The government has announced plans to overhaul responsible lending obligations

6 minute read  13.10.2020 Kate Hilder, Mark Standen

A summary of the key takeaways from the government's 25 September announcement outlining proposed changes to responsible lending requirements.  

Key takeouts

  • In the interests of improving the flow of credit and supporting the nation's economic recovery, the government has announced plans to 'simplify' responsible lending obligations.  Ahead of a formal consultation on the proposed changes, the government has released a fact sheet providing some detail around the proposed changes, including indicative timelines.  
  • Broadly, the government proposes to:
    • Remove responsible lending obligations from the National Consumer Credit Protection Act 2009 (Cth) except in relation to 'higher risk products' ie small amount credit contracts (SACCs) and consumer leases from March 2021.  ADIs will be still be required to comply with the Australian Prudential Regulation Authority's (APRA's) lending standards, 'key elements' of which will also be extended to non-ADIs
    • Strengthen consumer protections around provision of small amount credit contracts and consumer leases from six months after the legislation is passed
    • Require debt management firms representing consumers in internal and external dispute resolution processes to hold an Australian Credit Licence (ACL) from April 2021.  This last change (if implemented) will mean that consumers involved in a dispute with a debt management firm representative will have access to the Australian Financial Complaints Authority (AFCA) to resolve the dispute
  • The proposed changes appear to have been broadly welcomed by industry, but consumer groups have raised concerns.  
  • The government's announcement follows the decision in Australian Securities and Investments Commission v Westpac Banking Corporation [2020] FCAFC 111 (Cast note: Appeal against the Wagyu and Shiraz decision) in which their Honours Justice Gleeson and Justice Lee held that there is no statutory basis for ASIC's 'prescriptive' interpretation of responsible lending obligations.

Plans to overhaul consumer credit laws

In the interests of improving the flow of credit and supporting the nation's economic recovery, the Federal government has announced plans to overhaul consumer credit laws, including plans to roll back responsible lending obligations.

Announcing the government's planned changes, Treasurer Josh Frydenberg and Assistant Treasurer and Minister for Housing Michael Sukkar said:

'Now more than ever, it is critical that unnecessary barriers to accessing credit are removed so that consumers can continue to spend and businesses can invest and create jobs. What started a decade ago as a principles based framework to regulate the provision of consumer credit has now evolved into a regime that is overly prescriptive, complex and unnecessarily onerous on consumers. The Government will simplify the system by moving away from a "one-size-fits-all" approach while at the same time strengthening consumer protections for those that need it'.

Ahead of a formal consultation on the proposed changes, the government released a fact sheet providing some detail around what is being proposed, including indicative timelines.

What's being proposed?

The fact sheet states that the proposed changes have four key aims:

  1. to simplify existing legal requirements thereby reducing the time and costs of credit assessments for consumers and businesses;
  2. to reduce 'red tape' for consumers when applying for credit;
  3. to improve competition by making it easier for consumers to switch lenders; and
  4. to enhance access to credit for small businesses.

Proposed simplification of responsible lending obligations (RLOs)

  • The government proposes to remove responsible lending obligations from the National Consumer Credit Protection Act 2009 (Cth) except in relation to 'higher risk products' ie small amount credit contracts (SACCs) and consumer leases.
  • This will mean that Authorised Deposit Taking Institutions (ADIs) will still be required to comply with the Australian Prudential Regulation Authority's (APRA's) lending standards, but will no longer be required to also comply with the Australian Securities and Investments Commission (ASIC) guidance eliminating duplication/regulatory complexity.
  • At the same time, 'key elements of APRA's ADI lending standards' will be extended to non-ADIs, with ASIC (not APRA) administering the obligations for non-ADIs. The fact sheet states that 'appropriately adopting APRA's expectations of sound ADI lending practices for non-ADIs will ensure there is consistency between the standards applied for ADIs and non-ADIs'.
  • To help address the 'excessive risk aversion' which the government considers is currently restricting the flow of credit due to overly prescriptive guidance and to enable lenders to streamline their loan approval processes, lenders will be allowed to rely on the information provided by borrowers 'unless there are reasonable grounds to suspect it is unreliable', replacing the current 'lender beware' with a 'borrower responsibility' principle.
  • The fact sheet makes clear that where an application for credit is to any extent, for a business purpose, the responsible lending framework will not apply. The fact sheet states,

'Small business lending was never intended to be captured by the Credit Act, but the recent prescriptive interpretation of the obligations as well as the excessive risk aversion of lenders has meant that some small businesses have struggled to access credit, particularly where it is difficult to separate their business from their household, such as primary producers'.

