- Professor Kevin Davis, Panel Member, 2014 Financial System Inquiry
- Tim Gough, Senior Executive Leader - Credit, Retail Banking & Payments, ASIC
Credit is the lifeblood of our economy.
It underpins the Australian dream of home ownership with an average of $35 billion dollars in new consumer credit issued each month alone throughout 2020, to help families purchase a home and invest for the future.
It helps both small and large businesses manage the highs and lows of everyday consumer demand and survive the financial pressures of global economic shockwaves. In March 2020, as the pandemic unfolded, business credit increased 3.0 per cent, as businesses strengthened their liquidity and now there is around $990 billion of credit outstanding helping to support businesses.
The responsible lending obligations RLOs in the National Consumer Credit Protection Act 2009 were originally intended to be a risk-based principles framework that was scalable relative to the individual and product, but over time the principles have been layered with increased guidance from regulators.
This has increased prescription of the principles and obligations on lenders and borrowers alike.
That is why - as part of the Morrison Government’s COVID-19 economic recovery plan - we are simplifying Australia’s credit framework.
We are seeking a more efficient flow of credit to build a stronger, more resilient and more competitive economy.
And we are doing that by reducing the cost and time it takes consumers and businesses to access credit while ensuring that the right consumer protections are in place.
The Government understands that unnecessary barriers to accessing credit should be removed so consumers can continue to spend, businesses can invest, jobs can be created and our economy can continue its strong recovery from the COVID-19 recession.
Everything the Government has focused on in the last 12 months has been about protecting Australians: our health system, our economy, and our lives.
To be clear, we are not reducing lending standards. The Government recognises the importance of balancing access to credit with ensuring lending standards remain strong in order to protect the most vulnerable consumers.
Rather, these reforms are about providing more timely and less costly credit to those Australians who can afford it.
The fact is, removing burdensome, unnecessary obligations on lenders to make it easier and faster to lend money or extend credit limits is in the best interests of consumers, small businesses and the broader economy. We all benefit from economic growth.
The existing responsible lending framework
Originally a principles based framework to regulate the provision of consumer credit after the Global Financial Crisis, we now have a regime that many would say is overly prescriptive, complex and onerous on consumers seeking timely access to credit.
The National Consumer Credit Protection Act 2009 introduced a requirement that all lenders must not provide unsuitable loans.
However, what has developed in practice since then, is a rigid and inflexible system that has frustrated many consumers and lenders alike impeding prospective and good borrowers from much-needed credit because of their granular spending habits rather than their ability to service a loan.
This is clearly visible in the prescriptive RLO guidance and the response by lenders to be overly cautious in their credit assessments.
To meet their obligations under the Act, lenders have adopted a standardised credit assessment approach for most consumers and credit products, irrespective of individual circumstances.
The unintended consequence is a one-size-fits-all regime.
Over the years, layers of additional guidance have further confused the framework.
Now the onus is on lenders to verify information provided by borrowers who bear limited responsibility for providing incorrect or misleading information to lenders.
The result is a detailed and lengthy credit approval process aimed solely at ensuring the lender doesn’t breach the responsible lending obligations.
The question for lenders has become can I lend not should I lend.
Ultimately, these processes do not necessarily improve a lender’s ability to make an assessment on the suitability of credit for the customer.
So it is hardly surprising that significant delays in credit assessments have been observed in recent years - along with unreasonable wait times and increasing borrowing costs.
Even existing mortgagees face delays - avoidable delays - to refinance existing loans despite having a strong credit record.
This rigid and inflexible system risks impeding our economic recovery of COVID-19 and is no longer fit-for-purpose.
That is why the Morrison Government is moving to simplify the process, to reduce waiting times and the costs of accessing credit and ensure lenders continue to lend.
Simplifying the credit framework
Sensible adjustments to the National Consumer Credit Protection Act 2009 will:
- reduce the time and cost of credit assessments for consumers and businesses;
- cut red tape for consumers seeking credit;
- improve competition by making it easier to switch lenders; and
- clarify the confused application of the framework to credit for small businesses.
First, what came to be known as the responsible lending obligations will be retained only for small amount credit contracts (SACCs) and consumer leases, where they are provided by both ADIs and non-ADIs.
Under the new framework, for all other credit, lenders will still have to undertake credit assessments based on a borrower’s capacity to repay without substantial hardship.
Lenders will now have a greater flexibility in how they conduct these assessments.
We must also remember that it is in the interests of lenders to provide loans that can be repaid.
Therefore, consumers who can afford credit, will receive it.
For ADIs, the new framework will reduce regulatory duplication and require them to continue to comply with lending standards set by APRA.
New lending standards will be in place for non-ADIs but these will mirror APRA’s lending standards, providing consistency across both regimes.
These reforms will enhance competition and benefit consumers by:
- encouraging refinancing and enabling consumers to take advantage of the current low interest rates; and
- encouraging greater competition between small lenders and larger lenders.
Stronger competition in the lending market should result in lenders passing on the cost benefits of reduced regulatory burdens to consumers.
The new regime will further clarify the laws surrounding small business lending. The new framework will not apply where a proportion of a line of credit is for a genuine business purpose.
The recent prescriptive interpretation of the obligations has meant some small businesses have struggled to access finance.
Borrowers will have more confidence to approach lenders to access credit for business purposes knowing the process to obtain approval is simpler and less onerous.
Importantly, small business lending will continue to be covered by the ASIC approved Banking Code of Practice.
The Government also remains committed to the Australian Financial Complaints Authority’s (AFCA) role.
Should an ADI or non-ADI lender extend credit that would cause a borrower substantial hardship, AFCA will still be empowered to facilitate a fast, free and fair resolution for borrowers.
Credit providers will still be obliged to be AFCA members and comply with their existing licensing obligations to act efficiently, honestly and fairly.
Small business borrowing from AFCA members will continue within that jurisdiction, receiving free and timely access to redress.
More broadly, consumers will retain access to vital protections.
As lenders streamline and improve their credit assessment processes, they will be able to rely on information provided by borrowers, unless there are reasonable grounds to suspect it is unreliable.
This means borrowers will be more accountable for providing accurate information to inform lending decisions.
After all, borrowers have the best insight and understanding of their information, and lenders should be able to trust borrowers and rely on upon those disclosures.
An important step in reducing the time for credit assessments to be conducted is that the information handed over by borrowers should be deemed to be accurate information.
This does not override the need for a lender’s normal checks and balances, such as verifying debt information from third parties, but recognises that that the borrower knows the most about their own circumstances.
However, consumers cannot be expected to take greater responsibility if they are not fully informed of their own obligations.
Resources such as ASIC’s MoneySmart website can provide objective advice for consumers making important financial decisions.
Since the new framework will make it clear that lenders can rely on information provided by borrowers, the information provided will also be considered by AFCA in its assessment of cases.
More generally, it will be even more important for consumers to increase their financial literacy and be empowered to make informed decisions.
Now more than ever, it is critical that unnecessary barriers to accessing credit are removed so that consumers can continue to invest in their future and businesses can fund their growth and create jobs.