New credit laws
There can be no doubt that between 2002 and 2010 improper, lax and even
predatory lending practices were not uncommon. Indeed, these practices led to
major reforms in the provision of credit. Effective from 1 July 2010,
the National Consumer Credit Protection Act 2009 (National Credit Act) introduced
for the first time in Australia stringent responsible lending obligations on
credit providers and intermediaries such as finance brokers.
In this chapter, the committee considers ASIC's new role and the
effectiveness of the new laws in stamping out irresponsible lending practices.
The committee's consideration of inappropriate lending practices between
2002 and 2010 is not the first time that a parliamentary committee has recently
identified irresponsible lending practices as a problem. It should be noted
that the Parliamentary Joint Committee on Corporations and Financial Services (PJCCFS)
received evidence about poor lending practices from many investors caught up in
the failure of Storm Financial. Borrowers reported that they had signed blank
loan applications and, following Storm's collapse, discovered they had taken
out additional loans of which they were unaware. They also claimed copies of
forms provided by the banks post-collapse show overstated income figures or
asset values that led to grossly inaccurate representations of their capacity
to repay the loans.
Some of Storm's clients did not understand, or fully comprehend, that by
borrowing against the equity in their family home they were, in effect, putting
the ownership of their home at risk.
The PJCCFS found that practices by institutions lending for investment purposes
were below community expectations and not subject to appropriate regulatory
Need for reform
As noted in the previous chapter, from 2002 there had been a general and
growing awareness in the industry of problems with inappropriate lending
practices. This awareness led COAG to announce in March 2008 the need for a
broad regulatory reform agenda that would include taking early action and
progress on mortgage credit and advice, margin lending and non-deposit taking
The following month, the Productivity Commission found that a single
national regulatory regime covering both mortgages and mortgage brokers would
be 'an efficient response to the need to address a number of malpractices on
the part of certain brokers'.
It recommended that responsibility for the regulation of credit providers and
intermediaries providing advice on credit products ('finance brokers') should
be transferred to the Australian government, with enforcement to be undertaken
by ASIC. Amongst other things, the new national credit regime should:
cover all consumer credit products and all intermediaries
providing advice on such products (including through electronic or other
arms-length means); and
include a national licensing system for finance brokers, and a
licensing or registration system for credit providers that would give consumers
guaranteed access to an approved dispute resolution service.
In July 2008, COAG agreed to measures designed to provide better
protections for financial consumers across Australia. It announced that the
Commonwealth would assume responsibility for 'the regulation of trustee
companies, mortgage broking, margin lending and non-deposit lending
institutions as well as remaining areas of consumer credit'. It envisaged that:
National regulation through the Commonwealth of consumer
credit will provide for a consistent regime that extinguishes the gaps and
conflicts that may exist in the current regime. The new regime is anticipated
to introduce licensing, conduct, advice and disclosure requirements that meet
the needs of both consumers and businesses alike.
Over two years later, the Consumer Credit Protection Reform Package was
introduced, which aimed to further this goal of a national, uniform approach to
consumer credit laws. It included a national licensing scheme to overcome some
of the current anomalies—a 'single standard and uniform regime for consumer
credit regulation and oversight'.
New credit laws
Under the new credit laws, credit licensees must comply with the
responsible lending conduct obligations in chapter 3 of the National Credit Act.
If the credit contract or consumer lease is unsuitable for the consumer,
then credit licensees must not:
enter into a credit contract or consumer lease with a consumer;
suggest a credit contract or consumer lease to a consumer; or
assist a consumer to apply for a credit contract or consumer
These conduct obligations apply to credit providers—such as banks, credit
unions and small amount lenders—and to finance companies, lessors under
consumer leases and credit assistance providers such as mortgage and finance
The legislation requires credit providers to make inquiries into whether the
loan would meet the borrower's requirements and objectives. In other words,
since the National Credit Act came into force in 2010, both lenders and brokers
have 'a positive obligation to make inquiries into a borrower's financial
situation (i.e. that the loan will not cause substantial hardship), and to
verify that assessment'.
the responsible lending obligations came into effect on 1 July 2010 and for
ADIs on 1 January 2011. Being banks and mutuals, ADIs had a pre‑existing
code of practice, which had a similar obligation.
Much consultation and negotiation took place before the legislation was
introduced. According to Mr Philip Field, Financial Ombudsman Service (FOS),
the process 'probably took the best part of two or three years of negotiations
and roundtable meetings to get it into place and get people on board' including
consumers, lenders, and brokers.
Two parliamentary committees also scrutinised the proposed legislation that
would introduce the credit reforms. Mr Raj Venga, Ombudsman, Credit Ombudsman
Service (COSL), stated that the legislation was 'frankly, long overdue'.