  • The fact sheet also states that mortgage brokers will also be exempt from responsible lending obligations, stating:

'To ensure there is no misalignment between the obligations of mortgage brokers and lenders, following the changes, mortgage brokers will no longer be subject to RLOs; however, consumers will continue to be protected when accessing services by mortgage brokers through the recently introduced best interest duty for mortgage brokers commencing 1 January 2021'.

Proposed timing: subject to the passage of legislation, the proposed date on which these changes will apply is 1 March 2021.

[Note: In his final report, Commissioner Hayne recommended (Recommendation 1.1) against altering the obligation to assess unsuitability under the National Credit Act. His Honour also appeared to support the 'lender beware' principle suggesting (though not recommending) that the law should be altered should 'court processes reveal some deficiency in the law's requirements to make reasonable inquiries about, and verify the consumer's financial situation'.].

New obligations: Small Amount Credit Contracts (SACCs) and Consumer Leases

To 'limit consumer harm' while maintaining access to small amount credit contracts (SACCs) and consumer leases for those needing to access this form of credit, the government plans to implement the following two measures.

  1. Impose a cap on the total payments that can be made under a consumer lease: This new cap will be equal to the sum of the base price of the good hired under the lease , permitted delivery fees and permitted installation fees multiplied by 4% per month (up to a maximum of 48 months). Lessors will additionally be able to charge a one-off establishment fee of 20% of the good's base price.
  2. Introduce new 'protected earnings amounts' for SACCs and consumer leases to protect the most vulnerable consumers: The government proposes to ban SACC providers and consumer lessors from providing a SACC or lease where doing so would exceed a certain percentage of a welfare recipient's income.

Proposed timing: Subject to the passage of legislation, the proposed changes will take effect six months after the passage of the legislation.

New licensing obligations for debt management firms

The government proposes to amend the Credit Regulations to require debt management firms representing consumers in internal and external dispute resolution processes to hold an Australian credit licence and to meet the ongoing obligations imposed on credit licensees eg the requirement to meet the 'fit and proper person' test and to undertake their activities 'efficiently, honestly and fairly'.

This reform will enable consumers involved in a dispute with a debt management firm representative to have access to the Australian Financial Complaints Authority (AFCA) to resolve the dispute.

Proposed timing: The proposed commencement date is 1 April 2021.

[Sources: Treasurer Josh Frydenberg media release 25/09/2020; Consumer credit reform fact sheet]

Initial Response

  • Westpac has issued a statement welcoming the proposed changes. Westpac CEO, Peter King commented that the proposed changes 'strike a good balance' between reducing the regulatory burden on credit providers while ensuring 'rigorous credit processes' remain in place. Mr King also commented that the changes will enable lenders to speed up approval processes.
  • The Australian Banking Association (ABA) has issued a statement welcoming the changes on the basis that they will remove 'duplication and overlap between regulators while continuing to ensure strong protections for consumers' including further protections for customers accessing small amount credit contracts and consumer leases. Australian Banking Association CEO Anna Bligh said that banks 'look forward to working with the Government to ensure the legislation works for both customers and the broader economy.'
  • Consumer groups have raised concerns: Consumer groups CHOICE, the Consumer Action Law Centre, Financial Counselling Australia and the Financial Rights Legal Centre have issued a statement raising concerns about the impact of the proposed changes on consumers, and more particularly the potential for the changes to enable consumers to take on more debt with fewer protections. The 'government's proposed reforms will remove bank responsibility to customers, opening up new opportunities for banks to aggressively sell debt' the statement reads.CEO of Financial Counselling Australia Fiona Guthrie comments, 'As we learnt to our cost during the GFC, weaker lending standards mean people will be loaded up with as much debt as possible. There is significant profit to be made in pushing borrowers to the edge. Removing responsible lending obligations will free banks up to aggressively push credit onto their customers.'

New temporary 'targeted' relief from responsible lending obligations

The National Consumer Credit Protection Amendment (Responsible Lending Obligations) regulations 2020 commenced on 3 October.

The regulations provide six month relief from responsible lending obligations in relation to new credit, credit limit increases, variations and restructure, suggestions to remain in credit contracts and the lease of consumer goods where the consumer applying for credit is a person who operates a small business and the credit/leased goods are in part to be used for business purposes.

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