Economy

Australia scraps responsible lending laws

Australia scraps responsible lending laws”

Australia said on Friday it would ease lending standards for banks in a move created to free up credit and revive the economy, which slid into its first recession in almost 30 years due to the coronavirus pandemic.

Australia's banking industry, one of the world's most profitable, was slammed by the Royal Commission for rampant malpractice that included charging fees to dead people, using overly aggressive sales tactics and providing poor financial advice to clients.

According to the Australian Financial Review, a slashing of red tape will remove the Australian Securities and Investments Commission (ASIC) from enforcing responsible lending laws. However, the government has also pledged greater protections for vulnerable borrowers who are at risk from extortionist loan conditions from payday lenders.

The changes effectively end a decade of ever-increasing regulation for the banks that peaked a year ago when a wide-ranging inquiry into misconduct recommended a stricter observance of lending rules.

The announcement from federal treasurer Josh Frydenberg said the reforms would cover about 76 percent of businesses subject to insolvencies, and 98 percent of those businesses have less than 20 employees.

He confirmed the decision on Friday, ending former PM Kevin Rudd's strict laws which were introduced in the aftermath of the GFC.

Mr Frydenberg said the changes will restore balance to a system that has seen the "pendulum swing too far away from borrower beware to lender beware".

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Calling the move a very good sign from banks' point of view, Henry Jennings, senior analyst and portfolio manager at Marcustoday Financial Newsletter said, "It would enable people to get a loan quicker, speed up the paperwork, free up the credit market and hopefully stimulate some economic activity".

"Our changes will make it very clear that the prudential framework that's in place is not to apply to small business lending".

NZ advisers have blamed Australian responsible lending laws for an overly-strict approach from the banks in recent years, with servicing criteria making it hard for borrowers.

As part of his ruling, Justice Nye Perram said borrowers can change their spending habits to service a mortgage: "I may eat wagyu beef everyday washed down with the finest Shiraz but, if I really want my new home, I can make do on much more modest fare".

The responsible lending rules have been criticised in Australia for squeezing the flow of credit.

Under the new obligations, which will require legislation to be enacted, lenders will be able to base their assessments on information provided by the borrower, and the borrower would be held accountable for giving the lender accurate information, The Australian reported. In early trading, Westpac shares jumped by 6% in Australia.

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