'Disaster written all over it': Watering down lending laws will see banks trample customers for profit, consumer advocates warn

(Paul Rovere, SMH)
  • Consumer advocates have sounded the alarm over the Morrison government’s planned changes to wind back responsible lending laws.
  • Some slammed it as “a short-sighted fix”, putting individuals at risk of becoming over-leveraged in a “flailing economy”.
  • Others questioned whether the government had not learnt the lessons of the Hayne Royal Commission, in which banks acknowledged they prioritised credit growth over customers’ best interests.
  • Visit Business Insider Australia’s homepage for more stories.

By unshackling lenders, the Morrison government is prioritising short-term economic growth over the welfare of the Australian public, consumer advocate warns.

In a unified statement, major consumer bodies from consumer law organisations to financial counsellors comprehensively rejected the changes foreshadowed by Treasurer Josh Frydenberg on Friday.

Karen Cox, CEO of the Financial Rights Legal Centre, slammed the strategy as “a short-sighted fix for a flailing economy” and warned it would push individuals to accumulate “unsustainable debt”.

“The problem people are having right now is too much debt and not enough income. The Government’s solution is to take on more debt with fewer protections,” Cox said.

“Watering down credit protections will leave individuals and families at severe risk of being pushed into credit arrangements that will hurt in the long term.”

The first witness called at the financial services royal commission, Cox questioned how its lessons could already be “so quickly forgotten”.

Namely, it was in those public hearings that bank CEOs themselves acknowledged they had for years pursued short-term growth and profits at the cost of customers’ best interests.

It’s a lesson that we never seem to learn for long, Fiona Guthrie, CEO of Financial Counselling Australia, noted.

“As we learnt to our cost during the GFC, weaker lending standards mean people will be loaded up with as much debt as possible. There is significant profit to be made in pushing borrowers to the edge,” Gutherie said.

“Removing responsible lending obligations will free banks up to aggressively push credit onto their customers.”

The dangers of free credit outweigh the need

Despite those serious concerns, the government looks set to plough on with its deregulation regime.

The promised economic benefits of reform, however, may not even stack up, according to Consumer Action CEO Gerard Brody.

“The Commonwealth Bank recently said that the flow of credit is above pre-COVID levels and that lending is growing at a strong pace,” Brody said. “None of the big banks opposed the responsible lending laws at the recent House of Economics committee hearings.”

When it comes to mortgages, the latest ABS figures show the lending market rebounded heartily in July. Owner-occupiers, and especially first home buyers, have piled into the market, encouraged enough by low-interest rates and falling prices.

Meanwhile, a declining appetite for other credit products, such as credit cards, might not be a bad thing. Reserve Bank of Australia (RBA) figures show nearly 400,000 Australians cut up their cards this year, as recessionary fears prompted many to get their house in order and build up a savings buffer.

While banks may struggle to entice many of those back into the fold, they may instead be able to simply lower the bar for new applicants.

“Products like credit cards are complex. That’s why banks make so much money out of them. Banks are in a much better position to assess a person’s ability to repay, so they need to shoulder some of the responsibility,” CHOICE CEO Alan Kirkland said.

“We got rid of the idea of ‘buyer beware’ in consumer law decades ago. To make it the principle that guides lending in the middle of a recession has disaster written all over it.”

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