Appearing before the House of Representatives standing committee on economics yesterday (2 December), the governor of the Reserve Bank of Australia (RBA), Dr Philip Lowe, said that it is appropriate to review the responsible lending laws, adding that the federal government’s proposal to change responsible lending obligations “is the right direction to be heading in”.
The federal government first announced consumer credit reforms in September with the aim of improving the flow of credit by reducing the time that it takes consumers and businesses to access credit so that consumers can “continue to spend and businesses can invest and create jobs”.
The government aims to shift the laws from a “lender beware” model to a “borrower responsibility” model, and in turn strip the Australian Securities and Investments Commission (ASIC) of its enforcement powers.
The changes include amending the Credit Act so that RLOs apply only to small amount credit contracts (or equivalent loans) by ADIs and consumer leases beginning on 1 March 2021, and extending the best interests obligations already legislated for mortgage brokers to all credit assistance providers to “ensure appropriate consumer protections remain in place”.
Consultation opened in November on the changes to Australia’s consumer credit framework contained in the National Consumer Credit Protection Act 2009, as well as updates to the National Consumer Credit Protection Regulations 2010, and the introduction of a new Ministerial Instrument.
Public consultation on the exposure draft and explanatory material closed on 20 November 2020.
Responding to queries from the committee about his views on the proposed changes, Dr Lowe first noted that the principles of the responsible lending obligations that were put into legislation were “perfectly sensible” where it stipulated that lenders should not approve unsuitable loans and should ensure that borrowers have the capacity to repay their loans.
“What had happened was that those principles had turned into [around] 100 pages of guidance,” Dr Lowe told the committee.
“And that guidance, while it wasn’t formal regulation, had been interpreted through the institutions of the regulators or the courts as a form of kind of regulation.
“My feeling had been that that was a step too far and that there was perhaps an alternative way of keeping those high-level principles, which are perfectly sound, by reducing some of the regulatory burden and unnecessary kind of compliance that was associated with it.”
Dr Lowe emphasised that while financial institutions would still be required to approve loans that were suitable (or at least not unsuitable) for the borrower, and they should still conduct the appropriate background checks under the government’s proposal, this would fall under the remit of the Australian Prudential Regulation Authority’s (APRA) prudential standards.
“APRA is not going to be happy with financial institutions if they don’t do credit assessment properly and they make a lot of bad loans,” Dr Lowe said.
“I think there’s enough protection there from the regulated entities to deal with this through APRA’s powers.”
Dr Lowe also noted that the government has issued a proposal about how regulators could deal with non-authorised deposit-taking institutions (ADI).
“If you accept the idea that we shouldn’t try and over-regulate and shouldn’t kind of turn two principles into 100 pages of guidance I think this is the right direction to be heading in, but I accept that people have different views about that,” Dr Lowe said.
Dr Lowe warned, however, that if the proposal is approved by the Parliament and is enacted in legislation, and financial institutions subsequently do not lend in a manner that is appropriate for the borrower, they could expect to be saddled with tougher regulations.
“But I think it’s worth, in the spirit of reducing unnecessary regulatory burden, of doing something here,” he said.
Asked by the committee if the federal government and Treasurer Josh Frydenberg had consulted with Dr Lowe prior to announcing the proposal to change the laws, Dr Lowe said he discussed the matter with Mr Frydenberg, including the available options.
“I understood what his thinking was, and there was quite a lot of information exchanged as part of those discussions,” Dr Lowe said.
While APRA recently said that it was also consulted beforehand about the government’s proposals, ASIC commissioner Sean Hughes recently told the House of Representatives standing committee on economics’ review of financial regulators that he personally was not aware of the government’s proposal until it made the official announcement in September.