Radical Restructuring of Australian Responsible Lending Laws

On 25 September 2020, Treasurer Frydenberg and Minister for Housing and Assistant Treasurer Sukkar announced the Federal Government’s intention to undertake major reforms to credit regulation, including discarding the National Consumer Credit Protection Act [Credit Act] responsible lending regime for mainstream lenders and mortgage brokers.

In this post, Michael Funston, GRC Solutions’ Senior Lawyer and Manager, who has many years’ experience in Financial Services compliance and consumer law, analyses this dramatic policy shift in consumer lending regulation in Australia.

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The Government also proposes to:

• adopt and apply elements of the APRA credit risk management framework to non-bank financial businesses
• make it easier for lenders to rely on the information borrowers provide to them by introducing a ‘borrower responsibility’ principle
• remove Credit Act jurisdiction where any portion of a proposed loan is for a business purpose
• in the case of small amount loans and consumer leases, maintain existing responsible lending obligations and impose additional regulatory requirements, and
• require debt management firms to hold a Credit Licence.    

The Government is positioning the proposed changes as initiatives to facilitate the flow of credit to consumers and small business to help support economic recovery, while also refocusing regulation on protecting high risk borrowers.  

There will be a public consultation process before the required amending legislation is introduced into Parliament. Assuming the legislation passes, most of the changes will commence on 1 March 2021.

The Treasurer’s media release, Simplifying access to credit for consumers and small business, which attaches a six page rationale for the reforms (described as a factsheet), is here: https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/media-releases/simplifying-access-credit-consumers-and-small

The proposed reforms in detail

Responsible lending obligations to be removed from the Credit Act for all mainstream lending

The Government proposes to disapply the responsible lending obligations to all Credit Act regulated contracts except small amount credit contracts and consumer leases. These will continue to be subject to responsible lending as well as to further additional regulation (see below).

In support of this decision, the fact sheet accompanying the announcement characterises the responsible lending regime as interpreted/implemented in the Australian Securities and Investments Commission’s [ASIC] regulatory guidance [RG 209] as, among other things, “an unnecessary barrier to the flow of credit”, “no longer fit for purpose and which risks slowing our economic recovery”, “prescriptive”, “a ‘one-size-fits-all’ approach”, “burdensome for borrowers, irrespective of the risks they face”, “imbalanced between a lender and its customers”, “unduly restricting lending”, “imposing burdensome and unnecessary processes on both lenders and borrowers, leading to delays in credit approvals and increasing borrowing costs”, and often subjecting “sophisticated borrowers” to “the same stringent obligations as a high-risk borrower applying for a payday loan”.

As well as suggesting, in effect, that the responsible lending regime has been a failure (on ASIC’s watch[1]), the announcement also seeks to support the case for its general discontinuation by pointing to:

• recent reforms in other areas of the law “that have strengthened consumer protection in the credit system”[2]; and
• the Australian Prudential Regulation Authority’s [APRA] prudential standards relating to credit risk management which, the factsheet notes, “include expectations of sound lending practices” for banks; and “key elements” of which the Government proposes to apply to non-banks (see next heading).

Government to “ensure” that banks “continue to comply with APRA’s lending standards” and to “appropriately adopt … key elements” of the standards and apply them to non-banks

APRA has recently developed a new prudential standard, APS 220 Credit Risk Management[3], which commences in January, and will replace the current APS 220 Credit Quality. Among other things, the new standard addresses the need for banks to maintain prudent credit risk practices over the entire credit lifecycle and includes a section setting out APRA’s general expectations relating to the credit assessment and approval process[4]. APRA also provides more specific guidance on mortgage lending, APG 223 Residential Mortgage Lending (July 2019)[5], which includes commentary on prudent practice in relation to housing loan origination[6].

Despite the reference to ensuring that banks continue to comply with APRA’s lending standards, it seems unlikely that the Government intends to do anything further in relation to APRA’s supervision of bank credit risk management. There is no suggestion, for instance, that APRA will be asked to develop specific guidance on other types of lending apart from mortgage lending. The point being made, rather, is that the APRA standards, in effect, sufficiently guarantee sound lending practices without what is glossed as the additional/duplicative layer of responsible lending[7].  

In relation to the application of elements of APRA’s bank lending standards to non-bank financial businesses, the factsheet commentary does not provide any further detail at this early stage on how this will work, apart from stating that:

APRA will continue to regulate [banks] in relation to existing standards and ASIC will continue to regulate [non-banks] in relation to the new standards that are introduced. Appropriately adopting APRA’s expectations of sound [bank] lending practices for [non-banks] will ensure consistency between the standards applied for [these types of business].

It will be interesting to see how elements of a credit risk regime administered by a prudential regulator are going to be “appropriately adopted” and “applied” by a conduct regulator like ASIC. Presumably, ASIC will not be tasked to become a quasi-prudential regulator with respect to non-bank lending standards. If not, as a conduct regulator, will it be able to seek penalties and other orders for breach of those standards? If not, how will it do its job?        

