Consumer Action Law Centre (Consumer Action) has published its submission to the Royal Commission into Misconduct in the Banking, Superannuation and Finance Sector in response to the consumer lending hearings (available here). A summary of the submission and recommendations for reform is set out below.
Summary of consumer lending submission
Consumer Action’s submission begins by discussing the themes that emerged during the consumer lending hearings, including:
- inadequate investment in systems and processes to identify problems and remediate customers;
- banks’ reluctance to cease practices which risk consumer harm absent any government or regulator intervention;
- lack of transparency with customers, the corporate regulator ASIC and the Commission;
- sales culture and incentives within banks and harmful conflicts of interest;
- promises and apologies by the banks failing to result in improved outcomes for customers; and
- the devastating impact of irresponsible lending on Australian consumers.
Consumer Action’s submission supports the recommendations of Rowena Orr QC, Senior Counsel Assisting the Commission, in relation to available findings of misconduct and conduct falling below community standards. Consumer Action submits that additional findings of misconduct are open to the Commissioner in the cases of Robert Regan, Irene Savidis and Nalini Thiruvangadam, who were represented by Consumer Action. These include:
- unconscionable conduct, including high pressure sales tactics used to push add-on insurance;
- breaches of responsible lending laws;
- breaches of general conduct obligations under the Corporations Act and National Consumer Credit Protection Act;
- inadequate dispute resolution and hardship procedures;
- inappropriate reliance on expense benchmarks; and
- failure to manage conflicts of interest created by commissions and incentives.
In relation to CBA personal overdrafts, and CBA and Westpac credit cards, Consumer Action submits that banks had inadequate policies to ensure compliance with responsible lending obligations, relied on defective automated processes to assess income and expenditure, and expected customers to repay expensive credit card debt over many years to maximise income from interest and fees.
In relation to industry practices and regulation more generally, Consumer Action submits that the evidence at the consumer lending hearings support additional findings that:
- banks have breached contracts with consumers;
- bank directors have breached directors’ duties;
- penalties for misconduct are inadequate;
- banks have engaged in unsuitable product design, sales and marketing practices;
- remedies available to consumers for irresponsible lending are inadequate;
- banks have failed to respond appropriately to financial hardship and consumer complaints;
- access to legal assistance and financial counselling, particularly for vulnerable consumers, is essential to achieving access to justice; and
- the effectiveness and ability of regulators should be improved by increasing ASIC powers and resources.
Recommendations for reform
Consumer Action will be pushing for various reforms to address the issues raised during the consumer lending hearings. These reforms include:
- Applying the proposed design and distribution obligations to credit to ensure credit products are designed and marketing in a way that is safe, suitable and fair.
- Introducing a best interests duty for mortgage brokers.
- Extending the Future of Financial Advice prohibition on conflicted remuneration to credit, particularly mortgage brokers, introducers and car yards. This should also include performance targets for staff and brokers, and threats of losing accreditation as a broker or distributor.
- Removing the ‘point of sale’ exemption for credit providers, and strengthen requirements for credit licensee supervision of intermediaries. This should include clarifying that brokers act as agents for the credit provider.
- Banning the sale of add-on insurance on credit cards and loans, except as a standalone product or under a delayed sales model where the customer proactively buys the insurance.
- Improving remedies for borrowers when a bank or intermediary breaches responsible lending laws. This should include debt waiver for both secured and unsecured loans, rather than just waivers of interest and fees.
- Requiring banks to review past practices to identify customers who have suffered loss as a result of irresponsible lending practices, and proactively compensate affected customers. Given the delays and limits to banks’ remediation programs in the past, we recommend the Australian Financial Complaints Authority administer these programs.
- Establishing a last-chance compensation scheme that extends to credit providers and credit assistance providers, to ensure that consumers who are victims of irresponsible lending are able to get redress.
- Providing ASIC with stronger powers (including Product Intervention Powers and an enhanced directions power for remediation programs and enforceable undertakings). Responsible lending compliance, particularly inappropriate reliance on household expenditure benchmarks and dispute resolution, should be an enforcement priority.
- Introducing a mandatory breach reporting regime for credit licensees and credit representatives.
- Strengthening ASIC’s licensing regime, including the process for appointing credit representatives.
- Introducing stronger civil, criminal and administrative penalties for irresponsible lending, which cannot be dismissed as simply the ‘cost of doing business’. This should include increased fines (including disgorgement of profits, and fines of up to 10% of turnover), senior management and director penalties, and disqualifications.
- Boosting funding for financial counsellors and community legal centres to help vulnerable consumers who are victims of irresponsible lending achieve access to justice.
Consumer Action is available for comment on its submissions to the Royal Commission. Consumer Action also has clients available for interviews.