The committee appreciates that this legislation had a fairly long
incubation period and a definite purpose based on a clear understanding of the
problems it was addressing. In addition, all stakeholders had the opportunity
to engage in consultation and provide feedback. Even so, reforms of this nature,
no matter how well-intended and considered, need time for their effectiveness
to be tested.
Views on its operation
In early 2014, Mr Field informed the committee that the Financial Ombudsman
had not seen a lot of cases arise yet and was 'just starting to get disputes
around responsible lending under the National Credit Code'. He explained that
FOS was a 'rear-view organisation' and people approached it sometimes many
years after the original event. While his best guess was that the new
legislation was 'working quite well', he would like the chance to see how the
legislation settles down in terms of changing lender behaviour. He suggested that
it be given a fair opportunity to work and to see whether it actually solves
Mr Gerard Brody, Consumer Action Law Centre, informed the committee
that, since the introduction of the licensing regime and particularly the responsible
lending obligations, experience in the mainstream lending area indicated that
practices had improved. He explained:
Our experience is that the new obligations under the national
credit law have improved processes and that we are not seeing the type of loss
that people have experienced in the past, particularly because of the
responsible lending obligations and the obligations upon credit providers to
assess someone's capacity to repay and assess that a loan is in line with their
The CCLC agreed with the view that within mainstream lending there had
been 'a noticeable tightening of lending procedures, particularly within the
areas where the law applies'. It had certainly experienced a major reduction in
the type of poor lending that was occurring beforehand. According to Mrs Karen
Cox, CCLC, they 'get one-off cases where things have gone wrong' but:
For consumer credit lending and residential investment
lending we have not seen the sorts of cases seen in the past. That does not
mean they do not exist, but we are not seeing them at all.
Mrs Cox stated further that the CCLC had started to win a couple of
cases at the dispute resolution schemes on the interpretation of the law. In
her view, however, it was 'very early days yet in terms of what the law
actually means'. Noting that it was also very early days in terms of the
compliance reaction, Mrs Cox anticipated that:
...perhaps in time, we might see some people trying it on
again. That would require ASIC to make sure that does not happen.
Thus, while those who commented on the new credit laws were generally
satisfied that the legislation was working well, they still noted that the laws
needed time to bed down before a more conclusive assessment of their
effectiveness could be made. In this regard, Mr Field observed that, where
someone has obtained a loan they could not afford, difficulties would generally
become apparent within the first or second year, depending on the nature of the
loan. He did note, however, that with self‑funding, the borrowers would not
realise problems until the self-funding ran out.
Challenging this point, Ms Brailey argued that some problems with
lending practices remain. She explained that people who took out a loan in 2010
will 'not know that their loan is fraudulent, toxic, service calculators were
used or the same model used by 85 per cent of the major lenders'. In her view,
the contracts 'do not implode for five years'.
The loans are being approved on the idea that you can afford
it because you have some money in the bank. So where does that money come from?
When the banks set up the loan, they give people $300,000 to go and buy a small
property. It is usually $300,000 to $400,000—that is the average. But they give
them an extra $50,000 and in some cases $100,000 to afford it. So they are
paying the payments with the bank's own money, and the bank approves it. Then
you go on for another two or three years like that and that is where the
refinancing comes in, which ASIC has been going on about a bit. The
commissioner said to me, 'Denise, I can assure you refinances are finished.'
They are not. It is still going on. I was seeing it written only six months
ago. It is still there.
Her concern was that when loans are taken out on the basis of the equity
in an existing asset, the continuing refinancing and the continuing compounding
interest on the debt increases the value of the loan which eats 'into the
equity that is there'.
Possible gaps or weaknesses
While in general the consumer advocacy centres recognised the benefits
of the new legislation, they also identified a number of areas where there was
a possible gap or weakness in the legislation. Mrs Cox from the CCLC noted that
some areas of lending were not covered by the new law, including small business
lending and other forms of non-residential investment lending.
So, in her view, there were potential problems, but because the CCLC was not
funded to assist people in this area, it would not necessarily receive evidence
of what was going on there.
Even so, the CCLC stated quite clearly its belief that:
...investment lending has been instrumental in facilitating
some spectacular investment failures with catastrophic results for many
consumers, including self-funded retirees who have lost their homes and their
The CCLC cited the Regulation Impact Statement (RIS) on credit for investment
issued by the then Minister for Financial Services and Superannuation on
21 December 2012. The draft legislation recognised that consumer losses
due to misconduct were 'amplified where the consumer has borrowed to invest'. The
RIS indicated that the current legislative framework did not adequately address
misconduct in the credit to invest area. According to the RIS, ASIC's enforcement
activity was 'ineffective due to a combination of regulatory and enforcement
gaps, the prohibitive cost and inefficiency of enforcement action and the unlikeliness
of targeted enforcement action by ASIC resulting in behavioural change in the
industry as a whole'.
