Source document: https://docs-lawep.s3.us-east-2.amazonaws.com/1697633037474.pdf (Australia)
NATIONAL CONSUMER CREDIT PROTECTION AMENDMENT (SUPPORTING ECONOMIC RECOVERY) BILL 2020 SUBMISSION TO THE SENATE STANDING COMMITTEE ON ECONOMICS (ECONOMICS LEGISLATION COMMITTEE) 3 February 2021 PUBLIC National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020Submission 97 INTRODUCTION Overview of comments 1.
ANZ thanks the Senate Economics Legislation Committee (Committee) for the opportunity to comment on the National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 (Bill).

The Bill concerns amendments, discussed below, to the National Consumer Credit Protection Act 2009 (Cth) (Credit Act).

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2.

We welcome the Government’s intent of simplifying Australia’s consumer credit framework through the Bill and associated reforms.1 Currently, the credit assessment processes of authorised deposit-taking institutions (ADIs) are regulated under two primary regimes; the standards of the Australian Prudential Regulation Authority (APRA) and the responsible lending obligations of the Credit Act.
If enacted, we anticipate that the reforms will give ADIs a single framework under which they must assess whether a borrower can repay a loan.

Under this framework, we anticipate that ADIs would have a degree of flexibility in how they design their systems, processes and procedures to assess whether borrowers can afford to repay a loan.

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ANZ also supports strong protections for borrowers.
We welcome the fact that the Government’s proposed changes leave in place and, in one regard, enhance some important consumer protections.

These protections include the design and distribution obligations (DDO), the ability of borrowers to bring complaints to the Australian Financial Complaints Authority (AFCA) against member lenders and, for customers of signatory banks, the Banking Code of Practice (BCOP).
The enhancement concerns the extension of the best interest duty beyond mortgage brokers to all credit brokers.

These protections, together with the proposed new loan assessment requirements for ADIs and non-ADIs, mean that an objective of loan affordability remains at the centre of Australia’s consumer credit framework.

We think this is critical to ensure borrowers are adequately protected and the financial system is sound over the long term.

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These points concerning the credit assessment requirements and consumer protections are set out further below.

1 These associated reforms are those consulted on by Treasury in November 2020 and include the proposed promulgation of non-ADI credit standards under the Credit Act: https://treasury.gov.au/consultation/c2020-124502 2 National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020Submission 97 CREDIT ASSESSMENT REQUIREMENTS 5.
The Bill proposes to:  Limit the application of the responsible lending obligations in Part 3-2 of the Credit Act to low limit credit contracts;  Remove from the Credit Act any credit assessment obligations for lending to small businesses (other obligations, such as disclosure requirements, would remain for mixed-use lending);  Leave in place the credit risk management requirements for ADIs set by APRA (these are primarily set out in the new Prudential Standard APS 220 Credit Risk Management (APS 220) and elaborated upon in draft Prudential Practice Guide APG 220 Credit Risk Management (APG 220) and for residential mortgages in Prudential Practice Guide APG 223 Residential Mortgage Lending (APG 223));2 and  Expand the mortgage broker best interest duty to all credit brokers.
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In addition, APRA has consulted on amending APS 220 to add a sentence to require an ADI to assess an individual’s capacity to repay credit without substantial hardship.3 We support the introduction of this sentence; it will help provide clarity about the standards within APS 220 that underpin strong credit assessments.4 We understand that the Government would also introduce, through a legislative instrument, requirements on non- ADI lenders that are based on the requirements that APRA imposes on ADI lenders.
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If the Bill is enacted, it would mean that ADIs will lend primarily according to the APRA standards rather than both these standards and the responsible lending obligations in the Credit Act.

Other requirements, such as the obligations under clauses 49 and 50 of the BCOP and the DDO in Part 7.8A of the Corporations Act 2001 (Cth) (Corporations Act) will continue to apply.
Clause 50 of BCOP states that signatory banks will exercise the care and skill of a diligent and prudent banker by complying with the law.

While Part 3-2 of the Credit Act would no longer be ‘law’ that applies to signatory banks, APS 220 is a legislative instrument and could constitute ‘law’ for the purposes of clause 50.

2 We note that APS 220 Credit Quality (dated 7 September 2020) currently applies to ADIs.

The draft APG 220 is available at this link.


3 The consultative letter is available at this link.

The sentence would be added to paragraph 41 of APS 220.

