FSRC Final Report: Lending implications

4 mins  11.02.2019 Mark Standen, Kate Hilder
In the FSRC Final Report, 'Apply the law as it stands' does not tell not the full story.

Key questions to consider


1. How do we currently verify that a loan is 'not unsuitable'? Is our approach compliant with the spirit, rather than merely the letter, of our responsible lending obligations?


2. Do we need to review our loan contracts and our lending processes and procedures, to ensure they are compliant with the recommended new definition of ‘small business’ in the Banking Code?


 

3. How does our current approach to delivering services to our customers, especially those in regional and rural areas need to change? Do we have the right skills within the organisation to be able to operationalise the changes?


4. How does our current approach to delivering services to Indigenous customers need to change?


 

5. Do our existing systems, processes, and incentive schemes incentivise the right behaviour? If not, how do they need to change? What metrics will we use to monitor the effectiveness of the changes we implement?


 

Responsible lending: no change necessary?

Commissioner Hayne makes clear that he expects most of the responsible lending issues identified over the course of the hearings to be addressed through the proper application of the existing legal framework: ‘My conclusions about issues relating to the NCCP Act can be summed up as “apply the law as it stands”’.
On this basis he recommends against amending existing responsible lending provisions under the NCCP Act (Recommendation 1.1 (consumers) and Recommendation 1.9 (SMEs)) and makes no recommendation to change the way in which responsible lending requirements are framed under the ABA Code of Banking Practice.

However, banks would be ill advised to read this an endorsement of current practice.

Industry is heading in the right direction (in some areas)

Though existing responsible lending obligations are technically unchanged, Commissioner Hayne makes clear that he expects recent improvements in lending practices to continue as necessary steps towards legal compliance, that is, compliance with the spirit rather than the letter of the law.
For example, though the report makes no express recommendation to ban the use of the Household Expenditure Measure (HEM) or the use of other benchmarks to verify prospective borrowers’ ability to service a loan, Commissioner Hayne observes with approval the shift by industry away from using them. ‘I consider…steps taken by banks to strengthen their home lending practices and to reduce their reliance on the HEM – are being taken with a view to improving compliance with the responsible lending provisions of the NCCP Act’. He adds that should this interpretation of the content of the obligation be successfully challenged, that the law should be altered.

We consider that it would be prudent for banks, in light of the Commissioner’s comments, to take steps to review their lending practices.

Areas where industry is not doing enough

With respect to mortgage broking, Commissioner Hayne makes clear that he regards recent moves by industry, to be inadequate to address issues identified over the course of the hearings and recommends a raft of significant changes (Recommendations 1.2-1.6) to force a change in approach.

Separately he recommends a number of measures focused on shoring up customer protections and increasing banks’ focus on customer needs. They include:

  • Change in the definition of ‘small business’ in the Banking Code so that it applies to any business or group employing fewer than 100 full-time equivalent employees, where the loan applied for is less than $5 million (Recommendation 1.10)
  • Improvements to agricultural lending services (Recommendations 1.11-1.14)
  • Accessibility of services for those living in remote and regional communities and Indigenous customers (Recommendation 1.8)

Clear accountability and consequences for non-compliance

These proposed lending reforms are underpinned by two measures to increase, clarify and strengthen accountability (another theme of the report). Namely: 1) the introduction of end-to-end product responsibility into the BEAR (Recommendation 1.17), and 2) the introduction of statutory consequences for breach of key provisions of the Banking Code (Recommendation 1.16).

Challenges and opportunities for banks: Time for a cultural re-set

From a practical perspective, a number of the recommendations, particularly those concerning accessibility of services, represent an opportunity for banks to take immediate steps to rebuild lost community trust, and demonstrate their increased focus on customer needs. Supporting the ABA in enacting the recommended changes to the Banking Code, ensuring organisational compliance with the revised terms as rapidly as practicable, and acting to implement new BEAR requirements (in anticipation of the legislation) will also signal this commitment.

Likewise, banks would be well advised to review their current lending practices, products, systems and processes against heightened compliance obligations foreshadowed in the report, and in view of strengthened enforcement mechanisms.

More broadly to successfully operationalise these reforms, the shift away from technical compliance will need to continue and more particularly, non-financial considerations will need to be given greater weight and priority in decision making processes at every level of bank operations (Recommendation 5.6).

This will require a bank-wide cultural re-set.

Further insights for banks

Further expert insights into the impact of the report recommendations on lenders can be found in separate articles on: BEAR, Mortgage broking, Technology and Data and Vertical Integration.

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https://www.minterellison.com/articles/financial-services-royal-commission-final-report-lending-implications

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