Supervision of the Responsible Lending Regimes: Theory, Evidence, Analysis and Reforms*
| DOI | 10.1177/0067205X1804600202 |
| Date | 01 June 2018 |
| Published date | 01 June 2018 |
| Subject Matter | Article |
SUPERVISION OF THE RESPONSIBLE LENDING REGIMES:
THEORY, EVIDENCE, ANALYSIS AND REFORMS*
Gill North**and Therese Wilson***
ABSTRACT
National responsible lending regimes have operated in Australia since 2009, with the
stated aims to encourage prudent lending, curtail undesirable market practices, and
impose sanctions for irresponsible lending and leasing. This article outlines a study of
the supervision of the responsible lending rules by the Australian Securities and
Investments Commission (ASIC) from 2014 to mid-2017. The study finds that the
Commission proactively engaged with lenders, encouraged tighter lending standards,
and sought or imposed severe penalties for egregious conduct. Further, the Commission
strategically targeted credit products commonly acknowledged as the riskiest or most
material from a borrower’s perspective, such as small amount credit contracts, interest
only home loans, and car loa ns. Despite these positive findings, however, many
households are heavily indebted and large segments of the community and the nation
are highly susceptible to future harm. In this environment, we question the timeliness
and sufficiency of the Commission’s interventions and responses, and predict further
litigation that tests the boundaries of the responsible lending rules. Moving forward, we
call for more systematic supervision of responsible lending risks, practices and
exposures and propose modest reforms that require lenders to better inform and engage
with consumers about the risks of elevated levels of debt.
I INTRODUCTION
Australia is a fortunate country in many ways and has benefited greatly from a period
of economic prosperity lasting more than 25 years.
1
Much of this prosperity has been
funded by credit, with loan growth over this period well above levels of economic
* Readers should note that this article was accepted for publication in February 2018, prior to
the start of the Royal Commission into Misconduct in the Banking, Superannuation and
Financial Services Industry.
** Professorial Research Fellow, Law School, Deakin University; Adjunct Associate Professor,
Law School, University of Western Australia.
*** Associate Professor, Law School, Griffith University.
1
Digital Finance Analytics and the Centre for Commercial Law and Regulatory Studies at
Monash University, ‘The Stressed Finance Landscape Data Analysis’ (Report, October 2015);
Ben Phillips and Matthew Taylor, ‘Buy Now and Pay Later: Household Debt in Australia’
(Income and Wealth Report Issue 38, AMP.NATSEM, December 2015) 6.
194 Federal Law Review Volume 46
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activity.
2
The provision of credit to households is a two-edged sword though. When
used appropriately, credit can assist consumers to purchase goods and services or to
leverage the acquisition of assets for investment purposes. However, as the amount of
outstanding consumer credit continues to expand, concerns around the exposure of the
lending institutions, and more especially their borrowers, are intensifying.
3
Issues
concerning responsible lending ultimately compound at a household level,
4
with
household debt to disposable income now at record levels.
5
As debt levels grow,
households can find themselves in a position of increasing financial stress and can fall
into a debt spiral if they do not act quickly to regain control of their finances. In extreme
cases where debt is not managed appropriately, borrowers can end up in a position of
financial exclusion
6
or bankruptcy,
7
and can lose their personal assets, including the
family home and car. Given these significant risks, consumers of credit are afforded
protections under the National Consumer Credit Protection Act 2009 (Cth) (NCCP).
The NCCP includes, among its consumer credit protections, responsible lending
regimes that apply to all credit providers in Australia.
8
These regimes impose an
obligation on credit providers and credit assistance providers to ensure a loan is suitable
for the borrower (or more precisely, that it is not unsuitable).
9
The key factor that these
2
Reserve Bank of Australia (RBA), Chart Pack (August 2017) 9. See also Gill North, ‘Small
Amount Credit Contract Reforms in Australia: Household Survey Evidence and Analysis’
(2016) 27 Journal of Banking and Finance Law and Practice 203, 208.
3
See Philip Lowe, ‘Household Debt, Housing Prices and Resilience’ (Speech delivered at
Economic Society of Australia (QLD) Business Lunch, Brisbane, 4 May 2017); Gill North, ‘The
Australian House Party has been Glorious—But the Hangover May Be Severe: Reforms to
Mitigate Some of the Risks’ in Ron Levy et al (eds), New Directions for Law in Australia: Essays
in Contemporary Law Reform (ANU Press, 2017).
4
North, ‘Small Amount Credit Contract Reforms in Australia’, above n 2, 203.
5
Ibid 203; RBA, Statistical Tables: E2 Household Finances—Selected Ratios (21 December
2017).
