September 24, 2020
The major banks have won the argument that responsible lending has squeezed access to credit, with the Morrison government set to change the rules 18 months after Royal Commissioner Kenneth Hayne implored the financial services industry to "apply the law as it stands".Treasurer Josh Frydenberg will on Friday unveil "the most significant reforms to Australia's credit framework in a decade" in a bid to reduce red tape for lenders and increase the flow of credit to consumers and businesses amid the coronavirus pandemic.
The reforms put an end to a multi-year row between the big four banks, fintech challengers, regulators and the courts over the responsible lending regime introduced by Labor in the aftermath of the global financial crisis.
The Hayne royal commission castigated the banks for the allegedly widespread practice of what law firm Herbert Smith Freehills has called "credit-mash", whereby processes of inquiry and verification were combined into a single assessment process.It also took issue with reliance on the so-called Household Expenditure Measure (HEM) as a substitute for proper inquiry.Commissioner Hayne did not recommend amendment of the Act, but called on lenders to abide by "the law as it stands" and carry out the two distinct processes of inquiry and verification entirely separately.But the banks argued the boundaries of the long-standing laws were unclear and that the financial penalties for breaching the law had risen unreasonably steeply.
"It’s not clear where the line is but if you cross it, the penalty is extremely high," ANZ chief executive Shayne Elliott said this month.
"Well, the only rational response to that is to stay away from the line, so you just stay away from the line, you build a buffer. So yes, we have become more and more cautious."Mortgage brokers had expressed frustration as the turnaround times for credit applications lengthened by the post-Hayne application of the law, with complaints that some customers were waiting more than a month to access crucial lines of credit amid the recession.The argument won recent endorsement from the central bank, with Reserve Bank governor Philip Lowe conceding in August that the "pendulum has probably swung too far" towards blaming the bank when loans go bad."On a portfolio basis, we want banks to make some loans that actually go bad, because if a bank never makes a loan that goes bad it means it's not extending enough credit," Dr Lowe said, adding that the responsible lending legislation may require tinkering if the industry and regulators could not reach consensus.The government's overhaul is another blow to the Australian Securities and Investments Commission, which as recently as the beginning of September had claimed "all the feedback is that the law around responsible lending was now settled".ASIC also recently lauded fintech and regtech start-ups facilitating credit assessment in a provocation of the banks and indication the watchdog remained committed to the existing regime.“It is remarkable to think that regulators are often blamed for red tape blockages, when in fact the capability to harness and tap into technology to accelerate positive customer outcomes lies within entities, if they choose to invest in and develop it,” said ASIC commissioner Sean Hughes.It was the first public statement made by the regulator on the topic since it abandoned its appeal of the high-profile "wagyu and shiraz" lawsuit against Westpac, which took the bank to task for over-reliance on the HEM measure.Coalition MPs including joint parliamentary committee on corporations and financial services chairman James Paterson had blasted the responsible lending regime as "confusing for consumers" and criticised ASIC's guidance to the market.
