Submissions on RLO and BID extension released

The inquiry and its hearings are largely centered on the impacts of removing RLOs, and more than 100 submissions from the lending and mortgage industry – as well as other stakeholders – were released in relation to the proposed laws.

Several of the submissions released were from players in the mortgage broking industry. Some of the key points from the broker association submissions can be found below, including those relating to the extension of the BID to all credit assistance providers.

CAFBA submission

In the Commercial & Asset Finance Brokers Association of Australia (CAFBA) submission, the association suggested that the proposed changes to responsible lending should not affect commercial brokers, as the explanatory notes are “clear that it only affects regulated consumer transactions”. However, it added that they “should also have a positive effect on commercial lending and provide better access to credit for small business”.

“In essence, the legislation replaces responsible lending with best interests duty, which is extended to all consumers transactions, and CAFBA sees this as a positive step for best customer outcomes,” its submission reads.

“We have therefore considered the draft and welcome the removal of responsible lending obligations on consumer brokers and replacing it with best interests duty.

“CAFBA also appreciates the clarity in the draft legislation that this only applies to consumer finance, and the recognition that business finance is not part of this legislation,” it said.

FBAA submission

In the submission from the Finance Brokers Association of Australia (FBAA), the association highlighted its position that “no proper case has been put forward to justify the extension of the best interests duty to all credit assistance providers”.

The association suggested that such an expansion would necessitate “significant systems reform, changes to documented processes and procedures considering strategic alignment with partners such as aggregators, potentially large impacts on revenue and, for some, an assessment as to the viability of remaining in the industry”.

The FBAA outlined that non-mortgage loan products were also vastly different in structure and the markets “extremely different”, with a “more nuanced” risk-based pricing model. 

It also emphasised that commissioner Kenneth Hayne’s recommendation for a broking best interests duty during the banking royal commission was “expressly framed” to apply to “mortgage brokers”. Moreover, it said that it did not believe finance brokers could “implement system changes and be in a position to demonstrate compliance by 1 March 2021” (as per the original bill).

The FBAA also said that the proposed changes to responsible lending obligations (RLOs) were “welcome and necessary”, as the association believed the original objectives of the NCCP regime “appear to have lost their way as a result of excessively prescriptive and inconsistent administration of the framework”.

The FBAA stated that the repeal of RLOs would “allow credit providers to undertake a more meaningful assessment of consumer capacity to service a proposed credit facility without the need for the almost-forensic analysis of past spending behavior that has come to be demanded by regulators”.

The association did not support the notion of a separation of regulatory oversight of banks and non-banks to two different regulators (APRA and ASIC), as proposed. Instead, it supported the move for APRA to have oversight of lending standards and conduct across all lenders.

MFAA submission

In contrast to the FBAA, the Mortgage & Finance Association of Australia (MFAA) said it supported the extension of BID to all finance brokers, therefore “ensuring that consumers can expect all brokers and not just mortgage brokers) to act in their best interests”.

According to the association, the limitation of BID to just mortgage brokers, rather than to all finance brokers, leads to “customer confusion”.

“The new regime recognises that the law needs repair, and the proposals address that situation,” the MFAA stated.

It suggested that an expanded BID therefore:

• “Reflects consumers’ expectations of brokers;
• “Creates a level playing field across the broking industry;
• “Removes any confusion a consumer may have as to whether or not BID applies; and
• “Removes the unclear test of what amounts to a mortgage brokers as distinct from other finance brokers.”

The MFAA went on to state: “Brokers’ processes will be enhanced by BID. They will still make inquiries of consumers to determine their requirements and objectives, collect financial information to assess repayment capability at a high level, make recommendations and assist consumers to obtain appropriate finance.

“The need to form a view on affordability remains important, as this will be required to determine whether the broker believes a customer meets the credit policies of a particular lender. Importantly, however, the legal responsibility for assessing customer affordability will be with the lender – not the broker – with the broker’s responsibility being focused on the customer’s needs, objectives, priorities and preference and recommending products which meet these.”

As well as supporting the reforms, the association also suggested that there was an “opportunity” to consider the Point of Sale exemption and to “make changes that improve disclosure and consumers in this area, which will also allow finance brokers to complete on equal terms with those currently operating under the Point of Sale exemption”.

In summation, the MFAA said that the level of consumer protection would be improved under the consumer credit reform amendments, not diminished.

The association stated that this is because “the current law contains little details and the proposed Credit Standards create more detailed rules for lenders to follow”.

“These changes 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.”

It continued: “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 judgement of them.”

The Senate hearings on Friday did not delve into the expansion of the BID. 

While a second hearing is set to be held this coming Friday (26 February), the program for this hearing had not been released at time of writing.

Once the hearings have concluded, the Senate will weigh up the witness evidence and the submissions received to form the basis of its report on the matter, which is scheduled to be handed to Treasury on 12 March 2021.

[Related: Proposed BID extension delayed]