Apply the law as it stands
The Hayne Royal Commission was a once in a century examination of
the banking sector. A year‑long inquiry, that received over 10 000 submissions from the public, that commissioned background papers from a raft of experts, that pulled together an army of the best legal minds in the country, that held hearings all around the country, that produced a three volume interim report running over 1 000 pages, followed up by an equally exhaustive final report, handed down barely two years ago with 72 recommendations on how to regulate banks in the public interest.
The first recommendation of the final report of the Royal Commission was that 'the NCCP Act should not be amended to alter the obligation to assess unsuitability'. The government accepted this recommendation without qualification in February 2019. And yet this bill does the exact opposite of Recommendation 1.1. This bill rips up the responsible lending obligations in the NCCP Act that Commissioner Hayne said should not be amended.
There is no ambiguity about the Commissioner’s intent. The government’s too‑smart‑by‑half argument—echoed by the banks—that the Commissioner’s recommendation was made in the context of a proposal by consumer groups to change the test from ‘not unsuitable’ to ‘suitable’ is a ruse. Commissioner Hayne was crystal clear:
My conclusions about issues relating to the NCCP Act can be summed up as ‘apply the law as it stands’.
This bill has confirmed that this government never had their heart in the Royal Commission. They resisted it for years. They established it with great reluctance and only to quell a backbench revolt. And now they have abandoned its primary recommendation, disingenuously using a
pandemic-induced recession as cover for their reversion to type which is to be the parliamentary agents for the banks and their pursuit of ever bigger profits.
This bill is an insult to the Commissioner himself, through to the tens of thousands of people whose lives were destroyed by the banks’ rapacious behaviour. It is also an insult to everyone who called for, supported and participated in the Royal Commission.
A solution in search of a problem
The pretext for this bill is that current responsible lending obligations place an undue burden on banks, that this is impeding the flow of credit, and that removing these barriers is important to support economic recovery in the wake of a pandemic. The trouble for the government is, the numbers tell the exact opposite story.
The most recent ABS lending data shows that growth in new loans to households for housing over the last twelve months was 44 per cent, seasonally adjusted. This is the highest growth rate over any twelve month period on record. This twelve month period starts in January 2020 before
the pandemic hit and covers the time in which there was a nationwide lock down. That is, despite the pandemic, banks increased lending at a faster rate than they ever have. This illustrates that, so far as the economy wide provision of consumer credit is concerned, the effect of the RBA’s monetary policy and APRA’s prudential regulation dwarfs that of responsible lending obligations.
If the government was serious about ‘supporting economic recovery’ then it would commit to a long-term program of government spending that will support aggregate demand, starting with increasing JobSeeker to a rate above the poverty level, and moving through to a program of investment that would provide high-quality, universally accessible public services, rebuild manufacturing, and transition the nation to a carbon-neutral economy.
Creating a mountain out of a molehill
In seeking to make the case for this bill, the Explanatory Memorandum includes a lot of hand-wringing about how difficult it is, apparently, for banks to get loans out the door. In particular, the supposed burden imposed by ASIC Regulatory Guide (RG) 209 Credit licensing: Responsible lending conduct receives a lot of attention. Most of this is pure cant that doesn’t stand up to the barest of examination.
RG 209 has supposedly led to a 'one-size-fits-all' approach 'regardless of
the specific financial circumstances of the individual borrower or nature of
the credit product'. Yet an entire section of RG 209 is dedicated to guiding banks as to what inquiries and verifications it should make to 'determine what is appropriate in individual circumstances'. This includes that a lender may take into account the borrower’s income, expenses, credit history, the size of the loan, and the cost of the loan, amongst other things.
But then the Explanatory Memorandum, which itself runs to 143 pages, goes on to state that ASIC’s RG 209 'runs to more than 90 pages'. So, on the one hand the guidance is overly simplistic and ‘one-size-fits-all’, yet on the other hand it's too long for the banks to get their heads around.
