Increased regulation on loans to consumers is not confined to Australia. Jon Denovan looks at the UK experience and draws some parallels.
The business editor of The London Times, Ian King dealt with credit regulation in his lead item in June 2013. His view point reflects much of what I hear in the marketplace. Below is an edited version of the article.
The law of unintended consequences is set to strike again. As of April next year, the regulator will have a mandate to stamp down quickly on undesirable lending practices or products. In addition, the consequences will be more severe when the rules are broken, with senior executives of lenders being made personally accountable for abuses.
So far so good. The impact of the new regulation regime was reviewed in a recent independent study in which more than 100 lenders were questioned. The report was not encouraging for those who struggle to borrow. The new regime will create very real risks to what is already fragile access to credit for low income customers. We conclude that there is a real risk that lenders’ efforts to minimise regulatory risk will perpetuate and harden the current crisis of credit supply to those on low incomes.
It is easy to see that winners from the new regulatory regime will be established lenders with a long track record in the field and a large compliance department.
But smaller providers of credit, such as a family owned firm that has been dealing with the same customers for years, may be more reluctant to continue doing so.
It all points to a market with less innovation and greater unmet demand for credit, particularly amongst those on low incomes.
Ring any bells?
There are certainly significant barriers to entry into a credit business in Australia, and significant ongoing compliance costs. These include an Australian Credit Licence, EDR membership, AML/CTF Program and registration, understanding the requirements of the NCCP Act and the National Credit Code, Privacy, and so on. These barriers are a significant hurdle for new entrants and small businesses.
However, I believe Australian responsible lending rules should not be blamed as a reason for declining credit to non-prime customers. A loan is only unsuitable if the borrower will be unable to repay or only able to repay with substantial hardship. That’s a pretty light test – substantial hardship. So, it is not responsible lending that should reduce availability of credit, but rather conservative or incorrect interpretations of the test and lack of competition especially from niche players.