4 We note APRA’s view in its consultative letter dated 9 December 2020 that the obligation ‘…is consistent with APRA’s existing requirements, and will not impose additional burden on ADIs.’ 3 National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020Submission 97 Lending to individuals 8.
Based on the versions of APS 220, APG 220 and APG 223 cited above, if the Bill is enacted, we would anticipate that the functional credit assessment requirements on ADIs when lending to individuals at a system and process level will be largely analogous to what they are today.

There would, however, be some key differences between today’s regime and the one created by the Bill.

As discussed below, these include potential flexibility in how lenders approach checking customer’s historical expenses.
This could help customers to the extent that lenders do not need to second guess a customer’s stated expenses.

What bank lenders would still need to do 9.

If the Bill is enacted, ADIs will need to assess credit applications under APRA’s standards and guidance.
Paragraph 40 of APS 220 requires that ADIs ‘…must undertake a comprehensive assessment of a borrower’s credit risk which would consider and be proportionate to the nature, type and size of the exposure.’ ADIs would be required to assess the credit risk of borrowers primarily on the strength of their repayment capacity.

They would not be permitted to place undue reliance on the security that a borrower provides as a substitute for a comprehensive credit assessment.5 10.
This will mean that, for individual borrowers under APS 220, an ADI’s credit assessment systems and processes must:  Capacity to repay – Assess a borrower’s capacity to repay without substantial hardship (as noted above, this requirement is proposed to be inserted into paragraph 41 of APS 220);  Income – Consider, where relevant, the source of repayment, including making reasonable inquiries and taking reasonable steps to verify income or cash flows;6  Indebtedness – Consider, where relevant, the current risk profile of the borrower, including making reasonable inquiries and taking reasonable steps to verify commitments and total indebtedness;7  Repayment history – Consider, where relevant, the borrower’s repayment history and capacity;8 5 Paragraph 41 of APS 220.
6 Paragraph 44(a) of APS 220.

7 Paragraph 44(b) of APS 220.
4 National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020Submission 97  Expenses – Consider, where relevant, the borrower’s expenses, including collecting reasonable estimates (and not use expense benchmarks as a substitute for making reasonable enquiries);9  See below concerning other relevant elements of the APRA framework relevant to this component of the assessment process, including in respect of third parties; and  Loan requirements, objectives and needs – Consider, where relevant, the purpose of the loan.10 o We note that, under the DDO, lenders would need to take the prescribed steps concerning aligning the borrower with a loan that matches their likely objectives, financial situation and needs.
11.

If the Bill is enacted, we would anticipate that ADI lenders may adopt credit assessment processes that are proportionate to the risk posed by the lending arrangement to both the borrower and the bank.

We note that proposed paragraph 42 of APG 220 states the criteria in APS 220 are: …principles-based and intended to be applied in a manner proportionate to the nature, type and size of the exposure.

This provides for a scalable and flexible approach to credit assessment.
Lenders may be able to calibrate their processes for different lending products, as appropriate.

This could allow lenders flexibility in how they design those assessment processes.

Key changes made by the Bill 12.

Some of the important substantive credit assessment differences between the current framework and the framework that would be created by the Bill could be the following.
 Expense verification – While lenders will still need to consider, where relevant, a borrower’s expenses, the requirement to verify these may not exist in the same form.11 8 Paragraph 44(c) of APS 220.

Please note that this assessment would need to occur under various scenarios such an increase in interest rates or a decrease in income or cash flows.

9 Paragraph 44(d) of APS 220.

10 Paragraph 44(a) of APS 220.


The requirement is to consider ‘…the purpose and structure of the exposure and sources of repayment…’ (emphasis added).

11 Section 130(1)(c) of the Credit Act currently requires that lenders must ‘…take reasonable steps to verify the consumer’s financial situation’.
5 National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020Submission 97 o ADI lenders would be expected by APG 220 and APG 223 to take the higher of a borrower’s declared expenses and a benchmark expense level that is scaled for their income.

o Paragraph 42 of APG 220 states that ‘[a]n ADI would be expected to…take reasonable steps to verify a borrower’s financial situation’.

Paragraph 50 of APG 220 also observes that benchmarks are not effective verification.
However, APG 220 does not specifically counsel ADIs to verify expenses as it does for existing debt commitments.

o We note that paragraph 38 of APG 223 indicates that lenders would typically ‘assess and verify a borrower’s…expenses…’.

