Thursday, 25 February 2021
National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020; Second Reading
The bill before the House, the National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020, is urgent and necessary because the Gillard government's responsible lending provisions quite simply are now throttling businesses in this country. The intent behind these provisions in the wake of the global financial crisis were good. We must always ensure that lenders are careful not to give loans to people or businesses who manifestly cannot pay them back. However, in the context of the financial services royal commission and the rightly powerful enforcement messages coming from Australian regulators, the responsible lending provisions have become a millstone around the neck of this country. $34 billion a month in credit sits under these regulations. In a post-COVID world, we will need that credit to flow quickly and efficiently. As sound businesses in the worst affected sectors around the country continue to struggle and whilst unemployment remains elevated, we must drive growth and investment with a finance system that can adapt to changing circumstances.
Finance brokers in Fisher have described to me how the Gillard government's responsible lending laws took a noble concept and turned it into a bureaucratic nightmare. The Institute of Public Affairs have gone further. They've described responsible lending laws as:
… a disaster—drying up credit long before COVID-19 hit, and especially when credit is most needed.
In creating regulation to protect customers, we must ensure that the rules remain flexible enough to adapt to worsening circumstances and serve customers in harder times.
To be fair to the Gillard government, the responsible lending regime was not intended to be as onerous as it has become. Nor was it intended to apply to small business loans. However, in the strict regulatory environment that has understandably followed the financial services royal commission, the reality has become very different. Regulators and loan providers alike have become substantially overcautious, introducing requirements that go far beyond the basic legislative tests and spreading responsible lending practices to all kinds of credit. ANZ CEO Shayne Elliott, giving evidence to the House of Representatives Standing Committee on Economics, summed it up:
The only rational response … is to stay away from the line. So you just stay away from the line; you build a buffer … we have become more and more cautious.
This response is all the more understandable in the context of the conflicting advice that can be provided around this issue by the Australian Securities and Investments Commission, or ASIC, and the Australian Prudential Regulatory Authority, or APRA. While ASIC, for example, states that lenders do not need to conduct a full responsible lending assessment for individuals converting from a principal-and-interest loan to an interest-only loan, APRA requires a comprehensive review. According to Mr Elliot's evidence, the Australian Financial Complaints Authority takes its own third approach to responsible lending. Even Reserve Bank Governor Philip Lowe agreed that this system needs to be revised. As he said during the aforementioned inquiry:
I think the principles in the legislation are sound, but I think the way we've translated those principles into reality needs looking at again.
He went on:
On a portfolio basis, we want banks to make some loans that actually go bad, because if a bank never makes a loan that goes bad it means it's not extending enough credit.
We need legislative clarity to replace the increasingly complex guidance provided by regulators and to get the flow of credit moving again. I cannot stress how important this is for Australian businesses today. Of particular concern are the extreme practices which have been introduced by ASIC's guidance on lending obligations to verify the information that they are provided with. ASIC has introduced some 90 pages of guidance with detailed processes which go far beyond the original intention of this legislation and, in effect, force many lenders to examine every line on customers' bank statements. Finance brokers have come to me in absolute despair, as have people who have applied for home loans, telling me that the banks have been reviewing how much they are spending at a coffee shop each month and how much they're spending at Domino's or a pizza shop each month.
Applications for finance can now take eight weeks to assess, with more than half of that time spent trawling through existing expenses which tell us little or nothing about an individual's capacity to pay. Anyone who has ever taken out a mortgage knows that your lifestyle when you have the debt is very different to what you have experienced before. Justice Perram of the Federal Court expressed this truth very colourfully:
I may eat Wagyu beef every day washed down with the finest Shiraz but, if I really want my new home, I can make do on much more modest fare.
He went on:
Without additional information, I do not consider that it is possible to accept that the consumer's declared living expenses tell one anything about their capacity to meet repayments under the loan.
Yet it is exactly this kind of detail which currently makes the difference between whether or not a hardworking family can get a loan, and it can even impact the flow of much-needed credit to a local small business. In the process, given the number of new loans issued each year, this approach is undoubtedly adding tens of millions of dollars to the cost of getting finance at a time when it has never been more needed.