The previous chapter referred to cases where people borrowed to invest
and found themselves in difficulty. Also, as noted in the previous chapter, as
early as 2003 there were warnings about brokers arranging for borrowers to declare,
incorrectly, that a loan was for investment rather than personal use (with the
result that the consumer lost statutory protections provided under the Uniform
Consumer Credit Code). Clearly, this is an area that requires careful
Fringe areas of lending
Currently, the Consumer Action Law Centre's concern and focus is on the fringe
areas of the marketplace, such as payday lending and consumer leases, also
known as rent to own products. It highlighted concerns about systemic problems
with compliance in some of these areas.
For example, the Centre noted that property spruikers were not regulated and
not licensed by ASIC. It suggested that 'there may well be commission
arrangements between spruikers and certain brokers or lenders who encourage
individuals to purchase property (with or without a loan) that are
inappropriate'. The Centre cited the Victorian Parliament Law Reform
Committee's 2008 report that made a raft of recommendations including that the
Australian government regulate property investment advisers under its financial
services laws in the same way as financial advisers.
Mr Brody also drew attention to concerns and consumer complaints about businesses
established purportedly to help consumers in financial difficulty that charge
significant fees. He explained that such businesses are termed the 'for-profit
financial difficulty' businesses and target people who are in financial
difficulty, ostensibly to help them.
According to Mr Brody, this type of business model does 'not fit neatly within
current regulations or ASIC's purview, but they are related to issues within
ASIC's responsibility'. He stated:
An effective regulator needs to be one that has the power to
identify and act on new forms of consumer detriment in financial services...and
we think that if the regulator's tools were improved this could improve the
overall performance of ASIC.
One of the problems in raising those sorts of issues with
ASIC is that within the current regulatory framework they do not neatly fit
within ASIC's responsibility. They are not providing a regulated service, and
that can mean there are challenges in getting action on those sorts of
problems. To the extent that it can I think ASIC assists us in understanding
and raising these issues as far as possible. We have recently had a roundtable
with them on that exact business model. But there is a limitation in the scope
of what ASIC can do in relation to those businesses because of the regulations.
Mr Brody informed the committee that the Consumer Action Law Centre was
seeing a number of businesses adopting the 'for-profit financial difficulty' type
of model and was of the view that it was a 'growing sector'.
As an example of this type of practice, a committee member cited a
recent case that had come to his attention, where:
...a farm was in financial trouble and consultants came along
and said, 'We'll refinance you. Pay us $40,000 and we will get the money.' The
$40,000 was squeezed out of every last bit of juice and there was never any
Mrs Cox informed the committee that the CCLC had dealt with a very
similar situation involving a smaller amount. She explained:
There was a woman who had a range of debts after her marriage
broke down, and they charged her a percentage—which amounted to somewhere
between $11,000 and $17,000 in her particular case—to negotiate with her
creditors. She could not raise that money, so they said, 'That's fine; we'll
set up a direct debit arrangement and you can start paying us off.' By the time
we came along, I think she had paid a fair amount on the direct debit arrangement.
Absolutely nothing had been done, and her financial position was deteriorating.
I assume that either they never intended to do anything or they were waiting
till she had paid the entire fee before they began. We quickly became involved
and were able to resolve a lot of her issues with the help of another financial
counselling agency, and in that particular case we managed to argue to get her
out of the money that she had also paid.
Mrs Cox observed that the person who was supposed to assist the
individual in debt in the above example previously had a financial services
licence but was now banned from providing financial services. She noted that
there was absolutely nothing that could be done about this new activity.
According to Mrs Cox, in order to be captured by the credit regulation, a
person has 'to suggest that someone either take out or stay in a particular
credit product'. She explained further:
The people providing such advice 'would argue—and, some legal
advice suggests, successfully—that they are not actually suggesting any
particular credit product; they are actually offering to negotiate with your
creditors, and that is not caught as a credit activity or a financial service'.
In her experience, such practices were on the rise.
Mrs Cox also noted that the CCLC was still dealing with complaints in
particular areas such as payday lending where it was 'seeing a lot of problems'
including where people were 'blatantly avoiding the law'. She indicated that
although ASIC had taken action and was working on some cases in that area, the
Centre was 'usually frustrated because we want it go faster'. According to Mrs
Certain other members of the industry who believe they are
complying and are upset that others are not being hung out to dry also express
that frustration. Even those who believe they are complying in that sector we
do not always agree with their interpretation of the law.
Mrs Cox noted that it was very important for ASIC to 'use the new tools
that they have got under the new law to do whatever they can to actually
prevent the type of behaviour that occurred between 2002 and 2010 from happening
in the future'.
