Responsible lending ‘pendulum’ has ‘swung too far’: Lowe

Appearing before the House of Representatives standing committee on economics on Friday (14 August), governor of the Reserve Bank of Australia (RBA) Philip Lowe was asked to assess the impact of responsible lending arrangements on the flow of credit.

Governor Lowe backed principles enshrined in the National Consumer Credit Protections (NCCP) Act, namely the “not unsuitable test”, which he described as “imminently reasonable”.

“[The legislation] says that when extending credit, the loan can’t be unsuitable. Who can argue with that?” he said.

“And in making the loan, you’ve got to make reasonable steps that the borrower can repay. Who can disagree with those two broad principles?”

“I find it very hard to disagree with them.”

However, the central bank governor was critical of subsequent interpretations of the legislation.  

“What has happened is that those principles have turned into hundreds of pages of guidance,” Mr Lowe continued.

“Once the compliance people, the lawyers, the regulators, the media get involved, these high-level principles put in law turn into a lot of guidance because people don’t want to fend these regulatory requirements. 

“The principles in the legislation, I think, are sound. But the way we’ve translated those principles into reality, I think, needs looking at again.”

Mr Lowe added that the legislation may need to be amended to provide the industry with further clarity, in light of compliance disputes brought to the fore by the “wagyu and shiraz” case between the Australian Securities and Investments Commission (ASIC) and Westpac.

Governor Lowe went on to stress that banks should not bear complete responsibility for a borrower’s inability to repay their loan, adding that such arrangements would have unintended consequences on the flow of credit in the economy.

“We can’t have a world in which, if a borrower can’t repay the loan, it’s always the bank’s fault,” he said.

“On a portfolio basis, we want the banks to make some loans that actually go bad, because if a bank never makes a loan that goes bad, it means it’s not extending enough credit.”

He added: “The pendulum has swung a bit too far in blaming the bank if a loan goes bad because the bank didn’t understand the customer.

“[The mindset of some] is that if the bank had done proper due diligence, the bank would never had made the loan.”

ASIC recently revealed that in light of the Federal Court’s decision to dismiss its case against Westpac, it would review its updated regulatory guidance (RG 209) and consider the implications of the Federal Court’s decision on compliance practices.

ASIC issued its new guidance in December 2019, after holding two rounds of public consultation with industry stakeholders. 

The principles-based guidance was designed to provide lenders with greater clarity and flexibility amid uncertainty off the back of scrutiny from the banking royal commission. 

However, ASIC has stressed that prospective reforms of the National Consumer Credit Protection Act to further clarify the enforcement of responsible lending obligations is “ultimately a matter for the federal government and Parliament”.