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Lenders to be allowed to rely on the information provided by borrowers “unless there are reasonable grounds to suspect it is unreliable”. Borrowers to be made “more accountable for providing accurate information to inform lending decisions, replacing the current ‘lender beware’ practice with a ‘borrower responsibility’ principle.”

One of the Government’s concerns with ASIC’s guidance on responsible lending is, according to the factsheet (page 1, last para), that the guidance “puts the onus on lenders to verify information provided by borrowers[8], with borrowers bearing limited responsibility for providing incorrect or misleading information to lenders”.

The factsheet states that this has led to lengthy credit approval processes “aimed solely at meeting these requirements”, as a result of which “obtaining credit has become more burdensome for borrowers, irrespective of the risks they face” and “significantly increased the time needed to gain credit approvals”.

The factsheet says “new obligations” will address these issues, and thereby considerably simplify and streamline the credit application and approval process, thereby facilitating the supply of credit. No further detail is currently provided regarding how this will happen, including how borrowers will be made more accountable. One aspect of the proposal likely to attract considerable interest is how the new obligations will define the circumstances in which lenders will not be able to rely on the information provided by borrowers because they have “reasonable grounds to suspect” that information is unreliable.    

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All provision of credit where any portion is for a business purpose to be excluded from Credit Act coverage  

Under current law, a loan to an individual that is partly for personal and partly for business purposes is subject to Credit Act and Code regulation, including the responsible lending obligations, if the predominant purpose of the loan is a personal or household purpose. In April, however, as part of its response to the pandemic, the Government made Regulations[9] temporarily exempting licensees from most of the responsible lending obligations where a borrower with an existing relationship with the licensee seeks consumer credit, or a consumer lease, for purposes that include a small business purpose, even if the predominant purpose of the loan is personal[10].

Under the proposed reforms as announced, “the new framework” will not apply where any portion of an application for credit is for a business purpose (see page 4, second last para, factsheet). Although what is meant by “the new framework” is unclear, it appears from the commentary that the Government’s intention, going beyond the current temporary exemption, is to permanently carve-out all loans with any business purpose component, however small, from the Credit Act and Code regime. Further clarification of this will no doubt be forthcoming.

The Government says the reform will facilitate small business lending by removing supposed “ambiguity” regarding the application of consumer lending laws to small business lending. This ambiguity is attributed to “recent prescriptive interpretation of the obligations”[10] as well as “the excessive risk aversion of lenders”. The factsheet notes that small business borrowers will continue to receive protection through the Banking Code of Practice and the Australian Financial Complaints Authority’s [AFCA] small business jurisdiction.

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Mortgage brokers to no longer be subject to responsible lending obligations

The factsheet says this change will “ensure there is no misalignment between the obligations of brokers and lenders”.  It notes that “consumers will continue to be protected when accessing services by mortgage brokers through the recently introduced best interests duty for mortgage brokers commencing on 1 January 2021”.

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Additional regulation of small amount credit contracts [SACCs] and consumer leases to be introduced

As noted above, SACCs and consumer leases will continue to be subject to the RLOs. In addition, the Government proposes to impose a cap on the total payments that can be made under a consumer lease and introduce new ‘protected earnings amounts’ for SACCs and consumer leases. See pp. 5 – 6, factsheet, for details.

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Debt management firms to be required to hold an Australian Credit Licence

Debt management (“credit repair”) firms that are paid to represent consumers in disputes with financial institutions, both while the matter is being handled by the business’ internal dispute resolution process and also if it is escalated to AFCA for resolution, will be required to become Credit Licence holders and satisfy the ongoing obligations imposed on Credit Licensees. These include the requirement to meet the ‘fit and proper person’ test, and to undertake their activities ‘efficiently, honestly, and fairly’. Consumers involved in a dispute with a debt management firm will be able to have their dispute determined by AFCA.

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Initial reactions to proposed reforms

Reaction to the proposed reforms to date has been divided along predictable lines. 

Consumer groups have responded negatively, indeed angrily[11], highlighting concerns that the abandonment of responsible lending will lead to a resurgence of aggressive credit selling creating more unsustainable debt at a time of economic crisis.

They dismiss concerns about access to credit, citing Australian Bureau of Statistics data that lending is still growing strongly; as well as suggestions that consumer lending regulation is negatively impacting small business lending. The consumer groups also note that the Financial Services Royal Commission did not recommend any changes to responsible lending laws, just that they be properly applied.

By contrast, business, including the industry associations representing bank and non-bank lenders, mortgage brokers, the building industry, reg tech businesses, property investors, and others has generally welcomed the proposals citing potential benefits for industry, borrowers, and the broader economy[12].

