The Senate Economics Legislation Committee has paved the way for substantial changes to Australia's responsible lending laws.

In a report handed down on 12 March 2021 the Committee recommended that the Federal Government's National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 be passed. The Committee did not recommend any substantial changes to the Bill.

The Bill (summarised here) forms a key part of the Government's response as the economy recovers from the COVID-19 crisis. The reform was identified in the Explanatory Memorandum as a path to improve the efficient flow of credit by removing duplicative or excessive regulatory barriers that increase the time and cost involved in obtaining credit approval.

In supporting the Bill the Committee noted that it was concerned by evidence that the regulatory framework has resulted in consumers being unable to access credit in a timely manner to buy their first home or to obtain a grant under the HomeBuilder scheme. The Committee is also concerned by the invasive and onerous nature of the inquiry and verifications processes required under the existing responsible lending obligations.

The current responsible laws are contained in the National Consumer Credit Protection Act 2009 and are implemented through the complex lens of ASIC's Regulatory Guide 209: Responsible Lending Conduct . The regulatory guide is seen by some as overly prescriptive and complex.

The Committee appears to have placed significant weight on the support of industry bodies. The Australian Banking Association (ABA) supported the Bill in submissions that observed that ……

'This reform means less time and paperwork for borrowers, not less scrutiny for lenders. It means less reliance on obscure discretionary spending during the loan assessment and more attention on the factors that count, like income expenses and debt. Banks know from decades of experience that Australians are reliable and responsible borrowers. They adjust their lifestyle to repay their loans, and when things go wrong it is rarely, if ever, due to spending habits but more to major life events that impact income, such as job loss, illness or divorce. That's why this change makes sense'.

The submissions of the Customer Owned Banking Association (COBA) were also referenced in the Committees findings. These observed that the current responsible lending obligations are

'specific and detailed and contraventions are subject to very significant penalties; that the regime imposes prescriptive procedural obligations on the credit provider; that it is an elaborate statutory regime; and, finally, that identifying the proper construction of key provisions is not straightforward, and civil penalty provisions should be interpreted on the basis that it is expected that the obligation imposed would have been identified clearly and unambiguously'.

The reforms approved by the Committee have been the subject of some controversy over recent months, particularly given that they are contrary to one of the key recommendations of the Hayne Royal Commission that the National Consumer Credit Protection Act should not be amended to alter the obligation assess unsuitability.

The Committee received submissions that called for the retention of the existing responsible lending laws from representatives of bodies such as CHOICE and the Consumer Law Action Centre.

Not surprisingly, the Committee was not unanimous. Dissenting views expressed by both Labour Senators and the Australian Greens, both of whom referred to the recommendations made by Commissioner Hayne not to alter the existing responsible lending laws.

In recommending the passage of the Bill the Senate Economics Legislation Committee expressed its view that

'these regulatory changes will not undermine consumer protections and the principle of "responsible lending" is deeply embedded in Australia's broader regulatory framework, which credit providers and credit assistance providers must still operate within and comply with'.

This part of the Committee's findings gives some pause for thought. The removal of the current responsible lending laws is not seen by the Committee as the end of the obligations of credit providers to lend responsibly but perhaps a measure that will allow more balanced approaches to apply in their place.

However, seen in this light, it seems likely that other elements of the regulatory landscape will now become more important if as recommended by the Committee the existing statutory loan unsuitability test in the NCCP Act falls away. For APRA regulated entities APRA prudential standards relating to credit risk will be even more critical. There may also be an increased role for industry codes of conduct such as those applying to members of the ABA and COBA. Further it should not be forgotten that providers of regulated credit will also need to comply with the design and distribution obligations which are due to take effect on October 5.