On 19 February 2021, Gerard Brody, CEO of Consumer Action Law Centre and Fiona Guthrie, CEO, Financial Counselling Australia spoke at the Senate Economics Legislation Committee hearing on the National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020.
Good morning and thank you for the opportunity to appear today on behalf of Consumer Action Law Centre.
Consumer Action made a joint submission to the Committee’s inquiry with 9 other non-for-profit community legal centres or consumer groups, including Financial Counselling Australia, which we appear with today.
Debt stemming from unaffordable consumer credit is one of the most common issues both our financial counsellors and lawyers assist people with – we hear these stories on a daily basis. These debts can arise from all forms of credit, and too often were unaffordable for the borrower from the start. We are therefore dismayed that the Government has put a Bill before Parliament that would dismantle existing responsible lending laws, which we fear will lead us to a debt disaster.
Responsible lending laws are a vital consumer protection that helps ensure lenders do not sign people up to unaffordable credit that they could never afford, or which does not meet their requirements and objectives.
As Commissioner Hayne said in his Royal Commission Interim Report, responsible lending laws are critical in “enabling the confident participation of consumers in a lending market in which both consumers and lenders trade fairly and in good faith”. And in his Final Report, the very first recommendation was that the law should not change and Commissioner Hayne also said “my conclusions about issues relating to the [credit law] can be summed up as ‘apply the law as it stands’”.
Importantly, the existing law requires lenders to undertake reasonable inquiries and reasonable steps when it comes to suitability assessments. This allows for flexibility in how the lenders approach their obligations. What is reasonable will often be affected by the particular nature and amount of the credit contract in issue.
Our written submission outlines how this Bill, if enacted, would reduce consumer rights and accountability for lenders. I won’t repeat these concerns here but am happy to answer questions about them.
The central aspect of the Government’s Bill is to remove individual suitability assessments, and only require lenders to have policies, processes and systems to address risks associated with lending decisions. I would like to share an example of what this looks like in practice. Our client, who we will call Ben, wasn’t protected by responsible lending laws under the current regime, and the outcomes for him were disastrous.
Ben was on the Disability Support Pension when the loan was provided. The loan was for a vehicle and was written up by the lenders as a business-purpose loan, meaning responsible lending protections didn’t apply. Ben did want to start a courier and ride share business, but in reality, the car has been used mostly for personal purposes. The loan repayments were unaffordable from the beginning, and Ben made a complaint to AFCA. AFCA was not able to consider responsible lending laws, but it did look at obligations on lenders outside of this – such as the obligation to be a diligent and prudent lender. AFCA determined this obligation required the lender to have systems, policies and processes in place, but that a detailed assessment of Ben’s financial situation was not required because the lender’s policy did not require this. As such, Ben was unsuccessful with his complaint and has now been referred to homelessness services due to the risk of homelessness associated with not being able to make payments on this debt.
If responsible lending laws are repealed, there will likely be the same outcomes for many consumer credit complaints.
Finally, I just want to touch on the provisions of the Bill relating to payday lending & consumer leases. I want to be clear that this Bill does not deliver on the Federal Governments own commitments to implement the reforms recommended by the 2016 Small Amount Credit Contracts Review.
That review made recommendations that were designed to promote financial inclusion for lower income and more vulnerable people who may be excluded from mainstream credit. The review report said that unaffordable credit arrangements do not provide for financial inclusion, and that both the cost of credit and repayments of credit needed to be affordable for financial inclusion to be achieved.
Unfortunately, the changes now proposed, compared to amendments previously considered by Parliament, fail on this objective of financial inclusion. The proposal is to double the 10% protected earnings amount cap recommended for each of payday loans and consumer leases for most consumers and to allow lenders an extra 20% establishment fee to be charged with consumer leases, on top of already generous mark ups. This will mean that these products will continue to be unaffordable for many, making it likely that people will continue to become trapped in a cycle of high-cost credit that is difficult to escape.
We implore the Committee to recommend that this Bill not be passed.
View the full hearing transcript here: https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/NCCPEcoRocovery/Public_Hearings