Proposed changes to responsible lending laws explained
On 25 September 2020, the Government announced significant reforms to the responsible lending obligations (RLOs) in the National Consumer Credit Protection Act 2009 (Cth) (NCCPA).
The proposal simplifies the existing consumer credit regulatory regime by reducing the RLOs in an effort to expediate Australia’s post-COVID economic recovery. The Government seeks to improve the flow of credit by rolling back what it considers to be ‘overly prescriptive’ RLOs without compromising the interests of consumers. Further, the simplified loan process endeavours to increase competition by reducing barriers for consumers to switch credit providers and increasing opportunities for lenders to develop new products.
The Government intends to achieve the above objectives by:
- Ensuring that ADIs continue to comply with APRA’s lending standards;
- Adopting key elements of APRA’s ADI lending standards and applying them to non – ADIs; and
- Fortifying the existing RLOs in relation to higher-risk products.
The proposed commencement date of the new provisions is 01 March 2021.
Who is affected by the changes?
The proposal impacts all Australian Credit Licence holders and exempt credit industry participants who provide credit or credit assistance in relation to consumer credit products that are regulated by the NCCPA. It also affects individual consumers and to an extent, businesses.
The new regime seeks to reduce the need to verify a borrower’s financial situation to the extent that is currently required. Lenders will be able to rely on information provided by borrowers without further verification or investigation unless there are ‘reasonable grounds’ to suspect the information is unreliable. The purpose of this is to simplify the loan application and approval process and subsequently improve the flow of credit. Borrowers will bear more responsibility regarding their financial situation when applying for a loan and the current onerous obligations on lenders will no longer apply.
The new lending framework does not apply where any proportion of an application for credit is for a business purpose.
Winding back responsible lending requirements
The Government intends to move away from the current ‘one size fits all’ approach to lending and remove unnecessary regulatory duplication. The Government’s Fact Sheet provides limited information as to how precisely it will achieve this. However, it offers some guidance on what to expect generally from the new regime.
ADIs are currently subject to both the NCCPA regime (administered by ASIC) and the capital adequacy regime (administered by APRA). The APRA regime focuses predominately on risk management while the ASIC regime focuses predominately on consumer harm. The proposal seeks to subject ADI’s solely to the APRA regime.
There is no indication that APRA’s current prudential standards will change. APRA imposes some serviceability requirements through APG 233 (Residential Mortgage Lending) by providing for the verification of a borrower’s financial situation as part of the credit approval process. There is still an expectation that an ADI will take reasonable steps to assess and verify a borrower’s financial situation when considering an application for credit.
ADI’s will no longer be subject to two regulatory regimes, offering further clarification on the lending standards as they relate to ADI’s.
Non-ADIs are currently only subject to the ASIC regime.
ASIC will continue to regulate non-ADI’s. Additionally, appropriate elements of APRA’s ADI lending standards will be adopted for non-ADI’s to ensure consistency between the regulatory standards applied to ADIs and non-ADI’s.
It is unclear which of APRA’s standards will be adopted in relation to non-ADIs.
Are consumers adequately protected?
Despite the significant reform to the existing RLOs, particularly in relation to ADIs, consumers will remain protected by existing frameworks for borrowers. These include:
- Australian Financial Complaints Authority
- Independently assists individual consumers and small businesses to make and resolve complaints about financial institutions.
- Banking Code of Practice
- All signatory banks must exercise ‘the care and skill of a diligent and prudent banker’ when considering a loan application.
- All credit licensees are obligated to do all things necessary to ensure credit activities authorised by the licence are engaged in ‘efficiently, honestly and fairly’ and to avoid consumer detriment resulting from conflicts of interest.
- Increased maximum corporate and financial sector civil and criminal penalties.
- Effective from 01 January 2021: Mortgage brokers will be required to act in the ‘best interests’ of a borrower when providing credit assistance under the NCCPA.
- Corporations Act 2001 (Cth) (CA)
- Effective from 05 October 2021: Issuers and distributors of financial products will be required to comply with the design and distribution obligations outlined in the CA.
- ASIC powers
- ASIC may ban or amend any credit product that results, or is likely to result, in significant consumer detriment.
High risk products will remain subject to existing RLOs. These include Small Amount Credit Contracts (SACCs) and consumer leases. Further, increased protection to consumers from credit management firms is proposed to take effect from 01 April 2021.
How can we help you?
At Purcell Partners, we specialise in advising lenders on a range of lending transactions. If the new legislation passes, it will overhaul existing responsible lending obligations and pave the way for new products and processes to be developed. This is an exciting opportunity for lenders but it will also raise new concerns and issues regarding regulatory compliance. Our team of experienced solicitors can provide the necessary legal support and advice to ensure lenders are able to maximise on the stripped back lending obligations without breaching the new compliance requirements.