Weakening responsible lending laws is a bad look for the federal government. It has the hallmarks of political opportunism, with Morrison and Frydenberg using the Covid crisis to be a friend of business at the expense of consumers.
Commissioner Kenneth Hayne delivered 76 recommendations to reform the industry in February 2019. Almost two years on, the government has yet to implement 44 of those and turned its back on five key reforms – including curbing irresponsible lending practices.
The Covid crisis can explain some part of its tardiness. It cannot explain the decision to weaken protections for the financial health and welfare of Australian consumers.
The axing of responsible lending obligations (RLOs) under the National Consumer Credit Protection Act 2009 is particularly egregious. The government has also rejected Hayne’s recommendations on commission payments for mortgage brokers.
Instead, it appears to be banking on market forces and voluntary codes of conduct to protect financially unsophisticated borrowers. This is the triumph of ideology and vested interests over logic and evidence.
Plenty of credit
The case for removing responsible lending obligations rests on a number of unsupported assertions.
First, Treasurer Josh Frydenberg has argued lending needs be made easier to “kickstart” economic growth in these troubled times. The responsible lending obligations, he has said, increase the cost and time involved in making lending decisions.
But it is difficult to discern evidence in public statistics that responsible lending obligations have adversely affected loan growth or the cost of household-sector borrowing.
It is true lending for investment properties has plummeted, but that reflects changes in banks’ risk assessment and pricing of such loans. Owner-occupied lending has remained relatively strong and appears poised for further growth, likely raising existing house prices as much as stimulating new construction.
Personal lending has been declining for some years. But alternative ways to access personal credit, such as mortgage offset and redraw accounts, have grown.
New forms of “personal credit” such as Buy Now Pay Later and payday lending also appear to be growing strongly. These have generally skirted responsible lending requirements and arguably call for strengthening, not winding back, consumer protection laws.
Confusing regulatory roles
The second invalid assertion is that oversight of bank lending by the Australian Prudential Regulation Authority can substitute for explicit responsible lending laws enforced by the Australian Securities and Investments Commission.
This misconstrues APRA’s mandate and expertise, which is focused on institutional safety, not on consumer protection. APRA should be interested in the specifics of a very large loan that may affect the lender’s financial strength. It cannot be expected to examine thousands of smaller loans.
Fears no longer relevant
The third assertion is that responsible lending regulations have made lenders “increasingly risk averse and overly conservative”, out of fear of incurring onerous penalties.
That might have had some relevance in the past. But not so much since ASIC’s failed “Wagyu and Shiraz” case against Westpac in the Federal Court in 2020. The regulator accused the bank of breaching its responsible lending obligations by approving home loans using an automated estimate of applicants’ annual living expenses (known as the Household Expenditure Measure) rather than examining actual expenditure.
The Federal Court rejected ASIC’s argument – with the case acquiring its name due to the colourful analogy Justice Nye Perram used in his judgment:
I may eat Wagyu beef everyday washed down with the finest Shiraz but, if I really want my new home, I can make do on much more modest fare.
ASIC issued revised lending regulations in December 2019. It would have been more seemly for the government to have allowed more time to see how these changed regulations were working before abolishing them.
Loan processing costs should be falling
A fourth assertion is the excessive cost of gathering and processing borrower information. But the development of “open banking” is enabling fintechs to harvest data of consenting borrowers and provide information at lower cost than ever before.
Relying on codes of conduct is an act of faith
Finally, it is claimed that reforming industry codes of conduct, incorporating responsible lending objectives and making them legally enforceable, removes the need for separate lending laws.
But past experience with “self-regulation” does not promote confidence this approach will work.
Review preferable to removal
A case might be made that the consumer protection regulatory regime has become unduly complex over time and warrants a full-scale review with simplification an objective.
But simplification is not the same as abandonment. There was a reason the government found itself under so much pressure to call the royal commission; and a reason Commissioner Hayne made those 76 recommendations.
This is a bad look for the federal government. It has the hallmarks of political opportunism, using the COVID crisis to be a friend of business at the expense of consumers.
This article was republished from The Conversation. Read the original here.
Kevin Davis is Emeritus Professor of Finance at University of Melbourne (having retired at end 2020).
Comments
15 responses to “Ideology triumphs over evidence: Morrison government drops the ball on banking reform”
There are bigger issues to worry about that this. So politicians are hypocritical,cynical and perform backflips- who would have thought. At the end of the day people have got to take responsibility for their own actions and there own debts. And if all else fails, get a class action and an enquiry together and we will do it all over again!
You neglect the power of the “Hidden Hand” of Smithian fame!
People are sheep and are led by others who exploit them.
Nonetheless, we have a wealth beyond the dreams of those who lived a century ago!
Viva exploitation!
I am Leftist but I am not paternalistic.
My apologies to those who, like me, sympathise and empathise with victims. Nevertheless the longevity (two millennia and counting) of the latin expression ‘caveat emptor’ itself underwrites this truth: that it is, in the first and subsequent instance, for the buyer of loans to beware of the sellers of loans.
If that means that our community needs to better enable ordinary people (like me!) to access relevant, informed, truthful – and dispassionate – financial advice, let’s do it!
“I am Leftist but I am not paternalistic.” Really? That’s an oxymoron if ever I saw one.
When I was in the Industry many years ago, all the TPC (as it was known then in the early 1990’s) practices and regulations that were put in place for lending and ‘consumer protection’ have been removed by the lobby groups who had the most to gain/hide, (Banks, Mortgage Brokers, Accountants and Lawyers the very negative gearing industry that has commoditised what has always been a basic
necessity) not to mention that people are easily misled by various layers of misrepresentation along the way.
