23 October 2020

SUBJECT: Responsible lending.
NORMAN SWAN, HOST: The Government has set itself on a collision course with its coalition partners over its plans to axe responsible lending laws a key recommendation of the Banking Royal Commission. The laws were introduced by the Rudd Government in the wake of the global financial crisis to curb predatory lending practices. Last month National Australia Bank copped a $257m fine after admitting to misleading and deceptive conduct. But the Morrison government wants to strip banking regulators of their powers to pursue the big banks, saying the laws are a brake on credit. Stephen Jones is the Shadow Assistant Treasurer, welcome to Breakfast.
STEPHEN JONES, SHADOW ASSISTANT TREASURER: Norman, good to be with you now.
SWAN: Now, I mean you can say this is not just some falling on the part of the Federal Cabinet. I mean, the Reserve Bank Governor Philip Lowe has warned that the pendulum has probably swung a bit too far to blame the bank if a loan goes bad. I mean that's a pretty clear indication that maybe these laws have gone too far.
JONES: There is no evidence that these laws of operated as a brake on credit. And you can only take the evidence that the Treasury gave to the Royal Commission not 18 months ago where they said there's been no material impairment on credit flow as a result of these laws. And as recently as this week well-respected bank analysts have come out and said the laws are working. There's nothing in the laws which are impairing the flow of credit. So you've got to scratch your head and wonder why the government is doing this, when you look at the background of why the laws were introduced in the wake of the global financial crisis where we saw a sales-driven, commission-backed culture inside banks competing amongst each other for market share, selling loans to people who couldn't afford them. And brought down not only the US banking system, but led to a financial contagion around the world. You couldn't think of a worse time than at the tail end of an economic recession for us to be introducing a watering down of consumer protection laws of this sort.
SWAN: What about the contrary argument, which is that, you know, Philip Lowe has said on a portfolio basis, we want banks to make some laws that actually go bad because if a bank never makes a loan that goes bad, it means it's not extending enough credit. You know, and also the responsibility on the other side of the borrower to repay the loan. It's not always the bank's fault. I mean, how do you balance this out?
JONES: A couple of points to make there. Firstly, these laws only apply to consumer credit. So they don’t apply to business and small business lending. Only to household credit. And of course households individuals have got responsibilities themselves to ensure that when they're taking out a loan that you know, they're providing honest information to the bank, of course, they've got responsibilities and nothing in these laws removes the responsibility from the individual. But what history has shown us, is that when people and individuals are in stress, they don't always make the best decisions. And what we've also seen is that the competition and the sales- and commission-driven culture within the financial system itself, and particularly within the banks, has driven basically unsound selling practices where in the absence of these sort of consumer protection laws, it was the sell a loan, get the commission, rush onto the next one culture that led to all sorts of people getting into hot water in the financial system getting it hot work water itself.
SWAN:  While you see these are consumer loans, there are allegations it’s made it more complicated for small business with individuals forced to put their family homes on the line because of the demands for a director guarantees.
JONES: Look at the principal purpose of the loan is for a business, purpose than the laws don't impact. And we've always been quite clear with the Government that we're willing to look at things that will make it easier for small businesses to get the credit that they need. But we don't want to see anyone getting in over their head and taking on credit that they can't afford.
And I guess another thing to go to your to your point, Norman, a whole heap of these products, people might think a loan’s a loan’s are loans a loan. The fact is they're not. And some of these products are very complex credit products, and we saw in Australia that terrible episode where we saw sales force out there selling foreign-denominated loans to farmers and other who really didn't understand the product they were getting into. And as the as the exchange rate change. They found themselves in credit products that they couldn't understand and they couldn't afford. So it's not as straightforward as some might like to say it is. We're always willing to work with the Government to ensure we've got the flow of credit to businesses that need it. But we don't need to be watering down consumer protection at the same time. And that's exactly what the government's proposal is going to do.
SWAN:  One of the proposals is that ASIC, the Australian Securities and Investments Commission, is that the responsibility transfers to APRA, the Australian Prudential Regulation Authority. And you’d have to say that ASIC has had a mixed results when it's brought cases against banks. It failed against Westpac for so-called “Shiraz and Wagyu” case, and the upheld by the Court of Appeal. Does it make sense to move it from ASIC to APRA?
JONES: Well no it doesn’t. Peter Costello under Howard government set up a twin peaks financial regulation system that had ASIC and APRA performing two very different functions. APRA is a prudential regulator, is ensuring that the system the banks as a whole are working in a responsible way, managing credit in the flow of credit in a responsible way. ASIC has a very different function. If you like it's the cop on the beat. It is the conduct regulator. And it's the one that goes out and chases down a breaches of the law, and poor behaviour by individuals or individual banks. The Royal Commission found that they both had a pretty uneven history over the last decade or so. As a result of some of those Royal Commission findings, we've seen ASIC adopt a “why not litigate?” approach, which has obviously offended many. But I think we've got a better result. I think we've got a system which is on its on its toes, ensuring that it's obeying the law and doing the right thing.  I think the transfer of functions is a bad one.
SWAN: So no reform is needed? It's all hunky-dory?
JONES: I think, like I said at the beginning, we're always willing to work with the Government to ensure that a flow of credit to business is working. But we don't want to water down these critical consumer protections that are in place at the moment. We've seen the result of what happens here in Australia and around the world when we do that. We think this decision by the Government to remove the Consumer Protections in these responsible lending laws is wrongheaded. It's wrong, and it will lead to terrible results.
SWAN: Stephen Jones. Thanks for joining us.