On 25 September 2020, as part of the Government’s economy recovery plan, the Treasurer Josh Frydenberg announced the intention of the Government to simplify access to credit for consumers and small business. The Government proposes to achieve this by simplifying the existing consumer credit framework (particularly the responsible lending provisions) under the National Consumer Credit Protection Act 2009 (NCCPA). So, what prompted this change in policy?
Why the change to responsible lending provisions?
Since the beginning of the COVID-19 pandemic, a variety of economic packages have been introduced to stimulate the economy. By simplifying the responsible lending provisions, the Government hopes to reduce the cost of (both lender and borrower costs) and time it takes consumers and small and medium sized businesses to access credit.
The Treasurer described the current responsible lending provisions as having “evolved into a regime that is overly prescriptive, complex and unnecessarily onerous on consumers”. The recent ASIC v Westpac, “Wagyu + Shiraz” case illustrated the issues faced by lenders and ASIC in interpreting and applying the existing responsible lending provisions in conducting credit assessments. The case was brought by ASIC (and then successfully appealed by Westpac) to provide clarification on the legal obligation on lenders when it comes to responsible lending.
Key elements of the proposed reforms:
- Simplifying the rules applying to authorised deposit-taking institutions: Currently, authorised deposit-taking institutions (ADIs) are subject to two responsible lending regimes: the consumer protection regime in the NCCPA administered by ASIC; and the capital adequacy regime administered by the Australian Prudential Regulation Authority (APRA). The proposed reforms will remove the responsible lending obligations for ADIs from the NCCPA, other than with respect to a small number of credit contracts and consumer leases where the responsible lending obligations will be strengthened to ensure there is adequate consumer protection. ADIs will still be required to comply with APRA’s lending standards.
- Ensuring non-ADI financial institutions are also subject to APRA’s lending standards: The Government is proposing to adopt key elements of APRA’s ADI lending standards and apply these to non-ADIs through the NCCPA. The aim is to have consistency between the standards applied for ADIs and non-ADIs, although it remains unclear exactly how this will be implemented.
- Adopting a borrower responsibility model: Lenders will be entitled to rely on the information provided by borrowers (in the absence of reasonable grounds to suspect the information provided is unreliable), replacing the current practice of ‘lender beware’ with a ‘borrower responsibility’ principle. The rationale here is that lenders will save costs (including borrower costs) and time in verifying information provided by borrowers and focus on speeding up the process of providing credit to consumers and small businesses. In addition, by moving away from the "lender beware" principle to the "borrower responsibility" principle, lenders will no longer be held liable should the information provided by a borrower be found to be untrue, misleading or incorrect (unless there are reasonable grounds to suspect that the information is unreliable). This is a key change in the proposed reforms which is intended to allow lenders to simplify their credit assessment processes. The Government expects the benefit of these reduced regulatory requirements to be passed on to borrowers in due course.
- Improving the flow of credit to small businesses: The new regime will not apply to any loan with an element of business purpose (irrespective of the proportion), removing the ambiguity regarding the application of consumer lending laws to small business lending. This has the effect of excluding the loan from the application of the entire consumer credit regime (not just the responsible lending provisions). The Banking Code of Practice and the Australian Financial Complaints Authority’s (AFCA) small business jurisdiction (where the lender is a member) will continue to apply to small business lending.
- Providing better protection for consumers of high-risk products such as consumer leases and pay-day loans: The existing responsible lending provisions will continue to apply for Small Amount Credit Contracts (SACCs) (being non-ADI loans of less than $2,000 where the term of the loan is between 16 days and 12 months) and consumer leases, as these are considered higher risk products that are typically accessed by vulnerable persons. However, the proposed regime will introduce a new cap on the total payments that can be made under a consumer lease being the sum of the base price of the goods hired under the lease and permitted delivery and installation fees multiplied by 4% per month (up to 48 months) and a permitted one off 20% establishment fee. The Government is also proposing to introduce a new protected earnings regime for SACCs and consumer leases where lenders or lessors cannot provide these credit products to certain persons. These changes are to be implemented 6 months from the date the legislation is passed.
- Regulating Debt Management Firms*: The Government intends to implement consumer protection from the predatory practices of debt management firms by requiring debt management firms to hold an Australian credit licence when they are paid to represent consumers in disputes with financial institutions. This will require debt management firms to satisfy the regulatory requirements for credit licensees, including meeting the ‘fit and proper person’ test and the requirement to act ‘honestly, efficiently and fairly’. Consumers will also be able to seek assistance from AFCA where they have a dispute with a debt management firm.
The above-mentioned reforms are scheduled to commence from 1 March 2021 (or 1 April 2021 where indicated with an asterisk). These reforms come against the backdrop of the finding of the Financial Services Royal Commission that key provisions of the Banking Code of Practice should be given regulatory force. Although it is unclear how that recommendation will be implemented in the context of the proposed reforms, the duty under the Banking Code of Practice for signatory banks to exercise the care and skill of a diligent and prudent banker will continue to apply.
Draft legislation implementing the reforms has not yet been released and the Government will consult publicly with all stakeholders before implementing the reforms.