6
See Commonwealth, Strategies for Reducing Reliance on High-cost, Short-term, Small Amount
Lending, Discussion Paper (April 2012) 3–4. See also Chris Connolly, Measuring Financial
Exclusion in Australia (Report, Centre for Social Impact, University of New South Wales, 2014)
5, 9; Kristy Muir, Axelle Marjolin and Sarah Adams, Eight Years on the Fringe: What Has It
Meant To Be Severely or Fully Financially Excluded in Australia? (Report, Centre for Social
Impact, University of New South Wales, 2015) 5.
7
Bankruptcy Act 1966 (Cth). See Australian Financial Security Authority, Non-Business Related
Causes of Personal Insolvencies 2016–17 <https://www.afsa.gov.au/statistics/causes-non-
business-related>. These statistics show that excessive use of credit is now the most common
non-business related cause of personal insolvencies in Australia. See also Paul Ali et al, ‘The
Incidence and Causes of Personal Bankruptcy in Australia’ (2016) 4 JASSA—Finsia Journal of
Applied Finance 27.
8
The responsible lending provisions are a sub-set of the various laws designed to protect
consumers of credit.
9
National Consumer Credit Protection Act 2009 (Cth) (‘NCCP’) pts 3.1–3.2. Section 8 of the NCCP
states that a person provides credit assistance to a consumer if, by dealing directly with the
consumer or the consumer’s agent in the course of, as part of, or incidentally to, a business
carried on in this jurisdiction by the person or another person, the person: (a) suggests that
the consumer apply for a particular credit contract with a particular credit provider; or (b)
suggests that the consumer apply for an increase to the credit limit of a particular credit
contract with a particular credit provider; or (c) suggests that the consumer remain in a
particular credit contract with a particular credit provider; or (d) assists the consumer to
2018 Supervision of the Responsible Lending Regimes 195
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credit licensees must consider when determining whether a loan is suitable is the ability
of the borrower to repay the loan. This suitability assessment must be verified by
gathering information that confirms the financial capacity of the consumer to meet the
relevant loan commitments.
10
Lenders must also document the purposes of a loan
because the proposed credit must satisfy the objectives and requirements of the
borrower.
11
ASIC is required to supervise and enforce these provisions.
12
The stated
aims of the responsible lending rules are to encourage prudent lending and introduce
appropriate standards of conduct,
13
to curtail undesirable market practices,
14
and to
impose sanctions for irresponsible lending and leasing.
15
These principles are
acknowledged internationally and supervisory bodies confirm the importance of robust
national frameworks governing responsible lending, especially to consumers.
16
Active monitoring and enforcement of the responsible lending regimes in Australia
is essential to address issues arising from irresponsible lending, consumer over-
indebtedness, and financial stability concerns, but extant literature on this critical area
of law is scarce. Accordingly, this article outlines a study that examines and critiques the
supervision of the responsible lending rules by ASIC from the beginning of 2014 to the
end of June 2017, including enforcement actions, relevant legal theory, and the longer-
term effects. The aim of the study is to provide a nuanced picture of the theory, law and
practice of responsible lending in Australia, with an intentional focus on the current and
prospective risks and exposures of borrowers (rather than the status of lending entities).
A search of ASIC’s website revealed 93 actions initiated by ASIC in response to
alleged breaches of the responsible lending provisions. Nearly 90 per cent of those
actions involved small amount credit contracts (SACCs), car loans, and standard home
loans,
17
with the remaining actions concerning overdraft facilities and credit cards. To
apply for a particular credit contract with a particular credit provider; or (e) assists the
consumer to apply for an increase to the credit limit of a particular credit contract with a
particular credit provider; or (f) suggests that the consumer apply for a particular consumer
lease with a particular lessor; or (g) suggests that the consumer remain in a particular
consumer lease with a particular lessor; or (h) assists the consumer to apply for a particular
consumer lease with a particular lessor.
10
NCCP ss 115–16, 128–32.
11
Ibid.
12
The Australian Prudential Regulation Authority (APRA) is responsible for the prudential
supervision of authorised deposit institutions in Australia. The actions taken by APRA
around lending standards are reviewed in a companion article because the roles and
responsibilities of the Australian Securities and Investments Commission (ASIC) and APRA
differ markedly. See Gill North and Therese Wilson, ‘P rudential Supervision of Residential
Property Lending: Has APRA Been Asleep at the Wheel?’ (Working Paper, May 2018).
13
Explanatory Memorandum, National Consumer Credit Protection Bill 2009 (Cth) [3.16].
14
Ibid [3.11].
15
Ibid [3.16].
16
See, eg, James Eyers, ‘APRA to Ramp Up Scrutiny of Bank Lending Practices’, The Australian
Financial Review (online), 8 September 2017 <http://www.afr.com/x/gydmfb>; Bank of
England, ‘Financial Stability Report’ (Report No 42, Bank of England, November 2017) 13–
20.
17
For the purposes of this article, the term ‘standard home loan’ includes mortgages on
residential properties for the purposes of owner occupation and or investment but excludes
reverse mortgages. Reverse mortgages are a specialised and complex form of loan and
represent only a tiny share of outstanding residential property loans in Australia.
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