17 Mar 2016
Extension of responsible lending obligations recommended by Senate Committee
by Narelle Smythe, Morgan Clarke
A Senate committee report into agribusiness managed investment schemes has recommended discussions on extending the application of existing responsible lending obligations to credit provided for investment purposes.
On Friday, 11 March 2016 the Senate Standing Committee on Economics tabled its report into agribusiness managed investment schemes, Bitter harvest. Twenty-four recommendations were made. They included the following two recommendations which are not limited to lending for the purposes of investment in agribusiness managed investment schemes, but extend to credit for investment purposes:
1. the Federal Government to initiate discussions with the States and Territories on taking measures that would lead to the introduction of national legislation that would bring credit provided predominantly for investment purposes under the current responsible lending obligations in the National Consumer Credit Protection Act. The Committee recommended the provisions have two primary objectives in respect of retail investors:
oblige the credit provider (including finance companies, brokers and credit assistance providers) to exercise care, due diligence and prudence in providing or arranging credit for investment purposes; and
ensure that the investor is fully aware of the loan arrangements and understands the consequences should the investment underperform or fail.
2. the Banking Code of Practice include an undertaking that banks adhere to responsible lending practices when providing finance to a retail investor to invest. The Committee provides that this responsibility would apply when the lender is providing finance either directly or through a third entity (such as a financing arm of a Responsible Entity).
The Committee noted that many of the retail investors in the schemes were first-time investors and not highly literate in financial matters. It further noted particular concerns about consumers being encouraged to take out "full recourse" loans and evidence of investors signing over a power of attorney to their adviser to arrange and refinance loans. In making the responsible lending recommendation, the Committee indicated that the responsible lending obligations should apply equally to the promoters, advisers and lenders involved in providing funds for investment purposes.
While the Committee considered there were gaps identified in the regulatory framework around credit laws, it also noted the need for better consumer education and called on the Government to take steps to ensure consumers are better informed about borrowing to invest and are more adequately protected from unsuitable investment credit contracts. It also:
- acknowledged that the investor must take responsibility for their own decisions; and
- limited its recommendation to the extension of the responsible lending obligations under the Act, rather than the extension of the entirety of the Act and the National Credit Code to credit provided predominantly for investment purposes (which would include, for example, the licensing requirements under the Act).
The Committee noted in the report that it understood a referral of legislative power from the States and Territories would be required to extend the application of the responsible lending obligations, hence the recommendation made to the Federal Government was to initiate discussions with the States and Territories on the taking of relevant measures. The National Consumer Credit Protection Amendment (Credit Reform Phase 2) Bill 2012 was noted by the Committee as commencing the consultation process and providing an ideal starting point for reform.
Time-frames were not set or proposed by the Committee in relation to the recommendations. However, the report noted the Committee's belief that "this situation needs to be remedied" and "the Government should give priority to reforming this area of investment credit".
The recommendation to extend responsible lending to investment loans is in addition to the recommendation made in the Committee's report Interest rates and informed choice in the Australian credit card market tabled on 18 December 2015 which was to amend responsible lending obligations, as they apply to credit card lending, so that serviceability is assessed on the basis of the borrower's ability to pay off their debt over a reasonable period.
As a result, expect the focus to be on responsible lending and its ambit into the future.