Almost two weeks ago, the Internet was abuzz with emails flying around about the Government’s Consumer Credit reforms. It took many in the industry by surprise that relaxing responsible lending provisions is required.
Loans easier to get, faster to deliver and responsible lending guidelines wound back to stimulate the economy certainly made headlines. There was even talk of ‘responsible borrowing’ being introduced. All this because the current consumer protection framework has allegedly created risk aversion and restricted the flow of credit. Many ADI’s and brokers have been jumping for joy but is this a good move?
Some history
The National Consumer Credit Protection Act 2009, what ASIC and Treasury refer to as the “Credit Act”, is just over 10 years old. It was created when the States and Territories transferred their powers to regulate credit to the Federal government.
Before introduction, it was claimed the Credit Act would provide legislation that applied to all lenders. Upto that point, there was a ‘gentleman’s agreement’ in place. It allowed the Australian Prudential Regulation Authority (“APRA”) to regulate the ADI’s whilst the States regulated credit under the UCCC. The UCCC did apply to the ADI’s but there were so many exemptions for them, it was largely ineffective. APRA had no appetite for credit legislation compliance. Whilst ASIC could have intervened under the ASIC Act, it rarely, if ever, did so. Little wonder the ADI’s were free to do almost whatever they wanted.
The Credit Act introduced principles-based legislation and regulation aimed at ensuring all lenders provide suitable loans to consumers. The industry has endured the double-negative of “not unsuitable” which, along with poor drafting from the outset and complex enhancements and amendments, has made the legislation increasingly complex over the years. Fast forward to 2020, and the Government now claims these very principles which underpin responsible lending obligations (“RLOs”) have been implemented in a way that is no longer fit for purpose and risks slowing our economic recovery.
Independent umpire?
ASIC is a regulator allegedly independent of Government control. The Government claims ASIC’s prescriptive approach in RLO guidance has stifled the economy. It says “the guidance puts the onus on lenders to verify information provided by borrowers, with borrowers bearing limited responsibility for providing incorrect or misleading information to lenders. In response, many lenders have put in place detailed and lengthy credit approval processes aimed solely at meeting these requirements, but without necessarily improving a lender’s ability to understand if the loan is suitable for the customer.”
ASIC will continue to have some say over ADI activities because they will still be subject to the ASIC Act. If ASIC’s staff have less to do because of the changes, perhaps we’ll see more prosecutions of ADI’s for other financial transgressions.
Responsible Lending Obligation Improvements
Since the introduction of RLOs, the Government points to its implementation of a number of significant changes that include:
• ASIC’s product intervention powers;
• design and distribution obligation to reduce the risk of consumers acquiring or being mis-sold products that don’t meet their needs;
• a best interests duty for mortgage brokers ;
• more than doubling the maximum corporate and financial sector civil and criminal penalties under the Credit Act;
• enhancing protections for credit card customers by banning unsolicited offers of credit limit increases, simplifying how interest is calculated and requiring online options be available for consumers to cancel cards or reduce their limits; and
• establishing AFCA.
It says APRA has updated its standards for ADI’s to ensure lenders have appropriate settings for managing risk. However, that risk largely applies to prudential requirements the lender must meet, not whether it is lending appropriately.
The Government’s media release says the ‘one-size-fits-all’ and prescriptive nature of RLOs is imposing burdensome and unnecessary processes on both lenders and borrowers. It’s led to delays in approving credit and increasing borrowing costs. Existing mortgage holders now face avoidable delays in refinancing existing loans even if they have a strong credit record. Sophisticated borrowers are often subject to the same stringent obligations as a high-risk borrower applying for a payday loan.
Well, not quite but yup, all true. The vast majority of this action, though, has occurred after and directly because of Hayne’s 2017 Banking Royal Commission (“RBC”). Up to then, the ADIs weren’t truly adhering to RLOs as the RBC found out.
Hypocrisy
There was plenty of condemnation of the banks’ actions whilst the RBC was in full swing. Implementing these proposed changes quickly and without proper consideration risks a prompt return of some of those heinous actions that were brought to light in the RBC. We still remember it was this government that didn’t want a RBC in the first place.
