07 Oct ISN’T RESPONSIBLE LENDING, JUST GOOD BUSINESS?
The Global Financial Crisis of 2007-2008 highlighted excessive risk taking by major banks in the US, which resulted with the Rudd Government reviewing our banks a lot closer and implemented new Responsible Lending laws in 2009. The commencement of the National Consumer Credit Protection Act 2009 changed the lending framework. The NCCP was designed to protect consumers from entering into bad loans and stamp out predatory lending practices.
These new changes saw banks become parents for their clients as these changes determined that borrowers could not be responsible for their borrowing decisions and their parents (like all good parents of children under the age of 18) would need to make decisions for them. The battle lines between lenders and borrowers were drawn when the regulations were implemented.
The Australian community, however, were not happy with how the banks were performing and like any good child, they dobbed the banks in and requested a full inquiry into the industry. The well reported inquiry identified cultural issues with these large institutions exhibiting an avarice culture, which drove banks to not follow responsible lending practices.
Despite the responsible lending laws and the findings of the Royal Banking Commission, I really believe that the Australian community did not want banks to be their parents but rather, they expected banks to be more collaborative with their lending.
Prior to the Royal Banking Commission, ASIC akin to Atticus Finch in to Kill a Mockingbird was able to mediate outcomes however, the findings from the Royal Banking Commission on ASIC was that their approach was not hard enough on the banks.
So, ASIC became Dath Vadar and decided to take Westpac to Court in the well-known ‘wagyu and shiraz’ case over their interpretation on how they assess whether a loan is “not unsuitable” for a borrower by applying the well-known HEM index to make their assessment. The decision handed down by the judge was not supportive of Darth Vadar’s case and like any good dark force character it went back for round 2. Perhaps the findings from the Royal Banking Commission and the newly introduced industry funding gave ASIC their additional superpowers to defeat the bank but that wasn’t the case.
Responsible Lending, Royal Commission and “wagyu and shiraz” are words many professionals in the banking industry would rather stop talking about. The findings from the Royal Banking Commission and the regulator taking on Westpac; are enough to strike fear on any lender writing any new loans.
However, despite the findings and the community expectations on banks, Josh Frydenberg our Federal Treasurer announced further reforms to Responsible Lending to promote consumer confidence with banks expediting loan applications and writing more business. This on face value has set back 11 years of regulatory reform and put shockwaves again through the industry as journalist John Kehoe for the Australian Financial Review reported on 24 September 2020 the industry will shift from “lender beware” to “buyer beware”.
Responsible lending over the last 24 months has truly disrupted the banking industry. Why is it the case we have a set of community values where it is a case of ‘lender beware’ vs ‘buyer beware’?
Isn’t lending responsibly just simply good business? Isn’t borrowing responsibly simply just good for financial wellbeing?
Shouldn’t lenders and borrowers be trusted partners in any financing arrangement? Aren’t we all trying to achieve the same thing?
The changes proposed by Treasurer Josh Frydenberg should be seen as a positive change, not to enable banks to recommence their bad habits but rather to remove the battle line between lenders and borrowers to change the dynamic from being a parent / child relationship back to an affiliative relationship where we are all striving to achieve the same goal of financial independence.