Changes to Responsible Lending

The Treasurer, the Hon. Josh Frydenberg, has announced simplification of Responsible Lending obligations in an effort to help “kick start the economy” as we move to the recovery phase of COVID.

In his opinion piece and the Fact Sheet entitled “Consumer Credit Reforms” (a joint release with the Hon. Michael Sukkar, Assistant Treasurer), the Treasurer pointed to the growing disconnect between the goal of principles based Responsible Lending obligations and the reality of the regulatory guidance over the 10 years since its introduction. His view, mirroring a growing economic performance-led narrative, is that the most recent ASIC Responsible Lending regulatory guide running to almost 100 pages is evidence that the principles based goal has degenerated to “an overly prescriptive, complex, costly, one-sized-fits-all regime”.

The Treasurer has noted that the regulatory burden on lenders has resulted in higher costs and higher levels of conservatism in credit-decision making, which has resulted in consumers bearing the burden of higher obstacles to access credit. 

As a result of this, the Treasurer has announced a plan of simplification of the existing Responsible Lending laws.  The existing laws will cease to operate for all classes of lenders, except those who offer small amount credit card contracts or consumer leases. For all other lenders, those currently regulated by APRA will remain subject to APRA’s lending standards.  APRA-regulated ADIs will still be required to “make reasonable inquiries and take reasonable steps to verify a borrower’s available income”.  Non-APRA regulated lenders will now need to comply with the same APRA standard, but with ASIC continuing to monitor compliance over the non-ADI lending space.

This appears to effectively create a two-tier system of monitoring of conduct by regulators of the Australian consumer lending system – the conduct of ADIs will now be monitored by the prudential regulator, APRA.  And for non-ADI lenders, while their conduct will be continued to be monitored by ASIC, they will need to comply with the “new” APRA lending standards.

The Treasurer has noted that the changes will:

We would expect that such a statement reflects likely changes that will introduce and elevate the notion of “responsible borrowing”.   The new obligations will allow lenders to rely on borrower attestations unless there are reasonable grounds to suspect the information is unreliable.  This should include such things as declarations about expenses and changes the borrowers are prepared to make and maintain if they were to be approved for a loan.   In short, borrowers are to be made more accountable for providing accurate information to allow lenders to make their credit decisions.

The Treasurer is silent on how the currently unregulated Buy Now Pay Later providers will be treated, and what changes, if any, will impact that part of the industry.  Lending to small businesses, not currently covered by the Responsible Lending obligations, will also continue to be exempt.

For mortgage brokers, Responsible Lending obligations appear likely to be removed.  The Treasurer has reinforced the best interests duty (commencing on 1 January next year, after a COVID-driven extension to the original start date) is an important part of the regulatory protections for consumers.

Whilst there are still more details required before lenders can respond in haste, in our view there are great opportunities for lenders to start to (re-) consider how they continue to innovate off the back of this new policy back-drop, with a focus on:

• Uplifting, simplifying and communicating compliance policies and guidance.  Getting the policy settings right is a requirement before changes are made to the end-to-end lending value chains;
• Amplifying use of technology and data in credit decisioning and acceleration of origination timelines and opening up of lending to new markets. We expect a number of lenders who have shelved projects due to the weight of regulatory requirements will be dusting off these plans;
• Continuing to build capabilities to source, analyse, and use relevant data within credit processes to deliver better outcomes for lenders and borrowers in a way that is commercially viable. We expect lenders to continue to explore efficient and effective ways to verify borrower-provided information, where it is deemed necessary;
• Intensifying efforts to more actively participate in the Comprehensive Credit Reporting regime and the Open Data regime more broadly;
• Implementation of changes during a changed, virtual working, environment. There is a need to be fast and clear in communications to all those involved in distribution (inside and outside of the organisation) with respect to any changed standards or new market focus areas.

This is a pendulum swing which began with the recent “wagyu and shiraz” decision and there is a need to ensure the pendulum lands in the right place, which for now is uncertain. What is certain is there is a need to get money moving within the economy and this is an important tool to achieve that, not one that was considered very likely just months ago.

While the Government intends to consult with stakeholders, it has indicated that these reforms are to commence in April 2021.

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