Looking at those “achievements”, industry representative groups told Treasury some of the provisions were over the top. Yet, it’s Ministers and MPs in this same Government that approved all of them but who are now crying foul. They now say it’s affecting pandemic recovery. It raises at least three very important questions:
- Why didn’t they raise their concerns before passing these legislative amendments?;
- If these changes were so important then, is there really a valid reason to water at least some of them down now?; and
- Exactly which ones are to be retained, watered down or simply repealed?
Use of benchmarks
Nowadays, almost the entire industry uses electronic assessment systems. Back in 2015, ASIC told one industry group that no system provided the lender with the appropriate level of assessment. Regulatory Guide 209 at that date said lenders could use benchmarks as a tool to verify the information provided by the borrower. That decision is, in my opinion, the root cause of where we are today. The law currently requires lenders to assess borrowers on two counts as to whether or not:
- they can afford the loan (i.e., “affordability” or “serviceability”); but also
- if it’s suitable for their needs (i.e., “suitability”).
The electronic assessment processes used by most lenders use affordability benchmarks such as HEM. These have been created using absolute basic living costs. Unfortunately, these systems take the benchmark expense totals as defaults. The benchmarks ignore suitability requirements completely. Indeed, Commissioner Hayne commented on this using the case studies from the first round of hearings in the RBC when he suggested that “credit licensees too often have focused, and too often continue to focus, only on ‘serviceability’ rather than making the inquiries and verification required by law”.
ASIC will no doubt be kicking itself it didn’t pass a legislative instrument prohibiting the benchmarks being used as default expense amounts.
Hayne v Perram
In his interim report, Commissioner Hayne said: “More particularly, identifying that the consumer’s income is larger than a general statistical benchmark for expenditures by consumers whose domestic circumstances are generally similar to those of the person seeking the loan does not reveal the particular consumer’s financial situation.” He went on to say “[a]ll it does is convey information to the credit licensee that it may judge sufficient for it to decide that the risk of the consumer failing to service the loan is acceptable. Verification calls for more than taking the consumer at his or her word.”
Despite its independence, there’s obviously been considerable political pressure applied. ASIC decided not to appeal this decision in the High Court. It’s now clear that the banks in particular have not liked ASIC’s take on responsible lending. They’ve obviously lobbied the government for change. John Kehoe and James Ayres, writing in the AFR on 15 July said senior bankers “wanted to have reasonable discretion about what customer information to use when assessing loans”. I would argue lenders want certainty more than “reasonable discretion”.
The Federal Court had previously rubber-stamped ASIC’s arguments in the largely undefended case with The Cash Store. ASIC’s case against Westpac in what has become known as the “Wagyu and Shiraz” case is far more important. It leads us to where we are now.
ASIC argued that Westpac’s electronic assessment processes were insufficient . It claimed the bank should have taken into account the borrower’s current spending habits. In its defence, Westpac argued that using benchmarks such as the Household Expenditure Measure (HEM), the borrower had the ability to reduce their spending habits in order to afford the loan.
The legal difference of opinion
Yes expenses can be cut back but from a realistic point of view, if a borrower is currently spending his or her disposable income on goods or services that satisfy a current lifestyle, are they really going to stop spending in certain areas? If the borrower has other loans or leases and the mortgage is paid first, experience says it’s the other credit providers that are going to see defaults and applications for hardship rather than the borrower cutting back on their lifestyle choices. Commissioner Hayne obviously thought so. It was a major blow for ASIC when Justice Perram found for Westpac.
This is precisely why buy-now-pay-later (“BNPL”) purchases are amongst those scutinised intensely. Experience shows that borrowers will pay BNPL lenders in preference to almost any other lender. As they promote impulse purchasing, a very good reason for the government to not want to regulate them regardless of any consumer detriment they cause.
Call for Borrower Responsibility
In over 15 years of submissions to both State and Federal Government, I repeatedly called for borrower responsibility. Former Assistant Treasurer, the Hon Kelly O’Dwyer, said on the 7:30 Report on 4 April 2016 that “I think we have been very clear with our values. We, of course, believe in accountability and people taking responsibility for their actions. But also providing them with information by which they can make positive choices. But at the end of the day, people are responsible for their own decisions. That’s a fundamental tenet.”
