A closer look at proposed changes in responsible credit reform
We recently published an update regarding the Australian Government’s plan to remove the current responsible loan obligations from the National Consumer Credit Protection Act 2009 (Cth) (NCCPA), with the exception of certain higher risk products (Proposed reforms). You can read this update here, including our assessment of the impact the proposed reforms will have on lenders and other key industry players (including neo-banks and other fintechs seeking to disrupt consumer credit).
The government has since released a bill for the proposed reforms. The bill was published on November 4, 2020 and is open for consultation until November 20, 2020. In this update, we provide an overview of the bill for the proposed reforms and what lenders and other key industry players may need to start considering in order to prepare for their implementation.
What’s on offer
As expected, at a high level, the bill removes the NCCPA’s existing responsible lending obligations for credit contracts, except for low-value credit contracts (SACC), loans equivalent to SACCs by ADIs and consumer leases. For all other credits, the proposed reforms will remove responsible lending obligations for ADIs and instead impose lending standards for non-ADIs that reflect a new “risk-based” regulatory framework for consumer credit. .
ADIs are already subject to the prudential regulatory framework by virtue of the Banking Act 1959 (Cth) which is administered by the Australian Prudential Regulation Authority (APRA). The removal of the existing responsible lending obligations in the NCCPA for IDAs aims to ensure that IDAs are no longer subject to two frameworks.
The series of bills for the proposed reforms include:
NCCP Bill (Support the Economic Recovery) 2020 (Invoice);
NCCP Regulation (A new regulatory framework for the granting of consumer credit) 2020 (Regulations); and
Non-ADI credit standards (Standards).
An overview of the main changes
What your business needs to start considering
As the proposed reforms go into effect on March 1, 2021, lenders (especially non-ADI lenders) will need to start thinking about what updates need to be made (or can be made) to their systems and processes to ensure compliance. consistency and compliance with the proposed reforms, including the assessment criteria described in the standards.
While a key feature of the bill is to increase the borrower’s responsibility to provide adequate information to lenders, before a lender revises their current processes, they will need to consider the following:
The appropriate thresholds for determining whether or not a consumer can repay a loan without “significant difficulty” (including with reference to the circumstances prescribed in the Standards).
How the lender will determine if there are reasonable grounds to believe that the information provided by the consumer is reliable or not. This will likely require at least some level of assessment of the information provided and the circumstances under which it is provided.
The processes required by the lender to make reasonable inquiries regarding sources of repayment, consumer risk profiles and consumer spending (and to verify information provided by a third party). We expect that at least some existing industry practices will be maintained in order to meet these obligations, but a growing culture of compliance can change this over time.
The other obligations of the lender, including the general obligation to ensure that credit activities are carried out in an efficient, honest and fair manner and future design and distribution obligations. The latter in particular will require lenders to put in place processes to ensure that credit products are distributed to consumers within the defined target market.
The lender’s risk appetite and the level of investigation it needs to conduct to ensure that a loan matches that risk appetite (so that it does not incur or unnecessarily increase the risk appetite). credit risk).
Therefore, although the reforms are aimed at facilitating the provision of credit by lenders, some level of investigation by lenders will continue to be required. This may mean that at least in the short term, some lenders will take a conservative view.
However, the ability to rely more on information provided by consumers may be attractive to fintechs and other new entrants to the consumer credit space, including those who do not yet have an established responsible lending program ( because there is an opportunity, under the reform proposal, to put in place a more streamlined credit assessment process).
We anticipate that the proposed reforms will allow some lenders to gain a competitive advantage, providing a more streamlined credit assessment process and reducing the time required to assess and extend credit. On the other hand, we expect that many incumbent actors will not be able to ‘relax’ their current procedures to any significant extent (or simply choose not to), and we believe this will lead to to a continuation of the general theme of greater competition in this area.
The proposed reforms have already been critically analyzed in the media for the effect they may have from a consumer protection point of view, so the government will undoubtedly take them into account when discussing the issue. finalization of its consultation process.
Consultation on the proposed reforms is open until Friday, November 20, 2020. Once the consultation period has expired, the government will consider all submissions to finalize legislation on the proposed reforms.