History of Responsible Lending Obligations (RLOs)
In 2009, the then Labor Government introduced Responsible Lending Obligations as part of Chapter 3 of the National Consumer Credit Protection Act (NCCP Act). The Labor Government was determined not to see a repeat of the type of lending misconduct that had occurred in the United States prior to the Global Financial Crisis.
Chapter 3 of the Act was established to protect the interest of consumers over the lenders by putting the following standards into law:
Expected standards of behaviour of licensees when they enter into consumer credit contracts or leases, where they suggest a credit contract or lease to a consumer, or assist a consumer to apply for a credit contract or lease.
The key obligation on licensees is to ensure they do not provide a credit contract or lease to a consumer or suggest or assist a consumer to enter into a credit contract or lease that is unsuitable for them. This obligation requires licensees to assess that the credit contract or lease is not unsuitable for the consumer’s requirements and that the consumer has the capacity to meet the financial obligations under the credit contract or lease.
A decade later, these standards served an important marker for the financial services industry, as the Royal Commission into misconduct in the Banking, Superannuation and Financial Services Industry unfolded, commonly known as the Banking Royal Commission.
Labor Senators want to stress a key statement made by Commissioner Kenneth Hayne in the final report:
My conclusions about issues relating to the NCCP Act can be summed up as ‘apply the law as it stands’.
Commissioner Hayne also made a clear recommendation relating to the NCCP Act:
The NCCP Act should not be amended to alter the obligation to assess unsuitability.
It is the view of Labor Senators that the Banking Royal Commission reaffirmed the need for responsible lending obligations to be enshrined in the NCCP Act. The responsible lending obligations (RLOs) have successfully worked in Australia over the past decade and removing it through Schedule 1 of this bill from the NCCP Act puts at risk a system that has worked. This was particularly made clear by submissions and witnesses at the hearing, which can be summed up by Mr Kirkland from CHOICE who stated:
The interim report of the royal commission presented evidence of over $350 million in compensation that had been paid or had been agreed to be paid to consumers—to around 600,000 people—from 2010 to 2018 as a result of remediation programs. This was where institutions agreed that they had breached responsible lending laws and that consumers were owed compensation. That simply won't happen if this bill goes through. There will be no hook to create remediation programs, so if institutions behave in the same way in the future then there will be no such compensation for consumers. That shows the power of these laws but also the impact of this bill for consumers.
The Diminished Role of ASIC in Responsible Lending in Schedule 1
An important part of responsible lending obligations is the role ASIC plays in compliance and enforcement of ADI’s. ASIC explained to the committee their current role in respect to their obligations under the NCCP Act:
Mr Hughes: The role that ASIC plays at the moment in relation to
the regulation of consumer credit is as set out in the credit act. Our role is to monitor the compliance by credit licensees, which includes credit assistance providers, with the obligations that are set out in the act—colloquially referred to as the responsible lending obligations—amongst other things. We also have a role in observing and approving codes of conduct, such as the Banking Code of Practice. We also have a role in relation to allowing entrants into the market, which is the licensing function, in monitoring and then enforcing the obligations under the credit act. The submission you will have seen has attached as an appendix some examples of the enforcement actions that we've taken over the years.
ASIC’s submission to the inquiry pulls no punches in terms of their approach to enforcing the NCCP Act:
Through our enforcement work, we seek to deter poor behaviour and misconduct, punish wrongdoers and protect consumers. In particular, we focus on cases of high deterrence value and those involving egregious harm or misconduct. ASIC is committed to stepping in and taking strong enforcement action when we see misconduct that is likely to cause, or has caused, significant harm to consumers.
Schedule 1 of this bill diminishes the role of ASIC, as ASIC’s own submissions points:
If the Bill is passed, ADIs will not be subject to responsible lending obligations, other than in relation to small or low limit loans that are equivalent to a SACC. Accordingly, ASIC will no longer have a direct role in supervising decisions by ADIs to enter loans with consumers. ADIs will be subject to prudential standards that relate to credit assessment (the revised APS 220) and regulated by APRA.