If it were so important and fundamental, then why has it taken this long to even think about it? There have been plenty of opportunities over the past 4 years to implement changes to the Credit Act. Neither she nor any subsequent Minister in charge of credit legislation has done anything about it. Indeed, this government has done the exact opposite. It has taken the nanny state mentality to new highs, hence the current claims.
Relaxing Responsible Lending Obligations
The problem with what’s being suggested by the Government is it’s the ADI’s that are to be assisted. The media release talks about “homeowners” so we are really talking home loans. It must be remembered lenders haven’t stopped providing home mortgage finance. It’s just that they are having to look far closer at where borrowers are spending their money to be compliant. Relaxing responsible lending guidelines for the ADI’s and transferring responsibility to APRA means the banks will return to the “good old days”.
The vast majority of Commissioner Hayne’s Final Report Recommendations still have to be implemented. Despite accepting them, it will save the government a great deal of time if it fails to implement them.
Rational Self-Interest
The MFAA and FBAA along with others, such as the Master Builders Association, have all welcomed the government’s move to ease restrictions. Relaxing the regulatory oversight for only ADI’s, though, will create a conflict of interest that will have its own issues. For example, how does a broker reconcile the ease of say getting a $500,000 mortgage from an ADI for a consumer by dispensing with responsible lending and best outcome requirements but then having that same customer go through the hoops to obtain a car loan for say $25,000 from a non-ADI? It doesn’t make sense either for the consumer or the industry.
Two recent regulatory outcomes worth looking at
Two recent outcomes that have come to light over the past couple of weeks are worth consideration.
Firstly, we have the Banking Code Compliance Committee (“BCCC”), an internal regulator for banks. It found Bendigo and Adelaide Bank (“B&A”) breached the Banking Code of Conduct (“BCC”) for 4 years. The Bank has been officially sanctioned but nothing else. No financial or other penalties have been set, other than its naming and shaming. This bank is Australia’s fifth largest and what it did was ruled as “systemic breaches”. The BCCC investigation found B&A did not adhere to the BCC in regard to complaints, privacy and hardship issues. It was found to have not even acted “fairly and reasonably”.
Secondly, we have ASIC having another win in the Federal Court. ANZ Banking Group Ltd has been found guilty of unconscionable conduct over a 12 year period, though not specifically for Credit Act breaches. From August 2003 to September 2015, the Court found ANZ charged:
- fees charged for periodic payments that could not be made due to insufficient funds in the customer’s account (non-payment fees); and
- transaction fees charged for successful periodic payments (transaction fees).
Under the relevant terms and conditions, ANZ wasn’t entitled to charge non-payment fees or transaction fees to customers where the periodic payment was made between two accounts held in the name of the same customer name.
Importantly, the ANZ was made aware of this error in 2011 but chose to do nothing. Over 69,000 customers were affected and the total it charged amounted to approximately $3.1million. It’s since remediated around $2.5 million and the remainder will be paid to charity or to ASIC as unclaimed money.
The need for common rules applying to all lenders
Both banks did the wrong thing. One regulator chose to treat what it did as a minor misdemeanour whilst the other prosecuted. If APRA were the sole regulator of the ADIs, without further oversight from ASIC, how quickly will we return to UCCC days?
For this very reason, it’s why there should be one set of universal rules that apply to all lenders. No exceptions.
There are certainly areas the legislation and regulations can be eased to make it easier for lenders to comply without fear of regulatory action though. There needs to be a common sense approach to any change though. It’s one thing promoting policies to restart the economy but it should not do so by unfairly preferencing the ADIs. The RBC showed their actions to be amongst the worst kind.
Poor financial literacy
In the RBC, senior counsel assisting the royal commission Michael Hodge QC asked how consumers can protect themselves from making bad financial decisions. Mr Hodge pointed out that 46 per cent of Australians aged 15 to 74 struggle to understand even simple documents. The contracts in the telecommunications and financial industries are complex, even if written in plain English. There is no mention of increasing financial literacy in the general population in the media release or Budget.
Why not?
