FEATURE
Responsible Lending and Responsible Spending: What’s with the push to rollback consumer protection? ALEXANDER MACKEY, LEGAL COUNSEL, HOMESTART FINANCE
W
hen the precursor bill to the National Consumer Credit Protection Act 2009 (Cth) was introduced to parliament, commentators observed two notable features, namely the requirements for a lender to assess the suitability of the loan for the borrower, and the borrower’s ability to repay the loan.1 The sun was about to set on the first decade of the 21st century when Australia – having only been slightly grazed by the global financial crisis – realised there was no obligation to engage in responsible lending. Consumer protection laws did exist before that point-in-time. The Uniform Consumer Credit Code and the general legal principles of unconscionable conduct, misleading and deceptive conduct and economic duress were available to help regulate the retail lending market. However, the events of the period known as the global financial crisis shone a light into the banking and finance sector that revealed predatory lending, assetbased lending, low-doc and no doc loans, sub-prime and non-conforming loans and sub-optimal conduct by brokers and intermediaries.2 After the NCCP Act was introduced, consumer discontent with the banking and finance sector continued to grow. This discontent was then the catalyst for the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry which conducted its hearings in 2018 and delivered its final report in February, 2019. Interestingly, in his final report, Commissioner Hayne said this about the NCCP Act: “I am not persuaded that the NCCP Act’s framework for responsible lending to consumers needs change. The responsible lending issues identified during the Commission’s hearings will be resolved by banks applying the law as it stands.” 3
8 THE BULLETIN August 2021
One might be forgiven then for wondering why, in December, 2020, the Assistant Treasurer and Minister for Housing introduced the National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020.4 A bill that amends the NCCP Act so that only activities involving small amount credit contracts and consumer leases will attract responsible lending obligations.5 In other words, if passed, the legislation will rollback responsible lending obligations that currently apply to home loan credit providers.
NATIONAL CONSUMER CREDIT PROTECTION ACT 2009 (CTH) The obligations credit providers owe to their customers are documented in the Australian Securities and Investment Commission Act 2001 (Cth),6 the Banking Code of Practice and the NCCP Act. This article focuses on the NCCP Act. The Act came into force on 1 January, 2011, ushering in the era of responsible lending obligations. The introduction of additional regulation was justified by the view that the consumer laws existing at the time were narrow, applicable only to a small number of situations and the alternatives of self-regulation, greater disclosure, and increased education were partial.7 There was of course opposition to reform. Counterarguments unsuccessfully raised issues of paternalism and the need for an emphasis on responsible borrowing, nevertheless, the prevailing wisdom was summarised as follows: “It is not disputed that it is important for consumers to educate themselves and make appropriate financial decisions. However, it must be remembered that there are groups of vulnerable and disadvantaged consumers who are incapable of protecting themselves financially.”8
The relevant provisions are found in Division 3 of the Act, where there is: • an obligation to assess whether the contract or credit limit increase is unsuitable for the consumer,9 • an expectation, in conducting the unsuitability assessment to make reasonable inquiries about (and take steps to verify) a consumer’s requirements, objectives, and financial situation,10 and • a direction given as to when a credit contract must be assessed as unsuitable, namely the consumer could not comply with the financial obligations under the contract, could only do so with substantial hardship or the credit contract does not meet the consumer’s requirements or objectives.11 The problem is that the Act is silent as to how a credit provider is to conduct the assessment.12 To add to the mystery, it has even been acknowledged that unsuitable loans do not necessarily result from a breach of responsible lending obligations.13 The emphasis is on the process not the outcomes. In 2019, in the ‘wagyu and shiraz judgment’ (so dubbed for its reference to the decisions consumers may be expected to make about household expenditure after taking on a home loan),14 Perram J dismissed ASIC’s prosecution of Westpac for allegedly failing to have regard to customer’s declared living expenses in their loan applications. The Full Federal Court then dismissed ASIC’s appeal but was split (Middleton J, dissenting).15 The conclusion in both judgments was that ASIC had a tendency towards prescriptive requirements whereas the courts were inclined to hold that there was a real degree of flexibility.16
