Financial Services Regulation

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Unravelled: The ins and out (goings) of responsible lending

13 November 2018

Written by Overseas Practitioner Craig Dewar

Very broadly speaking, current legislation relating to responsible lending says that a person must not recommend or make an 'unsuitable' loan to a consumer – an unsuitable loan being one that either does not meet the consumer's requirements and objectives, or imposes repayment obligations that they are unable to meet without substantial hardship. To comply with the legislation, the person must make 'reasonable inquiries about the consumer's requirements and objectives'. They must also make 'reasonable inquiries about the consumer's financial situation' and take 'reasonable steps to verify' the financial information given by the consumer.1

The evidence, according to the Commissioner in his Interim Report, shows the banks had often only considered the credit risk of the borrower, rather than the other things the legislation requires them to consider. It also shows that while the banks had taken steps to verify a borrower's income, they had not taken enough (or any) steps to verify the borrower's expenditure, relying far too heavily on general statistical benchmarks and the customer's own declarations.

One of the banks had argued that the complexity in verifying expenditure, as well as the costs involved, outweighed the value.

The Commissioner makes short shrift of this argument, suggesting that verification was often a simple exercise, since the bank (at least with respect to its own customers) already had the applicant's bank statements and financial history at hand and therefore could readily check the outgoings from their account.

But it is easy to see how the method of verifying expenditure the Commissioner says is required by law would indeed be a costly and complicated exercise. The Commissioner expects the banks in large part to ignore what the customer says about his or her expenses (as the information may not be credible), and to check each and every one of their bank statements for a true picture.

You might say, so what? That is what the law requires (or ought to require) so that customers are protected from banks and themselves. And, for the most part, we agree.

Self-evidently, however, banks lend money so as to recover the money lent, to recover their costs and expenses in operating their business, and to make a profit. If any one of these objectives cannot be met, or are – through overregulation – systemically put at risk, there will be no credit.

Some balancing of interests is, therefore, necessary, particularly at any stage that changes are to be made to legislation arising from the Commissioner's findings.

As credit is an important ingredient in growing an economy, regulation must be cost-effective, it must be proportionate to the harm it seeks to address, and must take into consideration other imperatives (in addition to customer protection) such as competition and efficiency.

No doubt, the Commissioner believes these things too.

  1. Section 117 of the National Consumer Credit Protection Act 2009.

Other articles in this edition of Unravelled

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AFCA's powers and obligations – 'systemic issues'
In his Interim Report, Commissioner Hayne rejected claims that misconduct in the financial services sector was the fault of 'a few bad apples' and did not raise 'broader or systemic concerns'. Commissioner Hayne's comments made me think about AFCA and what it can do (and must do) about 'systemic issues' identified in the course of handling complaints. Read more>>

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