Clearly, this area of regulating the provision of credit services still requires
close monitoring to ensure that the laws are providing the required level of
consumer protection and to identify gaps that exist and should be covered by the
ASIC informed the committee that the National Credit Act had 'largely
addressed the regulatory issues and market problems prevalent before 2010',
although, in its view, 'it may be too early to make a final assessment of how
effectively it has been done.
Nonetheless, when asked whether there were any areas of concern emerging as the
new credit laws bed down, ASIC cited two substantive issues.
The first was concern that there could be 'a lack of competitive neutrality'
where players offered products that were 'functionally similar to regulated
products but without having to meet, for example, the licensing and responsible
obligations through the National Credit Act'. ASIC explained that there were
two different contexts in which this might occur:
mainstream products, where the lack of regulation may be the
result of innovations in product design (such as peer-to-peer lending); and
avoidance activity on the fringes, where lenders and brokers
deliberately change their business models and structures to fall outside the
law or aspects of the law.
ASIC informed the committee that the government had recently taken steps
to address some avoidance practices. It had done so 'by circulating draft
to close some gaps in the law being exploited by payday lenders and signalling
a review of the exemption for indefinite and short-term leases in the National
Credit Act'. ASIC observed, however, that:
...given that the possible structures for avoiding the cap on
costs are limited only by the ingenuity of those advising possible avoiders,
the Government could consider a general anti-avoidance provision that sought to
deter entities making repeated changes in business models to continue avoiding
their obligations under the National Credit Act (rather than addressing each
model as it emerges after the event).
In December 2012, Treasury consulted on proposals for changes relating
to investment lending, peer-to-peer lending, small business lending, short‑term
and indefinite-term leasing, and a number of anti-avoidance mechanisms. ASIC
stated that to the extent 'the Government identifies gaps or problems in
relation to these topics they have not been addressed'.
The increase in the number of businesses that charge consumers fees to
repair their credit records, or to pursue claims through the EDR schemes, was the
second source of concern for ASIC. It explained:
These companies often charge high fees for services that
would otherwise be provided free of charge by the dispute resolution services,
and may exacerbate the consumer's financial difficulties where they pursue
unmeritorious claims that delay or impede the resolution of their position.
ASIC considered that the implementation of the responsible lending
obligations would continue to be an area of review as the obligations are
in general terms, which allows for significant divergence in practices across
Since 2002, and undoubtedly well before, some unscrupulous people in the
financial services industry exploited the inadequate regulation of consumer
credit. Early indications suggest that the new credit laws have been effective
in stamping out the predatory lending practices that existed between 2002 and
2010, though most submitters agreed that the laws need time to settle down
before a definitive assessment of their effectiveness can be made.
The inescapable message coming out of the 2002–2010 period when
irresponsible, even predatory, lending went largely unregulated and unchecked
is that early indications of a problem must be attended to promptly and, where
possible, stamped out before it takes root. This may mean simply enforcing
existing laws or campaigning for new ones.
New credit laws are now in place and appear to be working effectively, although
there are suggestions that some people are operating on the margins of the legislation
in an endeavour to circumvent the law. Indeed, a number of witnesses, well‑positioned
to comment, identified areas on the fringes of mainstream lending that still
expose consumers to risks, such as the 'for-profit financial difficulty' businesses.
It is important for ASIC to match the ingenuity of these operators. Additionally,
ASIC needs to be ready to take on the challenge created by a constantly
changing industry with the creation of new products and business models—some
deliberately designed to exploit legal loopholes. It is also important for ASIC
to remain alert and receptive to any signs of poor or irresponsible lending
practices, and when they emerge, it must educate consumers of the dangers; act
quickly where it has the power to do so; and actively lobby for changes if the
laws are deficient.
In the previous chapter, the committee recommended that ASIC consider
adopting a multi-pronged campaign to educate retail customers. The campaign
should focus on the care consumers need to take when entering into a financial
transaction and where they can find assistance and affordable and independent
advice when they find themselves in difficulties because of that transaction.
In light of this chapter's discussion on the new credit laws, the committee
builds on this recommendation.
As part of the multi-pronged campaign (see Recommendation 1), the
committee recommends that ASIC actively encourage consumers to report any
suspected unscrupulous conduct related to consumer credit.
The committee recommends that as the national credit reforms introduced
in 2010 bed down, ASIC should:
carefully monitor the implementation of the new laws giving
particular attention to activities that may fall outside the legislation but
which pose risks to consumer interests;
ensure that it acts quickly to alert consumers to likely dangers
and the government to any problems that need to be addressed; and
build capacity to monitor and research lending practices and to
be prepared to launch marketing and education strategies should poor practices
begin to creep back into the industry.
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