat this in the same way as you do for discretionary deductions from the client's income.
For example, a client may make additional payments to super, or the social club, purchased leave, etc. Most clients are aware, especially if they are buying, that those discretionary items will need to be cut out or cut back in order to afford the loan.
Charity donations are considered discretionary spending and the client needs to understand that sometimes it is not always possible to keep up those discretionary payments in order to afford the loan.
Importantly, ASIC has determined that understanding your client’s financial position includes a knowledge of the client’s true and correct living expenses. Our Needs Analysis incorporates this section and it is important that you have a conversation with your clients about their living expenses. For more information refer to About Questionnaires.