The government’s plan to simplify access to credit by removing responsible lending provisions from consumer credit law are likely come unstuck because it has failed to consider the web of industry standards, other regulation and related legislation that influences lenders’ credit assessments.
The Treasurer announced last month that the government will remove the responsible lending provisions from the National Consumer Credit Protection Act and rely on APRA’s prudential supervision to regulate lending practices.
The government hopes to reduce the cost and time involved in the credit process, for both borrowers and lenders.
APRA’s focus is on the risk to the lender, not the borrowers. Given the different focus of the APRA standards, the lender should be given greater latitude about how it quantifies and manages those risks.
Since Frydenberg’s announcement, many commentaries have focused on the fact that the Banking Code of Practice, the Australian Financial Complaints Authority’s operating rules, ASIC’s powers under product intervention and design and distribution obligation rules, and the mortgage broker best interests duty that starts next year all have a bearing on lending standards.
The proposed change to the NCCP Act will not necessarily change the approach taken under these other standards and regulations.
Frydenberg said the current responsible lending provisions are “overly prescriptive, complex and unnecessarily onerous on consumers”.
This is not news. The ASIC v Westpac (wagyu and shiraz) case illustrated the issues faced by lenders and the regulator in interpreting and applying the rules.
Other elements of the government’s plan include making non-ADI lenders subject to APRA’s standards.
A key element of the proposed change is that lenders will be entitled to rely on the information provided by borrowers, in the absence of reasonable grounds to suspect that information in unreliable.
This would replace the current “lender beware” approach with a “borrower responsibility” approach. In this way, lenders are expected to save time and cost in verifying information and focus on the speed of processing applications.
Lenders would no longer be liable (or their liability would be greatly reduced) if the information provided by the applicant is not true.
The new rules would not apply to any loan with an element of business purpose.
Higher risk products, including small amount credit contracts and consumer leases, will continue to be covered by responsible lending rules.
The government also proposes to regulate debt management companies, requiring them to hold an Australian credit licence.
Under the current responsible lending guidelines, lenders must assess whether a credit contract is unsuitable for a consumer, make reasonable inquiries about the borrower’s requirements and objectives, inquire about and versify the borrower’s financial situation.
In a note to clients, law firm K&L Gates said the role of the Australian Financial Complaints Authority was a “sleeper”.
“With the responsible lending laws in place, many AFCA complaints allege that the lender did not fulfil these obligations,” it said.
“However, AFCA regards its role more broadly than this and sees one of its functions as ensuring fairness. What AFCA will make of the changes and how they interact with issues of fairness may well impact just how significant these reforms will