Following on from the announcement by Government in late September 2020 of proposed changes to responsible lending laws, Federal Treasury has now released draft legislation for consultation.
Given the fact that the proposed rollback of responsible lending laws is proposed to take effect from 1 March 2021, the consultation period is necessarily short – ending on 20 November 2020.
The legislative package comprises:
- An amending bill – National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 (updated)
- Draft Regulations – National Consumer Credit Protection Amendment (A New Regulatory Framework for the Provision of Consumer Credit) Regulations 2020
- Draft Standards – National Consumer Credit Protection (Non ADI Credit Standards) Determination 2020
- Explanatory Memoranda for the legislative package
The draft standards only apply to non–ADI credit providers and are designed to bring non-ADI credit providers into alignment with the requirements imposed on ADIs by the Australian Prudential Regulatory Authority (APRA)
The explanatory memorandum for the Bill contains a useful summary of the effect of the proposed legislative changes – extracted below. One thing clear is that further obligations will be cast upon credit assistants and that the coverage of the best interests duty will extend to all credit assistants, not just mortgage brokers. It was never clear why the best interests duty was limited to mortgage brokers.
The explanatory memorandum provides the following comparison between the existing and the proposed laws in connection with responsible lending obligations (RLOs)
|New law||Current law|
|Responsible lending obligations|
|Chapter 3 RLOs will only apply to SACCs, SACC-equivalent loans provided by ADIs and consumer leases beginning on 1 March 2021. This is the case for both credit providers and credit assistance providers.||Chapter 3 RLOs apply to all consumer credit contracts, consumer leases and SACCs. This is the case for both credit providers and credit assistance providers.|
|ADIs are not subject to Chapter 3 RLOs (other than for SACC-equivalent loans) beginning on 1 March 2021.
Existing prudential standards continue to apply.
|ADIs are subject to Chapter 3 RLOs and a prudential standards regime set and enforced by APRA under the Banking Act 1959.|
|Non-ADI credit conduct is not subject to Chapter 3 RLOs from 1 March 2021 (this conduct does not include SACCs and consumer leases).
Non-ADI credit conduct is subject to non-ADI credit standards made by legislative instrument. These will be similar to those imposed on ADIs.
|Non-ADIs are subject to Chapter 3 RLOs.|
|Best interests obligations|
|A best interests duty and obligation to resolve conflicts of interest in the consumer’s favour apply to all credit assistance providers.||A best interests duty and obligation to resolve conflicts of interest in the consumer’s favour is legislated to apply to mortgage brokers only.|
|New non-ADI credit standard|
|The Minister is able to make non-ADI credit standards, by way of legislative instrument, specifying requirements for a credit licensee’s systems, policies and processes relating to certain non-ADI credit conduct.||No equivalent.|
The net effect is that ADIs will follow APRA requirements and Non–ADIs will follow an equivalent standard set out in the National Consumer Credit Protection (Non-ADI Credit Standards) Determination 2020 as amended from time to time.
Importantly, the relevant Standards will be able to be changed and amended easily – without parliamentary oversight. ASICs Regulatory Guide 209 can also be changed without oversight by Parliament, so in practice there might be little difference in approaches.
While prescriptive responsible lending obligations are being rolled back it will not be open slather. There is a move towards a principles-based approach to lending rather than the current process driven approach. The explanatory memorandum explains the situation thus:
1.19 Schedule 1 to the Bill will amend the Credit Act to allow the Minister to make standards, by way of legislative instrument, specifying requirements for a credit licensee’s systems, policies and processes relating to certain non-ADI credit conduct.
1.20 These requirements will be system level obligations rather than focusing on individual loans engaged in by licensees. This reflects the Government’s decision to move away from a prescriptive framework for lenders and borrowers and will support risk-based lending that is attuned to the needs and circumstances of the borrower and credit product.
1.49 These standards will require licensees to implement adequate systems, policies and processes relating to non ADI credit conduct rather than impose individual conduct level obligations. This enables credit assessment to move away from a prescriptive framework for lenders and borrowers and will support risk-based lending that is attuned to the needs and circumstances of the borrower and credit product. These standards are appropriately adopted from the APRA standards to maximise alignment between the ADI and non-ADI regimes.
Additionally, the credit providers will have to conduct a credit assessment (draft standards 8 and 9) and will still be required to give a form of analysis/assessment to borrowers on request (draft standard 13) and may be required to give one as a matter of course, which is consistent with broker requirements.
For credit assistants there is commentary and worked examples in the explanatory memorandum about how they should satisfy their “best interests” duty obligations at paragraphs 1.23 to 1.37.
The extent to which there will be alignment between the obligations imposed upon ADIs and non-ADIs in connection with lending policies and processes remains to be seen. APRA’s approach in Prudential Standard APS 220 (Credit Risk Management) and Prudential Practice Guide APG 2239 (Residential Mortgage Lending) is always likely to be more nuanced and flexible than proposed legislation governing non ADIs.
The changes are major and upend the status quo in a significant way. Further updates will follow as developments occur.