It had been suggested by Coalition Senators, through their line of questioning, that APRA and AFCA will have sufficient powers to uphold responsible lending obligations through the Act, Prudential Standards and Guides, even with the removal of Chapter 3 in Schedule 1 of this bill. Evidence provided to the committee did not share the same view, as APRA’s role is focused on systemic risk relating to the protection of depositor’s money and not the failings of ADIs towards individual consumers .The scope for AFCA to resolve disputes for individual consumers is limited between financial firms and consumers. These issues were discussed with Senator McAllister and Mr Brody from the Consumer Law Action Centre:
Senator McALLISTER: At the moment ASIC regulates on behalf of consumers, APRA is responsible for financial stability and AFCA provides a remedy for individual compliance and problems. Under the new order, what under this bill is imagined that each of these institutions will contribute, and what is your assessment about their capacity to fulfil that task from a consumer perspective?
Mr Brody: That's a really good question, because it's slightly uncertain. The regime, as I understand it under this new bill, will be that ASIC will retain some responsibility over lending for nonbanks—non-authorised deposit-taking institutions. For authorised deposit-taking institutions, including banks, credit unions and the like, APRA will be the responsible entity. That already creates a problem in terms of a competitive marketplace— different rules for different players that are competing against each other. APRA's role is, as you said, to protect systemic risk. It's role is to protect the money of depositors, really, that put their money with the bank. APRA's role is not to look at individual matters; it's at a systemic level. So giving lending regulation to APRA, I think, really confuses
the regulatory architecture between APRA and ASIC. There's going to be an expectation that APRA do something now they've got this responsibility, but they don't really have the tools to do that. They don't have compliance and enforcement mechanisms in the same way that ASIC does.
AFCA's role is to resolve disputes between consumers and financial firms. It is limited in the way it applies its rules. One of its rules says that it cannot consider complaints about credit risk decisions. That is actually excluded from its jurisdiction. What AFCA can consider is what is called maladministration. They can also consider responsible lending.
But, outside responsible lending—like the small business example I talked about before— they can consider maladministration. That is whether the lender had systems in place and whether they followed them. What AFCA cannot do is make any determination based on the quality of that decision, because that would be outside their jurisdiction. So, will consumers will be able to complain to AFCA, AFCA's ability to resolve disputes will be really limited because it will have to apply the law at the time. So we expect that consumers will not get a remedy through complaints to AFCA.
The view that current protections will be lost was supported by Mr Kirkland of CHOICE:
I think there's an important distinction to be made in that AFCA is not a law enforcement agency. AFCA is there to resolve relatively small disputes. It has caps on how much compensation it can order. It has rules that exclude a number of disputes based on various facts from even getting to it. That's very different to the role that's currently performed by ASIC which is there to regulate conduct in individual lending decisions. What flows from that is that ASIC can effectively get an institution to the point of setting up a large-scale remediation scheme. As we've seen, that's not something that either AFCA or APRA will be able to do under the reforms.
The other thing that ASIC can do at the moment is, of course, take court action leading to quite significant fines—and that has a range of deterrent effects such as the reputational damage to institutions and financial penalties—and that will not be the case if this bill goes through. So, yes, there may well be legislative instruments bringing forward something a bit like responsible lending obligations, but the enforcement mechanisms will be significantly weaker.
ASIC in their submission make this clear point:
At this stage of the development of the new regime, it is not clear what direct remedies will be available to consumers who have complaints about assessments and credit decisions by ADIs. The explanatory memorandum to the Bill indicates the Australian Financial Complaints Authority (AFCA) will have jurisdiction to hear consumer complaints. APRA has indicated in its submission to the Committee that it has developed a relationship with AFCA and that it will refer individual complaints to AFCA.
AFCA makes decisions that it considers are fair in all the circumstances, having regard to legal principles, applicable industry codes or guidance, good industry practice and previous relevant AFCA determinations. It is not clear what legal principles AFCA will be able to have regard to where the only credit assessment requirements are under prudential standards for managing credit risk (unless the individual matter indicates the ADI has not met its general obligation to act ‘efficiently, honestly and fairly’ or that the entry into the loan is an unjust transaction for the purpose of s76 of the National Credit Code).
