21 December 2020
In a year requiring extraordinary fiscal stimulus packages to support communities facing reduced income, we now face an impending financial cliff.
As stimulus packages and loan deferrals are coming to an end, the Australian Government is proposing to weaken responsible lending regulations from early next year.
While it appears like a sound economic strategy to transition out of fiscal support and spur spending and business growth through more lending issuance, these eased protections come with dangers to individuals and the wider economy.
U Ethical ethics and impact manager Désirée Lucchese believes that the relaxation of responsible lending laws and removal of regulatory penalties would be an untimely intervention.
“Amidst a pandemic, particularly when Australian banks have had an opportunity to strengthen their poor international profiles around consumer financial protection – it’s not the time to reduce retail investor protections.
“The verification of borrowers’ information is not only best practice, but can spare financial distress among individuals and their families,” she said.
The history of responsible lending laws
Following learnings from the Global Financial Crisis (GFC), and in line with increased capital buffers aimed at enhancing the banks’ resilience to financial system risk, responsible lending laws were introduced in 2009 to level the playing field between individuals and lenders while reducing loan books’ exposure to bad debt.
Providing additional consumer protections during a time when consumers had been taken advantage of, these laws strengthened loan-related due diligence – reducing the risks surrounding lending.
Enforced by the Australian Securities and investments Commission (ASIC), consumers were hereon equipped with the option for redress.
Last year, the Haynes Royal Commission's report released highlighted a number of failures among financial companies, including instances where mortgage brokers pushed borrowers into taking out greater loans than they could afford, to boost their commissions. This shed a light on and reiterated the need for these protections to be in place.²
What the government is proposing
On the 25th of September 2020, the Australian Government released a legislative proposal to remove responsible lending obligations from the National Consumer Credit Protection Act 2009.
Under this reformation, lenders will no longer be required to conduct this verification of borrower information.
ASIC’s enforcement powers for bank loans and penalties for wrongdoing would also be removed.
These changes would apply to all loans sold from March 2021 and would not apply to payday loans or consumer leases/rent-to-buy.¹ ²
What impact would this have?
According to the Consumer Action Law Centre and Financial Counselling Australia, these changes will;
• Hurt individuals and families. Our responsible lending laws are like a health check for our finances, and removing them exposes people to the danger of debt;
• Lead to a wider economic debt disaster;
• And, undermine the reasoning behind the first recommendation of the Banking Royal Commission (Rec 1.1). Which was to not amend these laws as it is legalises “bad banking behaviour.” ¹
What is U Ethical doing?
As holders of bank shares, deposits and debt (bonds), U Ethical has exposure to the Australian banking sector. We often use this ownership as leverage to highlight concerning issues within the sector, such as our engagement with Westpac during the AUSTRAC scandal and on-going active engagement on matters such as consumer financial protection, privacy & data security, and/or human capital development. We’ll continue to constructively encourage the Australian banks in which we invest to be responsible and diligent in this lending space.
What can you do?
The Consumer Action Law Centre and Financial Counselling Australia is currently campaigning against axing responsible lending laws. Together with over 115 organisations, U Ethical signed an open letter before the bill goes to Parliament. You too can sign the letter and learn more here.