ASIC warns non-bank lenders over misleading offset accounts

ASIC has warned non-bank lenders their marketing of mortgage offset products could mislead customers.

ASIC is concerned customers may be misled by non-banks’ marketing of offset products that are not covered by the government’s guarantee scheme. Picture: Damian Shaw

The corporate regulator has warned non-bank lenders about their marketing of mortgage offset products, saying consumers could be misled in believing they operated in the same way as accounts offered by traditional banks that are covered by a government guarantee.

With the popularity of ­offset accounts soaring in recent years, non-banks have offered mortgages with offset features, despite not being “authorised deposit-taking institutions” that are regulated by the Australian Prudential Regulation Authority.

Non-banks use products such as offset redraw facilities that are not covered by the government’s financial claims scheme, which guarantees bank deposits, including offset accounts, up to $250,000 if lenders fail.

An Australian Securities & Investments Commission spokesman told The Australian: “Non-ADI lenders should ensure that they include sufficient disclosure about the nature of the loan product features in loan agreements with consumers, to ensure that consumers are not potentially misled as to the nature of the loan product features.”

In a study last year, the Reserve Bank found cash in bank offset accounts had soared to $90 billion after annual growth of about 30 per cent in recent years. There was an additional $120bn available to be withdrawn from “redraw” loans after growing by nearly 10 per cent.

In the competitive mortgage market, offset accounts are considered costly for banks because they reduce interest income and APRA requires them to have regulatory capital for the whole loan because of the risk customers could quickly use up offset accounts.

Consumer advocate Christopher Zinn said home loans were complex and it was important to explain matters like the government guarantee. While offset funds at non-banks might just pay down a borrowers’ loan if the lender failed, Mr Zinn said the process wasn’t simply explained and people could quickly need the money that had been set aside for other purposes.

“It really doesn’t seem transparent enough,” he said, adding mortgage brokers should also point out the differences in offset products.

Non-banks, which are regulated by ASIC, have enjoyed better conditions since the global financial crisis as the residential mortgage-backed securities funding market reopened and banks tightened lending to customers deemed more risky.

Pepper Group rode the wave to float on the stockmarket last year and performed well for investors before recently slipping below its initial public offering price of $2.60 as credit growth slows and “bubble” fears linger in markets such as Sydney.

Firstmac, the nation’s biggest non-bank, also recently struggled to attract fresh investment, despite flagging pre-tax profit for the year to June 30 had grown to around $23m from $9m on stronger volumes from subsidiary loans.com.au.

According to comparison site finder, loans.com.au is offering some of the sharpest rates in the market for loans with offset features, charging just 3.49 per cent a year for a $600,000 “offset” mortgage.

On its website, loans.com.au refers to the product as both an “offset redraw account” and “offset redraw facility” that provides “unlimited access to your funds”.

A spokesman for loans.com.au said statements on the website and in marketing materials were “accurate”.

“It is clear from the website, the applicant’s scripted phone conversation with the lender, the context of the account opening process and the terms and conditions of the loan, that it is not a deposit account and that we are not a bank,” he said.

Describing how the product operated, the spokesman said borrowers’ sole loan account included a 100 per cent interest ­offset redraw facility using an “offset sub-account”.

Borrowers can then make additional repayments to the offset sub-account within the loan, with amounts displayed separately. Redraws can be made against the loan balance or offset sub-­account.

Michael Saadat, ASIC’s senior executive, deposit takers, credit and insurers, has previously suggested that borrowers check whether a non-bank holds the offset account separately with an ADI because these would be guaranteed by the government, in contrast to redraw facilities which are not.