ASIC also points to a shift of responsible lending from the consumer to a portfolio basis if Schedule 1 was to pass:
Senator BRAGG: People who don't want these laws to pass say that there are not going to be any responsible lending rules. Clearly there will be responsible lending obligations.
Mr Hughes: I just want to repeat what Ms Bird said. It is subject to finalisation. But the differentiation, as we interpret it, is that the level of individual assessment on a per borrower basis will be different as opposed to the assessment on more of a systems basis—more of a portfolio basis.
Evidence provided to the committee also indicated that the legislation would represent a confusing step away from the “twin peaks” model of financial regulation. Under Australia’s current financial regulatory system, conduct regulation (undertaken by ASIC) is largely separated from prudential regulation (APRA). The retention of this model was explicitly recommended by the Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
The Consumer Action Law Centre said in their submission:
Confusingly, ASIC would remain the regulator for bank misconduct such as unconscionable conduct and misleading and deceptive conduct, but not lending conduct. This overlap of conduct and prudential oversight will be confusing and inefficient. It will not be competitively neutral, and it will create conflicting regulatory objectives for APRA.
While the Government’s stated objective is to use the bill to simplify lending regulation, evidence presented to the committee indicated that these changes—including the confused roles of APRA and ASIC, and the replacement of the RLOs with APRA prudential standards—could in fact lead to additional complexity. The Law Council of Australia noted in their submission:
Under this regime, non-bank lending to consumers will not be judged by whether unsuitable outcomes for consumers result but rather by whether:
(a) the systems and processes conform to the criteria in the regulatory declaration; and
(b) the assessment of suitability was made in accordance with those systems and processes.
Respectfully, the Law Council submits that this does not represent a simplification of RLOs, but rather makes enforcement of the standards complex and difficult. It would also make it highly difficult for a consumer to assess whether or not their own lender has breached the non-ADI standards.
These concerns were not confined to legal or consumer advocacy groups. Banks also noted the potential for regulatory disjunction between the regime for ADI lenders and the regime for non-ADI lenders. In their submission, Suncorp Group Limited said:
Suncorp believes there is a lack of regulatory alignment between ADIs and non-ADIs which compromises consumer protections by incentivising credit applicants to use non-ADI lenders who have simpler credit assessment standards and less regulatory oversight.
Labor Senators agree with the evidence provided to the committee that a shift away from Chapter 3 of the NCCP Act and a reliance on APRA and AFCA to enforce standards and to regulated against conduct in individual lending decisions is significantly weakened by Schedule 1 of this bill. The view of Labor Senators is that this weakening will lead to negative impacts to
the individual consumers.
Labor Senators also note that the bill stands in direct opposition to at least two recommendations of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry – Recommendation 1.1
(the retention of the responsible lending obligations) and Recommendation 6.10 (the retention of the twin peaks model for financial sector regulation). This is a concerning decision, and contributes to the Government’s ongoing failure to understand and implement the findings of Commissioner Hayne.
Using responsible lending obligations to prevent financial abuse
Labor Senators note that several stakeholders raised concerns that the bill will negatively impact victim-survivors of domestic and family violence and leave them exposed to the risk of continued and increased financial abuse. This is unacceptable. As the committee heard:
More needs to be done to protect victims-survivors of economic abuse, not less.
When responsible lending obligations (RLOs) are correctly implemented, they can help to prevent economic abuse because the lender will make reasonable enquiries about each applicant’s financial situation, the accuracy of information provided and suitability of the loan. This process is an effective mechanism to expose undue influence, imbalance of bargaining power and
the underlying dynamic behind economic abuse.
