Consultation launches on responsible lending changes

The government has now unveiled further details to its plan to overhaul responsible lending obligations (RLOs) and remove regulations which the government suggest may be contributing to a stifling in the flow of credit.

As first announced in September, the Consumer Credit Reforms are aimed at improving the flow of credit by reducing the time that it takes consumers and businesses to access credit so that consumers can “continue to spend and business can invest and create jobs”.

A consultation has now opened on the suite of changes to Australia’s consumer credit framework contained in the National Consumer Credit Protection Act 2009, as well as updates to the National Consumer Credit Protection Regulations 2010, and the introduction of a new Ministerial Instrument.

The changes – aimed at reducing the time it takes for individuals and small businesses to access credit while “maintaining strong protections for vulnerable consumers” – include:

• amending the Credit Act so that RLOs apply only to small amount credit contracts (or equivalent loans) by ADIs and consumer leases beginning on 1 March 2021;
• imposing lending standards for non-ADIs, as part of the new risk-based regulatory framework for consumer credit, based on similar obligations to those imposed on ADIs;
• amending the Credit Act to provide the Treasurer with the power to determine standards specifying requirements for a credit licensee’s systems, policies and processes in relation to certain non-bank credit conduct; and
• extending the best interests obligations already legislated for mortgage brokers to all credit assistance providers to “ensure appropriate consumer protections remain in place”.

In the proposed changes, which are now open for consultation under the Consumer Credit Reforms, the Treasury writes: “RLOs are designed to prevent the provision of unsuitable credit to consumers. They apply to consumer credit and do not apply to lending for predominantly business purposes…

“While both ADIs and non-ADIs are currently subject to the RLOs, ADIs must also comply with requirements under APRA’s prudential framework. This has resulted in regulatory duplication for ADIs with little additional benefit to consumers.

“Over time, the ‘one size fits all’ and prescriptive nature of the RLOs has imposed burdensome and unnecessary processes on both lenders and borrowers.”

Indeed, the Treasury writes: “One aspect of the reforms amends the existing responsible lending obligations by replacing what has become a one-size-fits-all approach to lending with a risk-based regime that allows lenders the flexibility to make decisions based on the characteristics of the borrower and the type of credit.”

However, it added: “The government will ensure that authorised deposit-taking institutions (ADIs) continue to comply with Australian Prudential Regulation Authority lending standards that require sound credit assessment and approval processes; key principles from these standards will be adopted for non-ADIs and regulated by the Australian Securities and Investments Commission.

“The measures will commence on 1 March 2021, subject to the passing of legislation. 

“This will ensure that barriers to accessing credit are removed so that consumers can continue to spend and businesses can invest and create jobs.”

Public consultation on the exposure draft and explanatory material will close on 20 November 2020.

You can find all the proposed reforms via the Treasury website, here.

[Related: APRA consulted on credit changes before announcement]