However, this observation about typical actions does not appear to be stated as a requirement.
o Paragraph 38 of APS 220 does, however, require ADIs to ‘…have prudent policies and processes to ensure that reasonable inquiries have been made and reasonable steps have been taken to verify the accuracy and completeness of all relevant borrower information provided by…’ third parties.
 Deemed knowledge – Under the Credit Act, lenders are deemed to know information that would have been obtained through reasonable inquiries and verification.12 This may mean in some cases that lenders must ensure that they take reasonable steps to uncover relevant information about a borrower even if the information is not provided by them.

What is reasonable can differ with the circumstances.

We cannot yet see a parallel requirement in the APRA standards.
o Removing this ‘deemed knowledge’ element of the credit assessment regulatory framework may mean that lenders are able to place more reliance on inquiries into expenses and a customer’s statement of these.

In effect, lenders may not need to second-guess a borrower’s stated expenses, unless it is unreasonable to rely on them.

12 This expectation is created by section 131(4) of the Credit Act.
The revised Explanatory Memorandum for the Credit Act explained, at paragraph 3.159, the effect of the section in this regard (emphasis added): The second is information that the licensee would have had reason to believe if the required reasonable steps to verify had in fact occurred, the intent of this part of the proposed provision is to ensure that credit providers, in making their assessments regarding unsuitability, are required to take into consideration information that they should have become aware of if the reasonable steps to verify had been taken.
Information that does not satisfy these requirements (that is, information that is not reasonably believed to be true) must not be taken into account.

6 National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020Submission 97  Loan purpose steps – The steps that lenders need to take to ensure the loan aligns with the borrower’s purpose may be different.
o As a lender, the obligation under the current Credit Act is to ensure that the loan is aligned to the borrower’s requirements and objectives.13 o If the Bill is enacted, lenders would still have an obligation under the DDO to take prescribed steps to ensure that it is likely the customer is in the target market for the credit product based on their objectives, financial situation and needs.

o Where a loan is originated through a broker, the best interest duty will also apply to that broker.
 System level requirements – As discussed further below, the focus of APS 220 appears to be on the ADI’s credit approval and assessment process rather than on obligations that apply to each credit contract.

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There would also obviously be a change in which regulatory agency supervises the credit assessment processes of ADIs.
At present, both the Australian Securities and Investments Commission (ASIC) and APRA do this; under the proposed framework, APRA would be primary regulatory agency using the powers and means of the Banking Act 1959 (Cth) (Banking Act).

ASIC would retain its responsibilities and powers in respect of the Credit Act more broadly (e.g.

section 47 concerning the general conduct obligations of credit licensees).

Lending to small businesses 14.


The Bill will also make clear that the responsible lending obligations do not apply to small business lending.

We note that clause 49 and 51 of the BCOP will continue to apply to lending by BCOP signatory banks.

In addition, paragraph 45 of APS 220 will apply to lending for businesses.

These obligations will continue to require ADIs to assess the business’s historical and future cash flows, sources of repayment, repayment history and capacity and business expertise.
However, based on the draft non-ADI credit standards released in November 2020, it is not clear that equivalent obligations will apply to non-ADI lenders.

13 See section 131(2)(b) of the Credit Act requiring an assessment that a loan is unsuitable if the loan will not meet the consumer’s requirements or objectives.

7 National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020Submission 97 CONSUMER PROTECTIONS 15.
We are mindful that consumer protections need to be adequate to ensure that borrowers and the public have confidence and trust in lenders and the financial system.

Some of the consumer protections that we understand will remain if the Bill is enacted include:  BCOP – Borrowers could still bring an action or complaint to AFCA that a signatory bank had failed to comply with the requirement in clause 49 of BCOP to exercise the care and skill of a prudent and diligent banker.
This protection will not apply to dealings with non-signatory ADIs or non-ADI lenders.
 DDO – When it commences, the DDO will require that lenders:  Design loan products that are likely to be consistent with the likely objectives, financial situation and needs of the borrowers for whom they are intended;  Take ‘reasonable steps’ that are reasonably likely to result in loan products reaching borrowers in the target market defined by the lender; and  Monitor outcomes and review loan products so that borrowers are receiving loans that are likely to be consistent with their likely objectives, financial situation and needs.
Borrowers will be able to bring actions for certain breaches of the DDO requirements.14  AFCA – We understand that AFCA will retain its ability to resolve complaints in a way that is fair in all the circumstances having regard to legal principles, applicable industry codes or guidance, good industry practice and previous AFCA determinations.15 AFCA can accept complaints concerning the assessment of credit risk posed by a borrower when the complaint is about ‘maladministration’ in lending (or a variation of credit contract as a result of the complainant being in financial hardship).16 14 ASIC’s Regulatory Guide 256 states, at page 78, that ‘[i]f a consumer suffers loss or damage due to an entity’s breach of the design and distribution obligations in s994B, 994C, 994D, 994E(1) or (3), they can seek to recover that loss or damage in court by taking action against the entity.’ 15 See rule A.13.1 of the Australian Financial Complaints Authority (AFCA) Complaint Resolution Scheme Rules (AFCA Rules).
16 See rule C.1.3 a) (i) of the AFCA Rules.

