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March 15, 2021

There's a bill before the Senate that would make it easier for banks to lend irresponsibly

The proposed legislation ignores the findings of the Hayne Commission and other inquiries

The Hayne royal commission into misconduct in the banking, superannuation and financial services industry found Australia鈥檚 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 鈥渘ot unsuitable鈥� for the borrower.

Hayne鈥檚 first recommendation (Recommendation 1.1) was that the National Consumer Credit Protection Act 鈥� to alter the obligation to assess unsuitability鈥�.

He saw 鈥溾�� the relevant provision of the banking code.

On releasing the royal commissioner鈥檚 report in 2019 Treasurer Josh Frydenberg said he was 鈥溾�� and 鈥済oing further鈥�.

Until COVID.

COVID the pretext for weakening rules

In , in the midst of the COVID recession, Frydenberg said he was 鈥渞educing the cost and time it takes consumers and businesses to access credit鈥�.

Credit was 鈥渢he lifeblood of the Australian economy鈥�.

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 鈥渓ender beware鈥� with 鈥渂orrower responsibility鈥�.

鈥楤orrower responsibility鈥�

Frydenberg introduced the legislation in . On a Senate committee recommended approving it, finding the current consumer protection framework 鈥減otentially overly prescriptive鈥�.

Labor and Greens Senators dissented. The bill faces a Senate vote .

We are members of a consortium of 12 academics who conducted an in-depth of the proposed changes and found they should be rejected. This is why.

Even after Hayne, banks are continuing to and have yet to show they have changed their ways.

The drop in lending since COVID was not caused by overly strict lending laws. Indeed, after a win by Westpac in a brought by the Securities and Investments Commission the banks said the laws were .

Lending standards protect against crises

Consumer protection in the field of finance is important 鈥� it contributes to strengthening financial stability.

 

The abusive, predatory and irresponsible lending practices that led to the US subprime mortgage crisis make this clear.

The government鈥檚 suggestion that it is fair for borrowers to take responsibility for their own circumstances doesn鈥檛 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.

The government says will fill this gap under a change proposed by Hayne that will require brokers to act in the 鈥渂est interests鈥� of their clients.

But Hayne鈥檚 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 , then from.

Brokers continue to be paid by the banks whose products they recommend.

APRA has no history of consumer protection

Hayne also recommended () that Australia鈥檚 鈥渢win peaks鈥� system of regulation continue.

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鈥檚 appetite for law enforcement had been limited, he found APRA鈥檚 had been non-existent.

The upshot is that, not only are the responsible lending requirements to be relaxed, but what鈥檚 left of them is to be handed to an agency (APRA) with no track record in the field, at the expense of ASIC.

 

The government has argued that the will step up to protect consumers.

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鈥檚 standards have been aimed at protecting financial stability rather than consumers.

 

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 ignore the findings of the Hayne Commission and dating back at least a .

They will neither properly protect consumers nor create the confidence in the financial industry the post-COVID recovery will need.

The government has named its legislation the National Consumer Credit Protection Amendment () Bill.

A more apt title might have been the 鈥淩educing Consumer Protection Bill鈥�.

 

, Senior Lecturer, Faculty of Law, ; , Professor of Law, ; , Senior lecturer, , and , Senior Lecturer, Griffith Law School,

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