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Responsible Lending and Responsible Spending: What’s with the push to rollback consumer protection?
ALEXANDER MACKEY, LEGAL COUNSEL, HOMESTART FINANCE
When 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
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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
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.
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
The NCCPA (SER) Bill was introduced to the Federal Parliament in December, 2020 and was described to be: • part of the COVID-19 economic recovery plan, • deregulatory in nature with benefits for lenders and borrowers, • helpful in reducing the time and cost associated with obtaining credit, • offering greater flexibility to lenders in adhering to ‘prudent’ lending principles, • helpful to borrowers by giving reduced application times and relieving them of the need to provide information to lenders, • promoting a new framework for non-ADIs based on APRA’s current prudential standards for ADIs.17
The explanatory memorandum also claims that over time responsible lending obligations have revealed themselves to be burdensome and unnecessary processes on both lenders and borrowers. It claims they are one-size-fits-all and overly prescriptive.18 This was not an issue identified in the Royal Commission19 and it is not made obvious which particular aspects of the obligations are intolerable.
Little detail is given about the new standards to be imposed on non-ADI credit contracts. However, they are explained to be system-level obligations as opposed to being focused on individual loans but will also “support risk-based lending that is attuned to the needs and circumstances of the borrower and credit product”.20 Confusingly, such a statement is not at odds with Westpac’s conduct in the ‘wagyu and shiraz’ litigation, which managed to avoid any criticism by the Federal Court at first instance and on appeal.
Despite the expressed view that the present obligations are overly prescriptive, the new non-ADI credit standards, as they are described, will prohibit non-ADI credit conduct unless the applicable systems, policies and procedures required by the standards are established, maintained, comply with the requirements in the standard and are documented in a written plan.21 This seems more prescriptive than the current regime.
Time will tell, but the present obligations22 seem on all fours with the stated purpose of these reforms especially since the courts appear willing to give these obligations a broad interpretation. The economic argument does not seem persuasive either. The cost of borrowing is low23 and the housing market is evidently booming, yet there is a push to make credit not just easier to obtain but quicker. The writer is concerned that such conditions seem reminiscent of those which prompted the last financial markets melt-down, but hoping they are not. B
Endnotes 1 Jessica Tuffin, ‘Responsible Lending Laws:
Essential Development or Overreaction?’ (2009) 9
Queensland U. Tech L. & Just. J 280, 281-282. 2 Ibid. 3 Commonwealth, Royal Commission into
Misconduct in the Banking, Superannuation and
Financial Services Industry, Final Report (2019) vol 1, 116-117. 4 Commonwealth, House of Representatives,
National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020,
Second Reading Speech, Hansard p11029. 5 Explanatory Memorandum to the National
Consumer Credit Protection Amendment (Supporting
Economic Recovery) Bill 2020, p 3, 7. 6 See Division 2 – Unconscionable conduct and consumer protection in relation to financial services which includes the provisions on unfair contract terms. 7 Jessica Tuffin, ‘Responsible Lending Laws:
Essential Development or Overreaction?’ (2009) 9 Queensland U. Tech L. & Just. J 280, 300 8 Jessica Tuffin, ‘Responsible Lending Laws.
Essential Development or Overreaction?’ (2009) 9 Queensland U. Tech L. & Just. J 280, 304. 9 National Consumer Credit Protection Act 2009 (Cth), ss 128 and 129. 10 Ibid, s 130 11 Ibid, s 131 12 Australian Securities and Investments Commission v
Westpac Banking Corporation [2019] FCA 1244, para 5. 13 Ibid, para 4; and Australian Securities and Investments
Commission v Westpac Banking Corporation [2020]
FCAFC 111, para 4, per Middleton J. 14 See note 12, at para 76 Perram J said: “I may eat Wagyu beef everyday washed down with the finest shiraz but, if I really want my new home, I can make do on much more modest fare.” 15 Australian Securities and Investments Commission v
Westpac Banking Corporation [2020] FCAFC 111. 16 A credit provider may assume that a customer will adjust their spending habits in order to make their loan repayments. See notes 14 and 15. 17 Explanatory Memorandum to the National
Consumer Credit Protection Amendment (Supporting
Economic Recovery) Bill 2020, p 3-11. Essentially both ADIs and non-ADIs will be relieved of responsible lending obligations, ADIs will remain subject to the purely prudential regulatory framework in the Banking Act 1959 and non-ADIs will receive a new risk-based framework based on similar obligations to be made by the Minister. The Bill is still before the
Federal Senate. 18 Explanatory Memorandum to the National
Consumer Credit Protection Amendment (Supporting
Economic Recovery) Bill 2020, p 8. 19 See note 3 20 Explanatory Memorandum to the National
Consumer Credit Protection Amendment (Supporting
Economic Recovery) Bill 2020, p 9, 10 and 19. 21 National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 (Cth)
Schedule 1, item 67, sections 133 EB and 133EC. 22 Those in Division 3 of the National Consumer
Credit Protection Act 2009 (Cth). 23 The Reserve Bank of Australia’s Cash
Rate Target is 0.10% as at 2 June 2021 https://www.rba.gov.au/statistics/cash-rate/ viewed 27 June 2021.