Under the AFCA Rules, ‘maladministration’ means ‘…an act or omission contrary to or not in accordance with a duty or obligation owed at law or pursuant to the terms (express or implied) of the contract between the Financial Firm and the Complainant’.
8 National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020Submission 97  Unjust transactions – Section 76 of the National Credit Code would allow a court to reopen an unjust transaction on application of the debtor / mortgagor (or ASIC) in the public interest and taking into account all the circumstances of the case.17 A court may consider various factors including ‘…whether at the time the contract, mortgage or guarantee was entered into or changed, the credit provider knew, or could have ascertained by reasonable inquiry at the time, that the debtor could not pay in accordance with its terms or not without substantial hardship’ (see section 76(2)(l)).
As interpreted by the courts to date, it may be that unaffordability alone would not be sufficient to warrant a court reopening the contract as unjust.18  Unfair or dishonest transactions – Section 180A of the Credit Act would allow a court to make certain orders where a person provided a credit service and engaged in conduct that was ‘unfair or dishonest’ which resulted in the plaintiff entering into a contract that they would not have otherwise entered into (this section applies to actions by credit service providers who are not also the providers of credit e.g.
brokers).

 Credit card protections – The additional protections with respect to credit cards, including those that the Government has recently legislated will be largely unaffected.

While the Credit Act’s responsible lending obligations will no longer apply to credit cards, BCOP signatory banks will continue to assess a borrower’s ability to repay a credit card within a three-year period.
 Best interest duty – The mortgage broker best interest duty will require mortgage brokers to act in the best interests of borrowers and will be extended to all credit brokers.

This is an important protection given the high percentage of home loans that are originated through mortgage brokers.

We also note that brokers will fall under the DDO as they will be involved in the distribution of loans.
 Product intervention power – The product intervention power in Pt 6-7A of the Credit Act allows ASIC to intervene in relation to a credit product (or class of credit products) when it is satisfied that the credit product (or class of credit products) has resulted, will result or is likely to result in significant consumer detriment.
 BEAR/FAR – Treasury has consulted on amending the Banking Executive Accountability Regime so that it becomes the Financial Accountability Regime 17 Under section 79 of the National Credit Code, ASIC would also have standing to bring actions under section 76 if ASIC considers it to be in the public interest.

ASIC’s application could apply to any one or more credit contracts and may apply to all or any class of credit contracts entered into by a credit provider during a specific period.
18 See, for example, Bank of Queensland v Edwards & Anor [2017] QSC 191, Barker v GE Mortgages Solutions Limited [2013] QCA 137 and Australian Society Group Financial Services (NSW) Ltd v Bogan [1989] ASC 55-938.

9 National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020Submission 97 (FAR).19 Under the FAR, there could be a new ‘product responsibility’.
This was a recommendation of the Royal Commission and would be a responsibility ‘…within each ADI for all steps in the design, delivery and maintenance of all products offered to customers and any necessary remediation for customers in respect of any of those products.’20 The interaction of this responsibility with lending conduct may become clearer once the draft FAR law is released.

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As noted above, one key substantive change if the Bill is enacted would be that the credit assessment obligations on lenders would shift from being contract-specific to obligations that largely apply at the level of the lender’s systems and processes.
It appears this would mean that borrowers may primarily have recourse through AFCA against lenders for a lending decision that they disagree with when the lender either has inadequate systems and processes, or perhaps when the lender does not apply those systems and processes to that lending decision.

With the proposed amendments to the APRA standards, those systems must ensure that the lender assesses whether the borrower can repay the loan without substantial hardship.
ENDS 19 Treasury Implementing Royal Commission Recommendations 3.9, 4.12, 6.6, 6.7 and 6.8 Financial Accountability Regime – Proposal Paper (22 January 2020).

20 Ibid, 5.

10 National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020Submission 97