The Future of Responsible Lending – Utopia or Dystopia?

How the governments proposed changes will affect the banks approach to responsible lending.

SYDNEY, Australia | September 2020

Last week the Federal government proposed some significant changes to Australia’s lending rules including the abolition of the responsible lending obligations for authorised deposit-taking institutions (ADIs). A review of the responsible lending obligations was expected by industry experts in light of the outcome of the ASIC vs. Westpac ‘wagyu and shiraz’ case. However, the proposal to remove them entirely has surprised many.

The government’s main motivation in moving to remove the obligations appears to be driven by a concern for the economy and the view that freer credit will help fuel a post-COVID 19 recovery.  The debate about the merits of this move from industry commentators has started to heat up this week, but how will this change really impact the way banks approach responsible lending in the future?

In a recent paper, Nigel Butler and Rich Data Corp wrote about the future of responsible lending in light of ASIC’s RG 209 guidelines and proposed a number of framework principles that should be adopted by lenders.  In looking back at this paper, the governments proposed changes do not appear to have a major baring on the future of responsible lending.  It’s true that the regulatory risk for banks may become diluted in terms of potential fines for mis-conduct, however the world is changing and more than ever banks need to do the right thing by their customers on social and moral grounds to avoid the kind of reputational damage that came about as part of the Hayne review.

The amount of data and information available about borrowers and the ability to collect and use it continues to progress in leaps and bounds and banks will still be obliged to use that information.  Banks that recognise that consumers come in all shapes and sizes, with a wide range of financial circumstances, experiences and sophistication, and use technology to tailor their interactions based on these will reap the benefits of positive customer experiences and brand recognition which are all important in a world driven by instant 5 star reviews.

We found that the principles of our paper still hold true.  Despite the governments U turn on RG 209, responsible lending obligations will remain under the watch of APRA who require that lenders must have sufficient processes in place “to make reasonable inquiries and take reasonable steps to verify a borrower’s available income”.  In order to do this well, and deliver best-in-class customer service, lenders are advised to use available data to tailor their processes to the needs and capabilities of their customers, and as new data emerges, and borrower behaviour evolves, having systems and models which can learn and adapt to such changes will enable lenders to differentiate themselves.

Download our paper on the future of responsible lending.

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