Appeal to the lowest characteristics of all concerned, throw out the rule book, the laws, the many conflicts of interest, the means by which people earn a living and constrain their ability to educate themselves and you have what we, as a whole society, are now experiencing.
That is the very experience of many people that have been badly served all round, and that is what the Hayne Royal Commission found, and it’s still happening to this very day, aided and abetted by our current ‘health’ challenges of both people and the planet, by the very people that have been elected to act in our best interests.
Truth gets down to interpretation, and there’s no vaccination for malfeasance, maladministration or outright lies.
And this is my imagination? Not likely https://thenewdaily.com.au/news/politics/2021/01/26/michael-pascoe-inequality-australia/?
Connoisseurs of the long Con may be aware of the disaster that befell the Irish banking system in 2008?
They had the official Regulator whipping banks into 30% annual growth in lending in 2007. The prime ministers, Taoshigh, I believe that to be the plural, had been granted unlimited overdraft facilities from the 1980s onwards. Economics was taught at Leaving Cert level, while economic history was abolished in the 1980s. Government had decided to direct inevitable tax evasion into domestic banks by not policing the non resident bank accounts of the banks. Eventually, that amounted to 2MMM GBP. 2 Billion. Applying a 10x multiplier that supported 20 billions in lending.
How much do our leaders have in debt to the banks?
The Banking system has always been predatory in its application, one only has to go back to the days of “The Warburgs” a pre-eminent Jewish Banking Dynasty, a family whom enjoyed immense wealth and power, moving from Hitler ‘s Germany to America from Israel to Europe and beyond. Not surprising Treasurer Frydenberg and Morrison have used the unfettered power that COVID-19 has bestowed upon them, enabling them to protect the interest of the of the “Money Lenders and the Land Lords” a terminology used in the bible.
The Kohanim, co dwellers with Judah, in Judea, are the bankers. They often pose as “Jewish”. They may be Hebrew, but they were the priests, the Sadducees and Pharises. They controlled the Temple the place where metals, money, was exchanged. They were and are the web of correspondent bankers that span the world. Consider the Parsi. Aka Pharisee! Useful, until they become conspirators in controlling the world. The “Jewes” are blamed by Jack the Ripper and others because they rejected priests and instead consult Rabbis, wise men.
Names like Kahn, Cohn, Khan, Cohen are all examples of Kohanim families, not necessarily involved now in banking.
Bankers lend. It is what they do and they get bonuses to do so. Eventually, demand drops, due to covid, lack of population increases and overwhelming debt as people stop churning housing.
Housing is a need not an investment vehicle. We have Superannuation for that. Inevitably, overlending destroys banks making nationalization the only way out.
Australia is perhaps the last banker garden to approach this, but a cursory look at Ireland and the UK shows what happens.
Consumers need protection from marketing by banks and media that housing always increases.
We need a short, sharp shock!
Patrick – sorry, I can’t help but remark that real estate has been – and has been seen to be – the single safest form of investment, especially for ordinary people, since at least WWII. And politicians and their actions are deep testimony to this truth.
Politicians know that they will suffer if house prices drop. So they help blow a bubble in housing. Inflation is the politicians friend as taxes rise and bracket creep is a silent rise in taxes. So they may do9le out moeny to voters. This all fails once growth ceases. Australia depends on migration for growth, else we decline in population as children are too costly
Until it isn’t. Look at Ireland? Banking failures across the board and consequient house price collapses.
Real estate is not an investment. Over 300 years, it merely keeps pace with inflation. There are bad investments and very good investments. Housing is not one. However, it does create debt and that makes inflation, so house owners are told housing is a good investment. short term it is. But with all bubbles, the pain comes near the end, when buying at the top.
In recent decades one’s home has been promoted via the ‘propserity gospel’ as an investment vehicle, financial commodity and borrowers being described as a ‘savvy property investors’; as opposed to an ASX balanced investment portfolio which would outdo property over time.
However, the majority of Australian adults lack basic financial literacy, especially round the most pivotal issue i.e. nominal price vs. real value (including all costs), while many believe ‘property always goes up’; supported in Australia by some of the most indebted households globally…..
Nationally, importing capital, although presently cheap, with a margin added by banks for lending to those entering or within the property market (with many incentives) is opportunity cost for more productive, innovative and sustainable investments.
Property investment is not sustainable, why? The Australian permanent population, which dominates the housing market, is due to hit a mother lode of demographic change i.e. ‘the big die off’ starting in 2025 with the lower end of the baby boomer bubble retiring, downsizing and upper end departing…..
This (lack of) action by the government on the Hayne’s report, and particularly by Frydenberg and Morrison, shows once again a government totally bereft of morals and concern for ordinary people. Only their rich bank mates matter. They simply cannot be trusted. Hayne’s mistrust and disdain towards Frydenberg when he handed over his report turns out to be well justified.
Such are our LNP politicians these days.
Bankers NEVER learn: https://en.wikipedia.org wiki/List_of_banking_crises
https://en.wikipedia.org/wiki/Australian_banking_crisis_of_1893
Having such a heuristic treasurer as Frydenburg, the recommendations were never going to fly!
It’s also instructive of just how fiscally murderous the LNP is, with Capitalism being the fatal flaw that it is and had always been, just keep pouring more fuel on the fire.
Capitalism is based on savings and productivity. Banking and lending money to speculators merely creates distortion in the value of savings and is the antithesis of capitalism.
Those who control the bond market control banks and governments.