Concerns raised to Senate on responsible lending changes

On Friday (19 February), the Senate economics legislation committee began its hearings for its inquiry into the National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020, which seeks to repeal responsible lending obligations (RLOs) and extend the best interests duty to more credit assistance providers, among other changes.

The chief intention of the removal of the RLOs, as set out by the federal government, is to reduce the time it takes for individuals and small businesses to access credit and streamline lending regulation. 

Under the change, banks will still be held to laws that ensure they are assessing a borrower’s capacity to repay the loan without substantial hardship (as outlined in the prudential regulator’s APS 220 standards) and other lending laws. However, the RLO change seeks to remove the financial regulator’s oversight of the banks’ lending assessments, in light of compliance disputes brought to the fore by the “wagyu and shiraz” case between the Australian Securities and Investments Commission (ASIC) and Westpac. 

Indeed, as the court did not agree with the financial regulator’s interpretation of what lenders should be doing to adhere to the responsible lending laws, the new bill would, in effect, remove ASIC's responsible lending remit, with the regulator no longer authorised to exercise its enforcement powers.

Aligning the regulatory approach with the ‘wagyu and shiraz’ case findings

Fronting the committee on Friday, the CEO of the Australian Banking Association (ABA), Anna Bligh, explained: “The legislation should be interpreted in a way that allows the banks to give less weight to expenses that would be reasonably viewed as discretionary versus expenses that are fixed. However, the guidance that is attached to the legislation through ASIC… that is not what it says and banks (I think, quite understandably) take the more precautionary approach.”

Ms Bligh continued: “It is precisely the treatment of discretionary expenses that are at stake here, and I would argue that in fact the government’s reforms, in effect, give effect to the wagyu and shiraz case.

“This is actually about saying, let’s put the wagyu and shiraz case back into what was probably the intention of the Parliament in 2010 [when setting the responsible lending laws] by clarifying [that there should be] one regulator, not two, and [that] it’s the regulator that has the most flexibility. 

“[It’s] still requiring banks to do the right thing, [it’s] still providing powers for customers to enforce when things go wrong, but [providing] sufficient flexibility for banks to treat different customers in different ways, depending on how long they’ve known them, how much they’re repaying, what their repayment history looks like etc.”

Concerns over consumer rights to challenge lending decisions

While the finance and property industry have been largely supportive of the repeal of the responsible lending obligations – citing its ability to improve the flow of credit and reduce the amount of red tape in the loan writing process – some concerns have been raised by some non-bank lenders, as well as members of the Labor Party, senators and consumer groups.

Witnesses called to the Senate hearings on Friday included representatives of consumer and financial counselling groups who reiterated their concerns that repealing the current laws would reduce consumer protections.

“The central aspect of the government to do is to remove individual suitability assessments, and only require lenders to have policies processes and systems to address risks associated with lending decisions,” Gerard Brody, CEO of the Consumer Action Law Centre, explained.

When asked whether the financial complaints authority, AFCA, could take over any individual grievances with lending decisions, Mr Brody replied: “AFCA’s role is to resolve disputes between consumers and financial firms. It is limited by its rules… one of its rules says that it cannot consider complaints about credit risk decisions. It’s actually excluded from its jurisdiction.”

He continued: “What it can’t do is make any sort of determinations based on the quality of that decision because that’ll be outside [its remit]. So, while consumers complain to AFCA, AFCA’s ability to resolve those disputes will be really limited… and so we expect that consumers will not get a remedy through complaints to AFCA (regarding individual credit risks assessments).”

He later added: “It’s an important distinction to be made in the sense that AFCA is not a law enforcement agency, it is there to resolve relatively small disputes, it has caps on how much compensation it can order, it has rules that exclude a number of disputes... That’s very different to the role that’s currently performed by ASIC, which is there to regulate conduct in individual lending decisions. And what flows from that is that ASIC can effectively get an institution to the point of setting up a large-scale remediation scheme, as we’ve seen. That’s not something that either AFCA or APRA will be able to do under the reforms.”

Similarly, Karen Cox, CEO of the Financial Rights Legal Centre, said she was concerned about removing ASIC’s oversight of the bank’s adherence to lending laws, stating: “I would like the [laws] to be as they currently are, enforceable by individual application and for compensation to flow when they’re breached, so that we’re not entirely dependent on one regulator. I would like there to be two regulators on the job doing the different jobs that they were set up to do: one to look at system stability and the other one to look at conduct. Because I don’t believe that the systems regulator is going to have sufficient resources or inclination to deal with the conduct [issues].”

Mr Brody also highlighted that ASIC has conducted “numerous systematic reviews” into lending practices over the past 10 years (including for credit card lending and reverse mortgages), which had resulted in wholesale changes in lending practices “without the need for enforcement action”. He outlined that should ASIC’s lending oversight be removed, it would no longer have that role and these reviews may cease.

The Senate hearings on Friday did not delve into the expansion of the BID. 

While a second hearing is set to be held this coming Friday (26 February), the program for this hearing had not been released at time of writing.

Once the hearings have concluded, the Senate will weigh up the witness evidence and the submissions received to form the basis of its report on the matter, which is scheduled to be handed to Treasury on 12 March 2021.

[Related: RBA backs responsible lending reforms]