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There's a bill before the Senate that would make it easier for banks to lend irresponsibly
There's a bill before the Senate that would make it easier for banks to lend irresponsibly

There's a bill before the Senate that would make it easier for banks to lend irresponsibly

There's a bill before the Senate that would make it easier for banks to lend irresponsibly

The proposed legislation ignores the findings of the Hayne Commission and other inquiries

The Hayne royal commission into misconduct in the banking, superannuation and financial services industry found Australia’s responsible lending requirements were correctly calibrated.

They are set out in the National Consumer Credit Protection Act, which requires lenders to offer credit that is “not unsuitable” for the borrower.

Hayne’s first recommendation (Recommendation 1.1) was that the National Consumer Credit Protection Act “ to alter the obligation to assess unsuitability”.

He saw “” the relevant provision of the banking code.

On releasing the royal commissioner’s report in 2019 Treasurer Josh Frydenberg said he was “” and “going further”.

Until COVID.

COVID the pretext for weakening rules

In , in the midst of the COVID recession, Frydenberg said he was “reducing the cost and time it takes consumers and businesses to access credit”.

Credit was “the lifeblood of the Australian economy”.

He put forward a plan to remove responsible lending obligations from the Act, with the exception of small amount credit contracts and consumer leases where he would impose heightened obligations.

Allowing lenders to rely on the information provided by borrowers would replace the current practice of “lender beware” with “borrower responsibility”.

‘Borrower responsibility’

Frydenberg introduced the legislation in . On a Senate committee recommended approving it, finding the current consumer protection framework “potentially overly prescriptive”.

Labor and Greens Senators dissented. The bill faces a Senate vote .

We are members of a consortium of 12 academics who conducted an in-depth of the proposed changes and found they should be rejected. This is why.

Even after Hayne, banks are continuing to and have yet to show they have changed their ways.

The drop in lending since COVID was not caused by overly strict lending laws. Indeed, after a win by Westpac in a brought by the Securities and Investments Commission the banks said the laws were .

Lending standards protect against crises

Consumer protection in the field of finance is important — it contributes to strengthening financial stability.

Not everyone knows what they are signing. Jacob Lund/Shutterstock

 

The abusive, predatory and irresponsible lending practices that led to the US subprime mortgage crisis make this clear.

The government’s suggestion that it is fair for borrowers to take responsibility for their own circumstances doesn’t hold water.

No matter how diligent their inquiries, consumers frequently lack the expertise to understand their circumstances and what financial products will be best for them.

For many, almost all of the expertise lies with the banks.

Since COVID, their need for this expertise has become greater, not less.

The government says will fill this gap under a change proposed by Hayne that will require brokers to act in the “best interests” of their clients.

But Hayne’s recommendations were based on the responsible lending requirements being in place.

And Hayne wanted mortgage brokers banned from taking conflicted remuneration, under which they get paid by the banks they steer customers to, a recommendation Frydenberg at first , then from.

Brokers continue to be paid by the banks whose products they recommend.

APRA has no history of consumer protection

Hayne also recommended () that Australia’s “twin peaks” system of regulation continue.

Under twin peaks, the Prudential Regulation Authority (APRA) regulates in order to ensure financial system stability, and the Securities and Investments Commission (ASIC) regulates to protect consumers.

While in his final report Hayne found that ASIC’s appetite for law enforcement had been limited, he found APRA’s had been non-existent.

The upshot is that, not only are the responsible lending requirements to be relaxed, but what’s left of them is to be handed to an agency (APRA) with no track record in the field, at the expense of ASIC.

Until now, APRA hasn’t done consumer regulation. APRA

 

The government has argued that the will step up to protect consumers.

But AFCA has to be guided by the law. Without responsible lending laws and regulations, it is unclear what laws AFCA could apply. Thus far, APRA’s standards have been aimed at protecting financial stability rather than consumers.

The Financial Complaints Authority would rely on APRA for guidance. Tashatuvango/Shutterstock

 

In our assessment the proposed changes fail in every respect.

They ignore the key lesson of the global financial crisis: that it was caused by reckless and predatory lending.

They ignore the findings of the Hayne Commission and dating back at least a .

They will neither properly protect consumers nor create the confidence in the financial industry the post-COVID recovery will need.

The government has named its legislation the National Consumer Credit Protection Amendment () Bill.

A more apt title might have been the “Reducing Consumer Protection Bill”.The Conversation

 

, Senior Lecturer, Faculty of Law, ; , Professor of Law, ; , Senior lecturer, , and , Senior Lecturer, Griffith Law School,

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