ABA calls for best interests duty clarification

The Australian Banking Association (ABA) is among one of the first respondents to release its response to the proposed consumer credit reforms.

While the ABA has said that it believes the reforms will “strike the right balance between maintaining strong consumer protections while providing credit into the economy at a critical time”, it does call for further clarification on a range of proposals.

For example, the ABA notes that the consumer credit reforms will extend the mortgage broker BID to other credit assistance providers and will require those providers to comply with the duty in relation to credit contracts. 

However, it notes that the bill does not reflect the same wording as the explanatory memorandum, which outlines that this duty will not apply where the credit representative or licensee performs the obligations or exercises the rights of a credit provider in relation to the majority of the credit contracts or where the credit assistance provider is offering credit contracts from one credit provider.

“While we understand that this is intended to exclude the duty from applying to bank staff in the proprietary channel, we suggest the explanatory memorandum to the bill be amended to make this clearer,” the ABA writes in its consultation response.

“At present, it refers to ‘all credit assistance providers’ while the bill has been drafted to clearly exclude some credit assistance providers from being within the scope of the duty.”

The banking association also outlined that it thought the current changes were “unclear” as to whether the BID will apply to an individual where they are providing credit assistance in relation to the products of “multiple credit providers under the same corporate group”. 

“We believe that the drafting should explicitly exclude the duty applying where an individual provides credit assistance regarding the products of credit providers within their corporate group (as opposed to single credit provider),” it said.

“In addition, some ABA member banks operate franchising models, whereby the individual/community own the bank branch and have entered into a franchising agreement with the financial institution, while other member banks provide credit assistance in relation to white labelled credit cards, where they are not the credit provider. 

“On this basis, we seek further clarity that these types of arrangements will not be captured by the proposed extension of the best interest duty,” the ABA writes.

BID should apply to the assessment of the product

The ABA is also calling on Treasury for more clarification on the scope of the BID should responsible lending obligations be removed from the NCCP Act. 

Specifically, it is calling for more onus to be placed on the veracity of the loan information provided to lenders by brokers.

“The duty was introduced in the context of responsible lending and was not intended to include an assessment of affordability, in light of the borrower’s overall financial position,” the association writes.

Given the proposals to remove the responsible lending rules, the ABA states that the BID “should apply to the assessment of the product and it should be up to the lender to determine whether the applicant can afford that loan in accordance with that lender’s criteria and risk appetite”. 

“The lender should be able to elect to rely on the information provided by the credit assistance provider unless it has reasonable grounds to believe the information is unreliable,” the association writes.

“Any such provision included in the non-ADI framework should be reflected in APRA guidance for ADIs,” it said.

It therefore recommends that the explanatory memorandum be amended to:

• provide greater clarity on the application of the BID to credit assistance providers, outlining that this duty will not apply to those providers who assist with the products of entities in the same corporate group, bank branch franchising arrangements, and those arrangements where a bank acts as a credit assistance provider in relation to white labelled credit cards; and
• stipulate that a lender may choose to rely on loan application information provided by the credit assistance provider unless it has “reasonable grounds to believe the information is unreliable”. 

The ABA has also called for the removal of RLOs to all consumer loans offered by ADIs (i.e. removing the concept of ‘low limit credit contracts’ from the bill) and for the principle of “borrower responsibility” to be formalised into the explanatory memorandum, among other changes that seek to reduce an uneven playing field between banks and non-banks.

Consumer groups baulk at changes

Consumer groups have also released their response, coming out strongly against nearly all the consumer credit reforms proposals, including the broker-related changes.

A joint response from the Consumer Action Law Centre, Financial Rights Legal Centre, Financial Counselling Australia, Consumer Credit Law Services from WA, SA and ACT Inc, CHOICE, Care and Consumer Law Centre ACT, NILS Network of Tasmania, Indigenous Consumer Assistance Network, and Redfern Legal Centre has now been released.

Its main recommendation is to “abandon this legislation and retain responsible lending laws in their current form”.

It warns that removing the RLOs from the NCCP and instead relying on the incoming BID would “offer inadequate protection for borrowers compared to the current RLO regime”.

“The best interests duty alone will not provide an equivalent basis for claims by consumers to that which RLOs currently provides,” it states.

“The loss of RLOs for brokers is a real concern, particularly considering the failure of brokers to properly obtain and verify finances from loan applicants was a common issue that arose in the evidence before the financial services royal commission,” the consumer groups state.

“Removal of RLOs for brokers (even though they will have a best interests duty) creates a big risk that red flags of domestic violence or financial abuse will be missed by the broker and will not be seen at all by the lender.”

In conclusion, the groups’ submission reads: “We normally provide constructive feedback in these consultations, aimed at improving the impact of planned changes to policy and law. Unfortunately, we are unable to say anything positive about the government’s plans.

“The repeal of responsible lending obligations for almost all forms of consumer credit is the most short-sighted, poorly thought out policy proposed by a government in credit or financial services in recent memory. The draft materials are fundamentally defective, and no number of amendments can solve this.

“The legislation, if enacted, would:

• reduce people’s legal rights against lenders and brokers in relation to lending;
• reduce the incentives for lenders to comply with lending standards due to the removal of penalties for irresponsible lending;
• reduce requirements for lenders and brokers to check information on loan applications;
• dismantle the ASIC and APRA ‘twin peaks’ regulatory regime for bank lending.

“In short, it would greatly reduce the extent to which the National Consumer Credit Protection Act 2009 (Cth) (NCCP Act) does what its name suggests it does. This reform risks more people being sold unsuitable credit products that will do them and the economy long-term financial harm. This is not the solution to a recession – in fact, these measures are more likely to prolong the recession,” it states.

“Repealing the bulk of responsible lending provisions in a matter of months, with a paltry two-week consultation period on draft legislation, flies in the face of the lessons we learned in the GFC and is bad economic policy.”

[Related: BID extension ‘the right thing to do’: FBAA]