Madam Deputy Speaker Bird, I invite you and anybody else listening to this to think for a moment what happens to Australian businesses and Australians when they can't get finance—they can't buy a car, they can't buy a house, they can't buy earthmoving equipment and they can't buy that new piece of equipment for their business that might drive innovation. That's what happens when we overcomplicate this system. The bill before the House will cut that cost and get credit moving again, by removing the existing inflexible responsible-lending obligations from those larger lenders offering home and business loans that are in many cases already being regulated by APRA. In the case of non-bank lenders who are not, the bill will give the minister powers to determine new lending standards that will align with APRA's requirements.
Under the new standards, lenders large and small will still be required to maintain strong consumer protections, to run appropriate credit assessments and to examine their customers' capacity to pay. However, the bill will allow lenders to apply flexible processes that are appropriate to the borrower and the type of product offered. It will also allow them to rely on the information provided by consumers, unless there are reasonable grounds for believing it to be unreliable. This will remove the sword hanging over the heads of those who write loans and will streamline the approvals process to deliver faster and fairer outcomes for all Australians.
While freeing up the flow of credit and ensuring that lenders can support our economic recovery, the bill also strengthens the protections available to vulnerable consumers. Small-amount credit contracts, also called payday loans, are disproportionately taken out by low-income Australians. These individuals are at particular risk from unscrupulous lending practices and from the spirals of debt and fees that can too often result from their use. The bill before the House protects these consumers by prohibiting small-amount credit contract providers from charging monthly fees after a small-amount credit contract is discharged. It also requires that these payday loans have equal repayments and equal repayment intervals so that repayments are clear, predictable and upfront and do not increase unexpectedly.
Finally, the bill directly protects those most vulnerable Australians by prohibiting small-amount credit contract and consumer lease providers from providing credit to individuals who receive significant proportions of their income from Centrelink where the resulting repayments would consume a large amount of that income. Credit providers would be prohibited from writing any payday loans or consumer leases that require a person who gets 50 per cent or more of their income from Centrelink to allocate more than 20 per cent of that income to those repayments. In the case of individuals who receive less than 50 per cent of their income from Centrelink, there would be separate caps of 20 per cent for each of small-amount credit contracts and consumer leases.
In an ideal world these risky high-interest products would not be necessary. The tactics used to promote them should be carefully controlled. This bill thus helps protect vulnerable consumers from experiencing pressure to take out a payday loan, by prohibiting unsolicited invitations to current and former customers as well as door-to-door selling of consumer leases. These protections have another important aspect that I want to touch on briefly.
These measures to increase consumer safety around payday loans will be important in the context of the use of credit in gambling. Study after study tells us that gambling leads to increased cost-of-living pressures on hardworking families, increases crime, antisocial behaviour and family and domestic violence, and drives up drug and alcohol abuse. It is clearly harmful enough that the growth of online gambling today allows vulnerable Australians to wager and lose everything they own, anywhere, anytime, with just a few taps on a phone. What is worse is that, today, credit cards can be used to gamble online, leaving vulnerable problem gamblers with huge debts that they cannot afford to pay.
As I've said, I believe we need to close this loophole; however, it is not the only way that credit can be used to facilitate gambling. Payday loans provide a destructive fallback option for problem gamblers who bet and lose more than can afford ahead of their next pay cheque. The use of these loans can, if unchecked, effectively facilitating gambling harms through short-term credit. The welcome provisions in this bill, extending the responsible lending requirements for these loans and introducing new regulations to limit the proportion of income that those receiving income from Centrelink can spend on credit contracts, will help to minimise the likelihood of these gambling-fuelled debt spirals in the future. However, in the case of traditional lower-interest credit products, where bank staff are expected to run through an individual's account, line by line, to check whether they have a Netflix account and how much they spend on pizza, we have a problem.
It is frustrating enough when responsible Australians in good credit cannot get finance for a sofa, a mobile phone, a car, equipment or a house, but the current situation is much more serious than that. Hardworking Australians with no record of defaulting on credit are in some cases unable to get a mortgage to buy a home. Successful construction businesses in my electorate of Fisher cannot get a loan to buy much-needed equipment which will help them grow their business. In those sorts of circumstances, the current regulations, if left unamended, are a handbrake on our economy, on our businesses and on innovation. In an environment where we are all, collectively, trying to assist Australians and Australian businesses, giving them a leg-up so that we can claw our way out of this pandemic, we need to do everything we possibly can in this place to facilitate that economic growth. This bill will do just that, and I commend it to the House.