The removal of obligations on lenders to make enquiries, and the transfer of obligations to consumers, heightens risks that financial abuse of victims of domestic violence will be masked by abusers through the information they disclose. For example, it will be easier for perpetrators of economic abuse to manipulate information on credit applications in order to get access to funds, with victims left holding the debt. In addition, because there will be no requirement for lenders or brokers to consider a borrower’s requirements and objectives, victims of domestic violence and economic abuse will lose a key protection as it will not be apparent when the borrower, or one of
the borrowers, will get no benefit from the loan.
As Ms Dacia Abela, Senior Lawyer, Economic Abuse, WEstjustice (Member of the Economic Abuse Reference Group), told the committee:
If this bill is passed, we expect an increase in the number of loans being approved in circumstances of economic abuse, and victims-survivors will have reduced options to seek an individual remedy against those lenders. Whilst lenders will still be expected to consider the affordability of a loan, the bill removes entirely the requirement for lenders to make reasonable inquiries of the borrower's requirements and objectives. This represents a missed opportunity to identify red flags of economic abuse.
The proposed legislation weakens individual rights to redress
The legislation will make it much more difficult for people who have experienced economic abuse to seek redress such as compensation, debt waivers and alternative payment arrangements. Removing redress will reduce the ability of advocates like financial counsellors and community lawyers to assist survivors with debts that they accrued during abusive relationships.
The practical implications of this for victims of domestic violence can be seen from this passage of evidence:
Senator McALLISTER: In your case study with Kate, you make the point that, where responsible lending obligations under the current regime were overlooked, you were able to use those obligations to argue for a full debt waiver for the loans. What does that mean, practically, for a woman who's escaping violence?
Ms Abela: Practically speaking, what we've heard from clients is that they have better mental health, they have less stress, they feel like they can move on with their lives post family violence, once that family-violence debt is removed from their names. We often hear that family violence victims-survivors suffer the economic consequences of family violence long after they've left a violent relationship, and this is just one way in which we can relieve some of that stress. Essentially, if we don't have
the ability to argue under the responsible lending obligations that debts should not been placed in their name, we might see people returning to violent relationships or people staying in violent relationships because
the financial pressures might be so insurmountable that they don't want to leave that relationship for fear of homelessness and things like that.
How regulatory changes will have a negative impact
Evidence presented to the committee also raised concerns about the proposed changes to regulatory arrangements, which are envisaged to have negative consequences for victims and survivors of domestic violence if responsibility for regulation moves from ASIC to APRA. As Ms Abela explained:
Australia's financial regulatory system is currently based on this twin peaks model, which is basically the premise that prudential regulation should be separated from conduct regulation. APRA's role has always been to protect banks against systemic risk and to look after the interests of depositors. Essentially, APRA ensures that banks don't fail, and they've not had to deal with individual consumer protections before. In fact, we're concerned that this would create a conflicting regulatory objective for APRA. In contrast, ASIC regulates on behalf of consumers and it has powers to effectively monitor compliance and protect consumers, and it has enforcement powers that allow it to take lenders to court, whereas APRA don't seem to have those correlating powers and it doesn't appear that they are going to receive a corresponding expansion of those enforcement powers to enable them to protect individual consumers. So, unless the consumer could establish something like a repeated failure, which is obviously notoriously difficult to track in family violence instances, then there would basically be no action that APRA could take.
Lastly, and importantly, APRA has probably not had to think much about how family violence intersects with financial services, whereas bodies such as AFCA and ASIC are developing practices and knowledge of how to deal with family violence issues. So, APRA would effectively be moving into new territory with virtually no knowledge of or set practice in the area.
The Government has not presented any satisfactory evidence in favour of this move in responsibility from ASIC to APRA, and the question remains as to why it is necessary given the contrary evidence presented about the likely harm to victims and survivors of family violence.
Supply of credit
The Coalition Government, through this bill, are seeking to undo responsible lending obligations in the name of supporting economic recovery, despite
the lack of any evidence of a credit supply gap at the current time.
Even the Australian Banking Association stated:
It is not the view or the assertion of the ABA or its member banks that current provisions are choking the supply of credit……macrodata tells us that, yes, credit is getting into the economy.
