The banking industry is anxious the AFCA has become a “back door” way to apply responsible lending rules to small business, even though the law only targets consumers and households.
Treasurer Josh Frydenberg has temporarily exempted most small business loans from AFCA’s remit during the COVID-19-induced recession, to ensure banks are not deterred from making loans. He has repeatedly urged banks to keep credit flowing to support the economy.
Sources said the government would review AFCA’s powers to oversee lending to small firms and consider if a more permanent relaxation of the rules was warranted.
AFCA’s appropriate lending rules were temporarily frozen for small business loans issued under the joint government-bank $40 billion coronavirus Small and Medium Enterprise Guarantee Scheme and for loan repayment deferrals provided by banks to small-business borrowers until April 2021.
However, since AFCA was founded in November 2018, it has been able to enforce “appropriate” lending to small business for complaints its receives against banks under the banking code of practice’s requirement for bankers to exercise the “care and skill of a diligent and prudent banker”.
Council of Small Business Organisations Australia chief executive Peter Strong said it was “more important than ever” red tape on finance providers did not stop credit flowing to small business.
“Applying consumer laws to business and red tape in the finance world makes it harder to get a loan and the rules need to be fit for purpose,” he said.
“People have to understand there are going to be situations where they get a loan and it doesn’t work out and they blame the bank.”
An ‘unaccountable regulator’
Regulators believe AFCA is an important “safety net” to protect small business.
AFCA acting lead ombudsman for small business Geoffrey Bant said it could investigate claims of inappropriate lending for loans up to $5 million and provided to businesses with up to 100 employees.
“Businesses can lodge with us if they consider the lender has engaged in inappropriate lending,” he said in an interview.
“We can review if the lender assessed the small-business loan application and exercised that due diligence on financials, historicals, cash flow projections, the person they’re dealing with and the industry.
“There is a whole raft of factors that go into our assessment for small business.”
Mr Bant said AFCA did not police “responsible” lending, which was a consumer law enforced by ASIC. Instead it investigated “appropriate” lending, he said.
There is very limited rights to appeal [AFCA’s] decisions to a court. It’s become quite challenging.
— Katherine Forrest, King & Wood Mallesons partner
AFCA received 3413 complaints from small businesses in the 2019-20 financial year, of which 1233 related to credit.
“Of the 2728 small-business complaints resolved, 1627 were resolved by agreement or in favour of the complainant,” an AFCA spokesman said.
King & Wood Mallesons financial services partner Katherine Forrest said AFCA was set up to be an independent arbitrator of disputes but its change in roles has made it an unaccountable regulator.
“AFCA can launch a systemic issues investigation and give directions about remediation,” she said. “There is very limited rights to appeal their decisions to a court. It’s become quite challenging.
“Standard-setting for responsible lending is a very long way from Treasury at this point in time and Treasury should have the levers for managing the economy, so does it make sense for it to be the way it is?”
She said responsible lending-related rules were overregulated by multiple overlapping authorities, who do not necessarily have consistent approaches – including the courts, Australian Securities and Investments Commission and AFCA.
A finance industry source said AFCA was “stifling SME credit” by “going beyond their jurisdiction”.
The government’s considerations on AFCA’s powers build on ASIC’s decision not to appeal to the High Court its case against Westpac for alleged responsible lending breaches, after the heads of the Reserve Bank of Australia and Treasury both privately warned ASIC it could slow lending and exacerbate economic uncertainty.
Bankers across the country breathed a collective sigh of relief at the decision, after ASIC said it was “mindful of the impact of the additional time required to resolve this matter in the current challenging economic circumstances”.
Despite the Westpac victory, some bankers and lawyers believe the government should simplify the responsible lending law by making legislative amendments.
The laws were drafted by the Rudd Labor government in 2009 in response to the US subprime home lending crisis, with many in the local industry claiming the law was poorly drafted and shifted the responsibility from “buyer beware” to “seller beware”.
KWM financial services partner Dale Rayner said the decision only covered narrow aspects of the responsible lending law – the way Westpac used the Household Expenditure Measure benchmark and assessed interest-only home loans as part of its borrower serviceability assessment.
The court found banks were allowed to assume borrowers could reduce their historical discretionary spending to meet their repayment obligations.
However, banks could be open to a future High Court challenge and there was ambiguity created by a dissenting judgment in the 2-1 decision.
The Hayne royal commission said in February 2019 that if the ASIC v Westpac court case revealed some deficiency in the law’s requirements to make reasonable inquiries about, and verify, the consumer’s financial situation, amending legislation to fill in that gap should be enacted as soon as reasonably practicable.
Some bankers said the industry can pragmatically deal with the full Federal Court’s decision and a government rewrite of the law is not a priority.
One banking source said it was “critical” to have “clear and consistent” guidance from the regulators, such as ASIC’s updated RG209.
The source said the bank supported ASIC’s decision to maintain a principles-based approach to responsible lending without providing prescriptive minimum standards.
Mr Frydenberg has said he welcomed ASIC’s decision not to appeal.
The Treasurer has no plans to amend the credit laws for consumers.
ASIC will release updated regulatory guidance in coming months to clarify how the responsible lending law applies to consumers.