Finally the Explanatory Memorandum states that 'over 50 per cent of the time spent on a credit application can go toward verifying information provided by borrowers'. Which begs the question: isn’t that exactly what a bank should be spending its time doing? The spreadsheet does all the loans calculations in
the blink of an eye. In the modern age, the human task is to test the veracity of the information being provided.
The bigger the loan, the easier the money
This bill functions by removing responsible lending obligations on consumer credit, except for on small amount credit contracts (SACCs) and consumer leases. SACCs are 'loans of up to $2,000, where the term of the contract is between 16 days and 12 months'. The result is that loans less than $2 000 will be subject to responsible lending obligations, whereas loans greater than $2 000 will not.
This is utterly perverse. This bill will literally make it easier for the banks to lend someone $2 000 000 than it would be to lend someone $2 000. And if a customer walks into a bank looking for a $1 900 loan, then the bank will be able to offer them a bigger loan at a lower cost because the transaction costs for the bank will be less.
A regulatory vacuum
By removing the responsible lending obligations from the vast majority of consumer loans, this bill would create a regulatory vacuum. Under the current ‘twin peaks’ regulatory framework, ASIC is the conduct regulator responsible for consumer protection and APRA is the prudential regulator responsible for stability of the banking system.
Here again, this bill is in contradiction with the findings of Commissioner Hayne who, while being highly critical of the performance of financial regulators, concluded:
The twin peaks model of regulation has now operated in Australia for many years. It should be maintained and strengthened.
If responsible lending obligations are removed, then ASIC will no longer have a role in consumer lending and, instead, APRA’s prudential regulation will be relied upon to protect consumers. This is a fundamental shift in the framework for regulating consumer loans and is as good there being no consumer regulation at all.
This is evident in APRA’s submission to this committee inquiry, which explained:
APRA’s mandate is to protect the Australian community by establishing and enforcing prudential standards and practices designed to ensure that, under all reasonable circumstances, financial promises made by
the institutions it supervises are met within a stable, efficient and competitive financial system. As the prudential regulator of ADIs, APRA seeks to assure depositors that their deposits are safe and the Australian community that the financial system is stable.
No mention of individual borrowers whatsoever. Because that’s not APRA’s job.
Conclusion
What this bill boils down to is that people will be left to fend for themselves. As is befitting of this government’s ideology, this bill will shift the burden of responsibility from the bank to the consumer. The vast majority of borrowers will not be provided with the most basic of consumer protection, which is that the product being sold to them is fit for purpose.
This gets to a fundamental question about how markets are regulated and what protections should be provided to consumers. Again, Commissioner Hayne explored this issue at length and highlighted it in the second of four key observations that he made about the misconduct that he uncovered in
the Introduction to his Final Report:
...entities and individuals acted in the ways they did because they could. Entities set the terms on which they would deal, consumers often had little detailed knowledge or understanding of the transaction and consumers had next to no power to negotiate the terms. At most, a consumer could choose from an array of products offered by an entity, or by that entity and others, and the consumer was often not able to make a well‑informed choice between them. There was a marked imbalance of power and knowledge between those providing the product or service and those acquiring it.
This is why consumer regulation exists. Because the dream of
the efficient‑market hypothesis, where well-informed individuals act rationally, seeking out the best deal for themselves, and, in doing so, encourage competition is just that: a dream with no foundation in reality. In reality, neoliberalism is about enabling the already wealthy and powerful to accumulate yet more wealth and more power.
This bill is designed to let the banks get on with writing loans as big as they possibly can, whether it's good for people or not, so that they can pay even bigger bonuses and rack up even bigger profits. In a country that already has one of the highest levels of consumer debt per capita in the world, this bill would give the banks a license to entice people into even more debt. Rather than building productive capacity and ensuring individual security, this would further constrain household spending, further constrain innovation, and further lead Australia down the dead end path that is an economy built on ever increasing house prices at the expense of just about everything else.
Senator Nick McKim
Australian Greens Senator for Tasmania