To smooth the flow of consumer credit as part of its COVID-19 economic recovery strategy, the Australian Government is dismantling much of the responsible lending regime introduced by the Rudd Administration in 2009 in response to the Global Financial Crisis.
The New Zealand Government is currently driving at pace in the opposite direction – toward further regulation and tighter requirements. But it is accepted that, while this will strengthen consumer protections, it will also raise the cost of borrowing, and may limit the choices available to consumers.
So should New Zealand follow Australia’s lead?
Australia’s route recalculation
The changes, to be made through amendments to the National Consumer Credit Protection Act (the Credit Act), are intended to come into effect from 1 April 2021. They include:
- removing responsible lending obligations, including the need for extensive verification procedures, with the exception of “small amount credit contracts” (SACCs) and consumer leases
- allowing lenders to rely on information provided by borrowers when making credit assessments, unless there are reasonable grounds to suspect the information is unreliable
- replacing the current practice of ‘lender beware’ with a ‘borrower responsibility’ principle
- adopting key elements of the Australian Prudential Regulation Authority (APRA) lending standards for Authorised Deposit-taking Institutions (ADIs) and applying them to non-ADIs
- strengthening lender obligations for higher-risk products, including:
- new ‘protected earnings amounts’ for SACCs and consumer leases (these impose maximum net income-to-repayment ratios), and
- capping the total amount that can be charged under a consumer lease
- specifying that small business will not be subject to the new framework and will have fewer barriers to obtaining credit, and
- requiring debt management firms representing consumers to hold an Australian Credit Licence, which will include a ‘fit and proper person’ test and will require that they undertake their activities ‘efficiently, honestly and fairly’.
The need for extensive verification procedures will also be removed, simplifying and streamlining the process and reducing the barriers for borrowers to switch lenders, and to find better terms and rates for loans.
The case for reform was building before the pandemic struck. The Governor of the Reserve Bank of Australia, Philip Lowe, has since said that the proliferation of guidance following the introduction of the responsible lending principles in 2009 has swung the pendulum too far towards blaming banks for bad loans.
The increase in ‘borrower responsibility’ is intended to rebalance the risk allocation between borrower and lenders. The Australian Government considers the current settings have restricted credit flow, and that a “one size fits all” approach to responsible lending regulation is not appropriate. This reflects the argument that New Zealand banks and other lenders have made for many years – that placing additional constraints on all lenders has a chilling effect on lending decisions by responsible lenders, and ultimately drives more customers to borrow from less responsible lenders.
ADIs will still need to comply with APRA’s standards, and some of these standards will be imposed on non-ADIs as well. These standards include sound credit assessment and approval criteria.
There continues to be concern for consumers in relation to predatory lending, but the Australian Government believes this can be mitigated through increased regulation of higher-risk products, and by requiring debt management firms to be licensed. Following the Royal Commission, there is also a general expectation that lenders should apply a conduct approach to their activities that focuses on good outcomes for customers. Lenders are also obliged to be members of the Australian Financial Complaints Authority (AFCA), ensuing that customers have access to an effective dispute resolution mechanism.
Should New Zealand follow suit?
The New Zealand Government has been reviewing consumer credit law with a particular focus on cracking down on irresponsible lending practices, and is now part-way through implementation of its proposed reforms. The reform process has led to greater restrictions on high-cost loans, including a ‘cost of credit cap’, and stricter responsible lending obligations (including tougher penalties).
Further changes, to be implemented in October 2021, will include:
- new prescriptive requirements when lenders assess the affordability and suitability of loans
- new duties and personal liability for directors and senior managers of lenders
- ‘fit and proper’ certification requirements, and
- removing a lender’s ability to rely on information provided by the borrower – a completely opposite change to that proposed in Australia.
Compliance with these new requirements will come at great cost to New Zealand lenders, particularly in terms of IT (and other) system and process changes.
We must accept that consumer lending in New Zealand is dominated by Australian-owned banks, and that those banks’ level of investment in New Zealand are decided in Australia by reference to the relative returns on investment that can be achieved.
Imposing disproportionately large costs on lenders in New Zealand risks a further erosion of the major banks’ commitment to New Zealand. This would run completely against the call from the Reserve Bank of New Zealand for banks to support their customers at this time with continued credit flow, rather than “hunkering down”.
The New Zealand bank and deposit taker sector is also undergoing upheaval through the already well-advanced Reserve Bank Act Review Phase 2. This is set to include modernised standards for ‘licensed deposit takers’ and increase coordination between regulators such as the Reserve Bank and Commerce Commission, providing alternative avenues for consumer protection that reduce the importance of the responsible lending obligations.
Given all of these factors, we believe New Zealand should consider following Australia’s lead in loosening (rather than actively increasing) the responsible lending obligations at this time. With the right safeguards in place, this could achieve a sensible rebalancing of risk and responsibility in the current economic environment.