In September, the Australian government announced plans to ‘simplify’ responsible lending laws, that it described as ‘overly prescriptive, complex, and unnecessarily onerous on customers’. The simplification was needed to get more money into the economy, it said.
Perhaps most surprisingly, the government proposes to remove certain responsible lending obligations from law, which will in turn result in significant changes to the Australian Securities and Investments Commission’s (ASIC) consumer credit lending guidance.
Lenders will be able to rely on information provided by borrowers unless there are ‘reasonable grounds’ for not doing so - so if borrowers say a loan is affordable, lenders could take their word for it
Where an application for credit is to any extent for a business purpose, responsible lending conditions will not apply
If this all sounds like quite an extreme proposal, it needs to be seen alongside a number of safeguards:
A ‘protected earnings limits’ for small loans and consumer leases, restricting the size of loans provided to customers on welfare benefits (small loans are up to AU$ 2,000 for up to a year)
A price cap on consumer leases that appears to restrict the annual hire cost to around 40% to 50% of the value of the asset
Existing principles-based lending standards set by the Australian banking regulator APRA will be extended to other lenders
The proposals are being hotly debated this week in the Australian Senate, the upper house of the Australian Parliament, and may well not be passed by the Parliament as they stand. Despite the proposed safeguards, the changes do seem to leave some significant gaps in consumer protection (e.g. for non-prime loans over the small loans AU$2,000 limit).
It is still impressive that a country that sits close to the UK in terms of consumer credit regulatory practices - there appears to be a ‘special relationship’ between the FCA and ASIC, with staff being seconded between the two - is taking a step back to ask some fundamental questions about whether its consumer credit regulatory system is working as effectively as it could.
Taking affordability as a case study, the FCA’s detailed rules (and FOS interpretations of them) are now fundamental to consumer credit lending in the UK. Robust affordability analysis is essential, but at the same time it remains an elusive goal.
Applicants are increasingly aware that they need to demonstrate affordability, so may choose to be selective in what they tell the lender. Despite the potential of open banking and some early success stories, there remain significant difficulties in reliably confirming affordability for non-prime customers.
Most fundamentally, the essence of non-prime lending is that it is there to serve customers who are not in a stable or comfortable financial situation. Ability to repay is inherently uncertain. Any affordability analysis that suggests otherwise is just an illusion.
This uncertainty is contributing to a situation where prime lenders, particularly banks, are progressively tightening their lending criteria. It leaves many more consumers unable to access prime rates and having to use non-prime finance at higher cost.
The used car market demonstrates this clearly. My analysis for Apex Insight’s latest used car finance report, published this month, shows that the non-prime lenders grew at an average rate of over 30% per year from 2015 to 2019. This was more than double the growth rate of the overall used car finance market.
There’s a similar trend in unsecured consumer credit lending, with Apex Insight’s latest report on non-prime consumer credit showing strong growth despite falls in payday lending and rent to buy.
The Australian proposals are not deregulation so much as a change in regulatory philosophy. Instead of micro-managing consumer credit lending conduct, the focus switches to putting in place hard limits on any harm that can be caused.
The proposed ‘protected earnings limit’ is a great example, capping the percentage of net income that can be spent on interest and other finance charges for those receiving benefits. Could a similar measure in the UK, enabled by emerging technology, help to protect the five million households receiving universal credit from unsuitable loans more effectively than existing creditworthiness and affordability conduct rules?
Initiatives like this can’t work without simplification. The price cap on payday loans in the UK, limiting total repayments to twice the amount borrowed, instantly removed the worst customer detriment from that sector. But a cacophony of other regulatory interventions around high cost loans has more or less killed off payday lending, a product that was valued by most of its users.
In combining important new consumer protections with simplification in other areas, The Australian proposals seem a bold attempt to improve regulatory outcomes.
For details of resources for the consumer finance market, please see my website page: https://www.assetfinancepolicy.co.uk/consumer-lending-market-analysis and for the asset finance market, please see: https://www.assetfinancepolicy.co.uk/asset-finance-market-analysis