Reduction of competition
The effect of the government’s measures is likely to further reduce competition. The banks’ positions have been greatly strengthened in recent years. One wonders what that other independent regulator, the ACCC, thinks of these proposals.
Additional capping requirement for SACC lenders and consumer lessors
As part of the new proposals, despite a recent Senate Committee advising against introducing new legislation that would have amended the Protected Earnings Amount (“PEA”), it now wants to have another attempt to introduce changes. Treasury has done no modelling to show the effects they will have. It appears any caveat emptor protection will not apply to these classes of contract.
For those that obtain 50% or more of their income from social security benefits, a consumer cannot currently pay more 20% of their income on SACCs and consumer leases. Under the new proposal, a consumer will be limited to 10% for SACC’s (as per the original proposal in the SACC Bill). For consumer leases, though, this would increase to 20%. Unfortunately, our modelling shows few, if any lender, will be able to survive offering SACCs if limited to 10% net income. In our view, the consumer should decide how it wants to allocate that 20%, not the government.
Anyone getting less than 50% of their income from social security is to be subject to a new cap of 20% of their income for SACCs and consumer leases. This is at odds with the Prime Minister’s comment this week, echoing that of the Treasurer in July 2019, that they don’t want to tell Australians how to spend their money. Either way, it’s likely lenders will lend more for longer, just as have been doing since 2013. Unfortunately, for the borrower, they’ll end up paying more.
For consumer lessors, they will be allowed an establishment fee of up to 20% of the base price. As well, they will be able to charge some specific fees like a delivery fee plus a 4% a month fee. The term will have a maximum cap and it’s likely leases will lengthen. We are wondering exactly how the base price will be defined as that was an issue raised to the Senate. Once again, though, there’s been absolutely no thought for the impact of GST and probably no Treasury modelling.
So urgent – but a 01 September 2021 start date
The government wants to stimulate the economy through increased home ownership. Judging by the Prime Minister’s remarks and the Treasurer’s Budget, one would assume the government wants this to occur now. There’s also the implication that it wants to halt any slide in property values which will again aid the banks. These moves, at least on face value, appear to benefit the top-end-of-town.
Yet the reality is ASIC already has the power to rescind some or almost all of the legislation that applies in the Credit Act and National Credit Code (“the Code”) to RLOs either permanently or for a period. So, why is there a 01 March start date and 6 month period to commencement?
AFCA
There is no mention of AFCA in all of the government’s proposals. It must be recalled AFCA was created by the government in order to stop the RBC. Unfortunately, that move failed and a RBC still occurred. Even if APRA becomes the regulator, unless AFCA can be made to amend its Rules, the ADIs will still be subject to some of its Rules.
Given AFCA is an Ombudsman and can ignore legislation if it so chooses, the ADIs may find AFCA the pseudo-regulator it fears most.
The devil will be in the detail
Without seeing the draft legislation, we only have the government’s media release to go on. The devil will be entirely in the details we don’t know about. Given an 01 March start date as announced, there’s likely to be little time for anyone to properly evaluate the draft Bill before it’s first reading. Like many other credit legislation amendments, this appears to be yet another knee-jerk reaction to endure. The fact it employs a divide and rule mentality for the lending sector is further evidence of benefiting the top end-of-town. As in Animal Farm, all animals are equal, but some animals are more equal than others. Relaxing responsible lending based on nepotism isn’t the answer.
The industry needs to see exactly how these changes are to be implemented. Are the changes applicable to a select type of loan or a select group of lenders (such as ADIs and other home mortgage lenders) as suspected? We already know this draft legislation will not be universally applicable – and why not, if that tenet is so important? – as the government intends tightening the regulations surrounding SACC loans and consumer leases. This is despite total industry objection to these same provisions being included in the SACC Bill. The Senate Economics Legislation Committee (“SELC”) Report recommended recently that the Bill not be passed, so why yet another attempt by Treasury to railroad it in?
The main problem with these proposals, though, is the constant tinkering with legislation. As I submitted to the SELC earlier this year, finance is like an eco-system. Alter one thing and it will have an affect in some other part. Unfortunately those promoting legislative change simply don’t understand this. Perhaps the best thing the industry could hope for is a further referral to a Senate or Joint Parliamentary Committee.