The Hayne royal commission into misconduct in the banking, superannuation and financial services industry found Australia’s responsible lending requirements were correctly calibrated.
They are set out in the National Consumer Credit Protection Act, which requires lenders to offer credit that is “not unsuitable” for the borrower.
COVID the pretext for weakening rules
Credit was “the lifeblood of the Australian economy”.
He put forward a plan to remove responsible lending obligations from the Act, with the exception of small amount credit contracts and consumer leases where he would impose heightened obligations.
Allowing lenders to rely on the information provided by borrowers would replace the current practice of “lender beware” with “borrower responsibility”.
The drop in lending since COVID was not caused by overly strict lending laws. Indeed, after a win by Westpac in a court case brought by the Securities and Investments Commission the banks said the laws were set appropriately.
Lending standards protect against crises
Consumer protection in the field of finance is important — it contributes to strengthening financial stability.Jacob Lund/Shutterstock
The abusive, predatory and irresponsible lending practices that led to the US subprime mortgage crisis make this clear.
The government’s suggestion that it is fair for borrowers to take responsibility for their own circumstances doesn’t hold water.
No matter how diligent their inquiries, consumers frequently lack the expertise to understand their circumstances and what financial products will be best for them.
For many, almost all of the expertise lies with the banks.
Since COVID, their need for this expertise has become greater, not less.
But Hayne’s recommendations were based on the responsible lending requirements being in place.
And Hayne wanted mortgage brokers banned from taking conflicted remuneration, under which they get paid by the banks they steer customers to, a recommendation Frydenberg at first accepted, then backed away from.
Brokers continue to be paid by the banks whose products they recommend.
APRA has no history of consumer protection
Under twin peaks, the Prudential Regulation Authority (APRA) regulates in order to ensure financial system stability, and the Securities and Investments Commission (ASIC) regulates to protect consumers.
While in his final report Hayne found that ASIC’s appetite for law enforcement had been limited, he found APRA’s had been non-existent.
The upshot is that, not only are the responsible lending requirements to be relaxed, but what’s left of them is to be handed to an agency (APRA) with no track record in the field, at the expense of ASIC.APRA
But AFCA has to be guided by the law. Without responsible lending laws and regulations, it is unclear what laws AFCA could apply. Thus far, APRA’s standards have been aimed at protecting financial stability rather than consumers.Tashatuvango/Shutterstock
In our assessment the proposed changes fail in every respect.
They ignore the key lesson of the global financial crisis: that it was caused by reckless and predatory lending.
They will neither properly protect consumers nor create the confidence in the financial industry the post-COVID recovery will need.
A more apt title might have been the “Reducing Consumer Protection Bill”.
- ^ not be amended (www.royalcommission.gov.au)
- ^ no reason to alter (www.royalcommission.gov.au)
- ^ taking action on all 76 recommendations (treasury.gov.au)
- ^ September (ministers.treasury.gov.au)
- ^ December (ministers.treasury.gov.au)
- ^ Friday (www.aph.gov.au)
- ^ this week (parlwork.aph.gov.au)
- ^ None of the justifications for weakening bank lending standards quite makes sense (theconversation.com)
- ^ analysis (cdn.theconversation.com)
- ^ fight their obligations (eresources.hcourt.gov.au)
- ^ court case (www.abc.net.au)
- ^ set appropriately (cdn.theconversation.com)
- ^ mortgage brokers (www.abc.net.au)
- ^ Vital signs. It's one thing to back down on Hayne's recommendation about mortgage brokers, it's another to offer nothing in its place (theconversation.com)
- ^ accepted (treasury.gov.au)
- ^ backed away (joshfrydenberg.com.au)
- ^ Recommendation 6.1 (www.royalcommission.gov.au)
- ^ Australian Financial Complaints Authority (AFCA) (joshfrydenberg.com.au)
- ^ It's about to become easier to lend irresponsibly, to help the recovery (theconversation.com)
- ^ other inquiries (www.aph.gov.au)
- ^ decade (www.aph.gov.au)
- ^ Supporting Economic Recovery (www.aph.gov.au)
Authors: Andrew Schmulow, Senior Lecturer, Faculty of Law, University of Wollongong