“We can't have a world in which, if a borrower can't repay the loan, it's always the bank's fault." This sentiment, as expressed by the Governor of the Reserve Bank of Australia last month, underpins major regulatory changes announced in Australia today.
In summary, the Australian consumer credit framework will be considerably simplified to ensure consumers and small businesses can get timely access to credit. At the same time, new restrictions on payday lending and consumer leases will provide greater protection for the most vulnerable borrowers.
The proposed changes, which are due to take effect early next year, will enable a considerably more flexible approach to lending than currently applies in New Zealand, and highlights by comparison the detailed and prescriptive approach envisaged under New Zealand's proposed responsible lending regulations.
Summary of proposed changes
The proposed Australian changes (outlined
here) are intended to address various defects with the current framework under the National Consumer Credit Protection Act 2009 (NCCPA). Specifically, the changes are aimed at easing the application of the “responsible lending obligations", which require creditors to make inquiries as to the suitability and affordability of loan products before extending credit. The government paper notes that:
The principles which underpin responsible lending obligations have been implemented in a way that is no longer fit for purpose and which risks slowing economic recovery.
The 'one-size-fits-all' and prescriptive nature of responsible lending obligations is
“burdensome and unnecessary," leading to delays in credit approvals and increasing borrowing costs.
Borrowers bear limited responsibility for providing incorrect or misleading information to lenders.
To address this, two key changes are proposed:
- Alleviating restrictions on mainstream lenders:
In assessing creditworthiness, lenders will be allowed to rely on the information provided by borrowers, unless there are reasonable grounds to suspect it is unreliable. The need for extensive verification procedures, which can often account for half the loan application process, will diminish. Borrowers will also be made more accountable for providing accurate information to inform lending decisions.
Authorised deposit-taking institutions (ADIs) such as banks, building societies and credit unions, will no longer be regulated by the Australian Securities and Investments Commission (ASIC). They will continue to be subject to lending standards set by the Australian Prudential Regulation Authority.
Where a proportion of an application for credit is for a business purpose, irrespective of the proportion, the new framework will not apply. The Treasury has separately explained that:
“Our changes will make it very clear that the prudential framework that's in place is not to apply to small business lending. We want small business to access lending."
“Small amount credit contracts" (for example, payday loans) and consumer leases, will remain subject to existing responsible lending obligations. New protections will also apply, including that:
Total payments under consumer leases will be capped at the base price of the goods, permitted delivery fees and permitted installation fees, multiplied by 4% per month (up to a maximum of 48 months).
Borrowers who receive 50% or more of their net income through social security payments must not be permitted to devote more than 10% of their net income to repayments on small amount credit contracts.
Debt management firms representing consumers must hold a credit licence and meet a 'fit and proper person' test.
The reforms will be implemented through changes to the NCCPA. The key changes will commence from March 2021, subject to the passing of legislation and a prior consultation phase.
Relevance for New Zealand
The Australian proposals note the particular importance of access to credit in the current COVID-19 climate, and describe a clear relationship between credit flows and economic recovery.
Those factors are similarly applicable in New Zealand. However, major reforms to New Zealand's Credit Contracts and Consumer Finance Act 2003 were enacted in December last year (though most of the major changes will not take effect until October 2021). Those changes – which are summarised
here – include new and enhanced responsible lending requirements, such as new obligations to make inquiries into the affordability and suitability of loans before making any “material changes" to the loan (i.e., beyond those inquiries made at the commencement of the lending). In addition, the Ministry of Business, Innovation and Employment is considering new regulations which would add additional complexity to the processes lenders must follow when issuing new loans, or making material changes to existing loans.
In that light, it is worth remembering that the introduction of responsible lending obligations in 2015 was intended in part to align New Zealand's consumer credit law with Australia. As Australia now seeks to wind back the resulting restrictions on the flow of credit, it remains to be seen whether the New Zealand government will do likewise.
If you have any questions about the matters raised in this article, please get in touch with the contacts listed, or your usual Bell Gully adviser.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.