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The announcement that the Australian government would be loosening responsible lending restrictions has been met with mixed feelings from the financial sector – so who might be better off as a result of the changes and who may struggle?
On Friday, 25 September, the government revealed that it was peeling back responsible lending laws, in an effort to increase the flow of credit and promote economic recovery.
It will see the removal of responsible lending obligations from the National Consumer Credit Protection Act 2009 while “allowing lenders to rely on the information provided by borrowers, replacing the current practice of ‘lender beware’ with a ‘borrower responsibility’ principle”.
“Now more than ever, it is important there are no unnecessary barriers to the flow of credit to households and business, especially small and medium-sized businesses, as the economy recovers,” a fact sheet from the Treasury explained.
For: Banks, property industry, brokers
Unsurprisingly, given their positions as major lenders, ANZ and Westpac have come out in support of the change.
A statement from ANZ chief executive Shayne Elliot said the simplification of the credit framework “will speed up the flow of credit to Australians during these difficult economic times while still providing the necessary protections for Australians when accessing credit”.
He added that the decision would “support the economy and customers at a crucial time”.
Westpac CEO Peter King also welcomed the news, considering the government initiative able to “reduce red tape for consumers seeking a loan and importantly speed up the process for customers to obtain approval for a loan”.
“These enhancements would enable us to assess loan applications across specific lending products rather than a ‘one size fits all’ approach. We will be able to streamline our processes, making it an easier and simpler process for customers,” he commented.
The Australian Banking Association has also weighed in, with chief executive Anna Bligh expressing that the “banks look forward to working with the government to ensure the legislation works for both customers and the broader economy”.
“This proposed reform removes duplication and overlap between regulators while continuing to ensure strong protections for consumers,” the body stated.
Ms Bligh added that it is “important to ensure that these changes strike the right balance between maintaining strong consumer protections while providing credit into the economy at a critical time”.
Also accepting the changes with open arms is the property industry.
A statement from the Housing Industry Association (HIA) has applauded the move, arguing that looser rules “will drive home ownership and the economy”.
HIA managing director Graham Wolfe said the changes have been a long time coming, noting “HIA has repeatedly called for better access to finance and a relaxation of the rules around home loans”.
“It’s a pity that it has taken a recession for these rules to change,” he commented, before considering that the plan “does not solve all the problems around access to finance and credit”.
“Currently, it is three times harder for a first home buyer to get a loan, despite low interest rates making it being easier to service a mortgage,” Mr Wolfe expressed.
“It’s only fitting that lenders and customers have their hands untied to work together to appropriately assess the risk and the loan.”
The biggest broking association in Australia has offered up a similar sentiment, having called for bipartisan support for the reform proposals.
The Finance Brokers Association of Australia (FBAA) has hailed the changes as a way to stimulate borrowing and the economy at large.
According to FBAA managing director Peter White AM, to date, many borrowers who could afford mortgages have been locked out.
Calling the changes “sensible”, he said “anything that puts the accountability back onto the borrower is just common sense”.
“It’s become an exercise by lenders to pass judgment on a borrower’s discretionary spending, which isn’t the role of a lender,” Mr White commented.
He believes all a lender should care about is the capacity of the borrower to service the loan and they already have many criteria on which to base that.
Acknowledging consumer group backlash, Mr White called this “unwarranted”.
“The changes will simply allow people who can genuinely afford to service a loan the opportunity to achieve this without restrictive red tape getting in the way,” the managing director argued.
Winners: Builders, banks, first home buyers, borrowers
On the fence: Regulation technology
Regulation technology provider Skyjed has responded extremely cautiously to the government announcement, with CEO Leica Ison taking on a tone of warning around the change, agreeing that the relaxation of lending criteria “is being rightfully met with some concern among consumer protection groups with the move back to ‘borrower beware’ lending criteria”.
“But in our view, it’s the banks that still need to be aware, and they still have the most to lose,” the CEO stated.
With “a far more stringent and complex” regulatory environment, Ms Ison acknowledged the existence of a “much more robust safety net for consumers”.
She said it’s banks that have the most to lose as a result of the change – flagging Westpac’s likely $1.3 billion settlement payment from last week as an example of what could happen.
“While the move is certainly a positive for growth as we recover from COVID, there is every reason to believe the banks will be treading far more cautiously with their product governance this time than they have in the past,” she added.
‘A shortsighted fix’
Against: Consumer advocacy groups
A number of consumer groups have argued against the loosened restrictions, considering a removal of credit protections as causing harm to individuals as well as the economy overall.
Karen Cox, CEO of Financial Rights Legal Centre, said too much debt and not enough income is a problem facing many Australians at the moment.
“The government’s solution is to take on more debt with fewer protections. Unsustainable debt hurts real people and is a shortsighted fix for the flailing economy,” she stated.
According to her, “watering down credit protections will leave individuals and families at severe risk of being pushed into credit arrangements that will hurt in the long term”.
For Financial Counselling Australia CEO Fiona Guthrie, the move is reminiscent of the attitudes that resulted in the 2008 global financial crisis.
She commented that as was learnt to our cost during the GFC, “weaker lending standards mean people will be loaded up with as much debt as possible”.
“There is significant profit to be made in pushing borrowers to the edge,” Ms Guthrie stated.
“Removing responsible lending obligations will free banks up to aggressively push credit onto their customers.”
Losers: Financially vulnerable Australians, the entire economy if a GFC-style scenario results