To support this view, Maurice Blackburn in their submission pointed out to the committee that there is not a need for this bill as it is seeking to solve an issue that does not exist. To further this point Maurice Blackburn highlighted from data:
The total value of new loan commitments for housing and the value of owner occupier home loan commitments each reached record highs in October 2020.
The total value of new loan commitments for housing rose 0.7 per cent in October, seasonally adjusted.
The value of new owner occupier home loan commitments rose 0.8 per cent in October 2020, more than 30 per cent higher than October 2019.
Commitments for the construction of new dwellings rose 10.9 per cent and was the largest contributor to the rise in October’s owner occupier housing loan commitments.
In October, the number of owner occupier first home buyer loan commitments increased by 3.4 per cent to reach 13,481 (seasonally adjusted) which was more than 30 percent higher than in any pre-COVID month since 2009.
The total value of loan commitments for investor housing was unchanged at $5.3 billion.
The value of new loan commitments for fixed term personal finance rose 4.3 per cent in October, seasonally adjusted.
These facts do not indicate that access to credit is an issue – in fact they show that access to credit is booming under the current settings.
Labor Senators’ noted there are concerns raised in the evidence over the timely access of credit. However, it is the view of Labor Senators’ that this is not a compelling enough reason to repeal the responsible lending standards.
The repeal of the RLOs would strip away consumer protections. If
the Government’s objective is to improve regulatory processes, it should consider options that do not result in real consumer harms.
It is important to note that under questioning, the Customer Owned Banking Association by Senator Bragg pointed out that there is a financial benefit to their members if the current regime of responsible lending obligations is removed:
Senator Bragg: So there must be a cost saving for your customer owned banks if this legislation is successful?
Mr Lawrence: Absolutely.
Labor Senators are concerned that the passage of this bill will serve to transfer risk from consumers to lenders. In doing so, the Government will have provided a significant financial benefit to the banking sector.
It is clear that the changes in the bill will overwhelmingly benefit one side of the lending market: banks and lending institutions. Labor Senators’ view is that legislation should be used to ensure fairness, rather than designed to benefit the major banks.
Schedules 2-6 of the bill relate to small amount credit contract reforms, commonly referred to as SACCs.
Evidence provided to the committee describes these changes as not going far enough by not implementing the Government’s response to the independent review of the small amount credit contract laws. Mr Brody from the Consumer Action Law Centre summarises:
I want to be clear that this bill does not deliver on the federal government's own commitment to implement the reforms recommended by the 2016 small amount credit contracts review. That review made recommendations that were designed to promote financial inclusion for lower income and more vulnerable people who may be excluded from mainstream credit. The review report said that unaffordable credit arrangements do not provide for financial inclusion and that both the cost of credit and
the repayments of credit need to be affordable for financial inclusion to be achieved.
Unfortunately, the changes now proposed compared to amendments previously considered by the parliament fail on this objective of financial inclusion. The proposal is to double the 10 per cent protected earnings amount cap recommended for each payday loan and consumer leases for most consumers and to allow lenders an extra 20 per cent establishment fee to be charged with consumer leases on top of already generous mark-ups. This will mean that these products will continue to be unaffordable for many, making it likely that people will continue to be trapped in a cycle of high-cost credit that is difficult to escape. We implore that the committee recommend this bill not be passed.
It is the view of Labor Senators that if the Government were serious about reform in this area, they would pass the National Consumer Credit Protection Amendment (Small Amount Credit Contract and Consumer Lease Reforms) Bill 2019 (No. 2) that is before the Senate.
This bill has already been through the Senate Economics Legislation Committee, and has the broad support of stakeholders. It would accurately implement the Government’s own commitment to implement the recommendations of the 2016 review of small amount credit contracts.
The Senate immediately pass the National Consumer Credit Protection Amendment (Small Amount Credit Contract and Consumer Lease Reforms) Bill 2019 (No. 2).
Senator Alex Gallacher
Labor Senator for South Australia
Senator Jenny McAllister
Labor Senator for New South Wales