For instance, Australian Banking Association CEO, Anna Bligh[13], noted that the Banking Royal Commission “identified the need to simplify the regulatory landscape” and said that the proposed reforms would “remove duplication and overlap between regulators while continuing to ensure strong protections for consumers”. Ms Bligh was very keen to emphasise the ABA’s commitment to striking “the right balance” between “maintaining strong consumer protections” and “providing credit into the economy at a critical time” in developing the reforms.

Similarly, Australian Finance industry Association CEO Diane Tate commented[14] that AFIA “believes the announcement to streamline credit processes and remove ambiguity with consumer and small business lending make sense”. She added that “these changes should aim to make it easier, faster, and simpler to access right-sized and best-priced credit to support economic recovery and underpin financial wellbeing”. It will be important, she said, “to work through the details of the changes so strong consumer protections are maintained and sensible changes are introduced that reinforce the principles of prudent lending, while removing complexity, embracing technology and reducing burdens on lenders and borrowers”.

On behalf of the Customer Owned Banking Association, CEO Mike Lawrence said[15] that customer owned banking institutions did not need responsible lending laws because “putting our customers first is part of our DNA”. He opined that “the Government is right to take decisive action to promote lending at a time of great uncertainty and the biggest peacetime economic contraction since the 1930s”.

At the political level, media reports suggest that the ALP is leaving the door open to supporting the reforms, with its Treasury spokesperson, Jim Chalmers, quoted as saying that “if [the reform proposal] makes sense, we’ll support it. But if it tips the balance too far in one direction, we’ll have something to say”[16].

Where to now?

A fuller picture of the Government’s reform proposals will emerge when Treasury commences the promised consultation process. Given the importance of the reforms being proposed, and the slated commencement date of 1 March 2021, we would expect that process to get under way soon.

Assuming they become law, the proposed reforms should have the intended effect of simplifying the credit assessment process for lenders.

It remains to be seen whether consumer representatives’ concerns about the impact of the reforms on lending standards are realised.

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Notes

[1] Without specifically naming ASIC, the factsheet consistently blames ASIC’s “prescriptive obligations, with close to 100 pages of guidance…” rather than the legislation itself (“what began as responsible lending principles”) for the purported deficiencies of the responsible lending regime: see bottom page 1– page 2. This critique has been facilitated by the recent Full Federal Court majority decision in the ASIC v Westpac responsible lending litigation.  

[2] The factsheet lists (page 2): the product intervention power, the design and distribution obligations, the best interests duty for mortgage brokers, increased civil and criminal penalties under the Credit Act, the ban on unsolicited offers of credit card limit increases, and the establishment of the Australian Financial Complaints Authority [AFCA].

[3] APS220 Credit risk management (January 2021) is available here: https://www.apra.gov.au/search?query=APS+220+Credit+risk+management+%28January+2021%29

[4] ibid paras. 39 – 59

[5] APG223 is available here: https://www.apra.gov.au/sites/default/files/apg-223-residential-mortgage-lending.pdf

[6] ibid paras. 21 – 58 (Loan origination), and 59 – 68 (Specific loan types)

[7] The suggestion of an unnecessary doubling-up of regulation of ADIs is made at a couple of points. See, for example, at page 2, factsheet: At present ADIs are subject to the RLOs while also needing to comply with APRA’s requirements in respect of the same lending activity.

[8] We might note, in passing, that the legislation itself imposes an onus on lenders and other licensees to “take reasonable steps to verify the consumer’s financial situation”: see s.130(1)(c), Credit Act. This is not just a burden that ASIC has arbitrarily imposed on lenders through its guidance, as is implied.

[9] The National Consumer Credit Protection Amendment (Coronavirus Economic Response Package) Regulations 2020 are here: https://www.legislation.gov.au/Details/F2020L00386/Download

[10] Another swipe at ASIC’s administration of the credit laws. Though often invoked, the suggestion that the application of the consumer lending laws to small business lending is “ambiguous” is tendentious, in our view. RG 209.34 –41 clearly explains the relationship.  

[11] See comments of CHOICE, Consumer Action Law Centre, Financial Counselling Australia, and Financial Rights Legal Centre here: http://consumersfederation.org.au/consumer-groups-slam-move-to-remove-responsible-lending-laws/.

[12] For a round up of some of these views, see Axing lending rules ‘will help consumers – and recovery’, Australian Financial Review, 26 September 2020.

[13] See Changes to Australia’s credit laws (25 September) here: https://www.ausbanking.org.au/changes-to-australian-credit-laws/

[14] Blog, 25 September 2020

[15] COBA welcomes proposed reforms to credit regulation (25 September) here: https://www.customerownedbanking.asn.au/media-a-resources/media-release-alerts/1474-coba-welcomes-proposed-reforms-to-credit-regulation

[16] See Rule changes set to boost home prices: Responsible lending, Australian Financial Review, 26 September 2020.