Consumer credit reforms introduced into Parliament

The bill seeks to amend the law relating to consumer credit and consumer leases, and includes the controversial proposal to extend the best interests duty to more credit assistance providers and to remove responsible lending laws.

The explanatory memorandum outlined that the BID that applies to mortgage brokers will be extended to certain other credit assistance providers, “following a six-month transition period from the later of 1 March 2021 and the day after Royal Assent”.

The extended BID will therefore cover:

• Mortgage brokers (from 1 January 2021, as previously legislated);
• “Certain other credit brokers” who: carry on a business of providing credit assistance in relation to credit contracts; and do not perform the obligations, or exercise the rights, of a credit provider in relation to the majority of those credit contracts; and provide credit assistance in relation to credit contracts offered by more than one credit provider; and
• “Brokers of consumer leases” who: carry on a business of providing credit assistance in relation to consumer leases; and do not perform the obligations, or exercise the rights, of a lessor in relation to the majority of those consumer leases; and provide credit assistance in relation to consumer leases offered by more than one lessor.

It does not apply in relation to credit assistance provided to a consumer by a credit representative acting within the scope of the credit representative’s actual or apparent authority from the licensee.

The extension of the best interests obligations beyond mortgage brokers to certain other licensees and their credit representatives means that those licensees and their credit representatives must:

• act in the best interests of consumers when providing credit assistance in relation to credit contracts and consumer leases; and
• where there is a conflict of interest, give priority to consumers in providing credit assistance in relation to credit contracts and consumer leases.

MFAA notes introduction

Noting the introduction of the bill intro Parliament, the CEO of the Mortgage & Finance Association of Australia (MFAA), Mike Felton, said the association supported the changes because they would ultimately lead to stronger customer outcomes, as lenders and brokers would now have a clearer understanding of their individual responsibilities, including a higher legal duty for brokers. 

“These consumer credit reforms balance a more efficient flow of credit while enhancing customer protections. They certainly represent a step forward from responsible lending,” Mr Felton said. 

“From the customer’s point of view, the strongest possible protection is the knowledge that their broker will always act in their best interests. From 1 January 2021, customers will have the comfort of knowing that mortgage brokers will operate under a legal best interests duty. 

“The best interests duty actually represents a higher standard than responsible lending. Under these proposals, the best interests duty will be expanded so that all consumers obtaining credit assistance through a broker will be protected by this unrivalled higher duty, providing yet another compelling reason to use a broker.”

The bill has garnered strong criticism from several groups, most notably consumer groups, who are concerned the removal of responsible lending might harm consumers.

Mr Felton commented: “I fail to see how this can be viewed as anything but a better outcome for borrowers; however, I look forward to discussing with the consumer advocacy groups to hear their concerns. I believe we are on the same page in terms of wanting the best possible outcome for customers.” 

The MFAA CEO said the new rules provided much-needed clarity for all parties involved in home lending, which would ultimately benefit Australian borrowers. 

“As an industry that is in demand from consumers, we are focused on consumers,” Mr Felton said.

“As long as lenders and brokers have a clear understanding of their individual responsibilities and obligations, the changes will refocus responsibility on the appropriate industry participant. 

“Lenders can focus on their risk-based lending policies and ensuring loans are affordable for individual borrowers, leaving brokers free to focus on customer needs, objectives, priorities and preferences, with a best interests duty to help ensure they act independently of lenders  and continue to deliver great customer outcomes,” Mr Felton said. 

Removal of responsible lending obligations

While the bill has been introduced and read, the passage of the bill through Parliament may be difficult given that several members of Senate have already suggested that they are opposed to scrapping the obligations due to concerns over consumer protections.

However, speaking this morning, Treasurer Josh Frydenberg emphasised that consumer protections would remain in place.

He told Sky News: “Our responsible lending has become the restrictive lending laws, and these were put in by the Labor Party in the wake of the GFC and they started off as a principles-based framework which has become overly prescriptive. You’ve nearly got 100 pages of ASIC guidance and the process has meant under these laws that households, people who are going to get a home loan, people who are going to get an extension on their overdraft, a new credit card, are being asked for a level of detail in their own finances which is unnecessary in order for that transaction to take place.

“This is delaying and, in some cases, prohibiting proper access to finance which should otherwise occur. We’re leaving in place the consumer protections. 

“What we are saying is, APRA, as the prudential regulator, [has] a lending standard and that will continue to apply. But what we are seeking to do here is cut red tape, make it easier for people to access finance and to move from a model which is based on lender-beware to borrowers having personal responsibility for the loans that they are seeking.

“Of course, these lenders will need to continue to seek to verify the income of those people who they are making loans to, but the consumer protections will remain in place, so much so that we saw the Council of Financial Regulators (which is made up of the heads of the Reserve Bank and ASIC and the Australian Prudential Regulator (APRA) and Treasury)... all [say] that the responsible lending changes that the government [was] seeking to implement can help boost access to finance.”

He continued: “People seeking a home loan and people seeking a credit card, there are examples where people with hundreds of thousands of dollars in the bank were unable to get a basic credit card because they were unable to show a weekly or a monthly income statement.

“Now, there are a lot of perverse consequences of what have become overly prescriptive regulations and laws that, in today’s world, are unnecessary.”

Mr Frydenberg highlighted “how important it is to Australia’s economic recovery that we have the free flow of access”.

“So, this is not only cutting red tape, but this is going to boost consumer outcomes in their favour,” he said.

The MFAA has agreed that the proposed changes should also improve efficiency in the finance industry by removing unnecessary barriers to the flow of credit and creating faster turnaround times for credit application processing for consumers, while providing consumer protections.

“These changes finally allow the removal of the unworkable ‘one size fits all’ responsible lending regime, as lenders will now be required to engage in risk-based lending that is attuned to the individual circumstances of the borrower and credit product,” Mr Felton said.  

“This more considered approach will eliminate the almost-forensic examination of consumer discretionary living expenditure required of brokers under responsible lending. This created inefficiencies and uncertainty because instead of primarily representing consumers, brokers were also sitting in judgment of them.  

“Going forward, the industry will place greater reliance on information provided by the borrower, and their ability to adjust future spending habits. Legal responsibility for assessing loan affordability will be with the lender, where it should be, while brokers will have a higher legal duty to act in the best interests of the consumer, which will be a powerful differentiator for the mortgage broking industry,” Mr Felton said.

The FBAA has not yet commented on the introduction of the bill into Parliament, but has previously welcomed the consumer credit reforms.

More to come.

[Related: BID changes could see brokers earning nothing on some loans]