Australia may see a resurgence in financial and economic abuse if the Senate opts to scrap responsible lending obligations (RLO), warns Gerard Brody of the Consumer Action Law Centre.
The move to weaken RLOs was made by Federal Treasurer Josh Frydenberg in September last year, in a bid to maintain credit flow in the wake of a recession. The bill is currently awaiting consideration from the lower house with a Senate inquiry on foot – much to the anguish of consumer advocates, who say it signifies a giant leap backwards in the sector’s post-Royal-Commission recovery.
Whilst RLOs are primarily focussed on protecting borrowers from taking out loans they cannot afford, compliance with this aspect can serve as a risk management assessment for abusive practices. These include securing credit in a partner’s name without consent, and gambling family assets.
Financial abuse – a form of family and intimate partner violence – is a prolific issue in Australia. Some estimates suggest that 16 percent of women and 8 percent of men (two million people) will experience financial abuse at some point in their lives.
Mr. Brody said that with fewer obligations for lenders comes greater risk with the assessment process.
“The great thing about RLOs is that lenders have to probe more to work out if a loan is suitable. The current law requires lenders to take steps to understand a borrower’s objectives, which means there is less scope for people to engage in malpractice,” he said.
“If lenders no longer have to consider a borrower’s requirements when writing a loan, there will be less opportunity to find out whether the loan is being used as a tool for financial abuse and identify ‘red flags’ in an application process. With fewer hoops and hurdles to navigate, it may become easier to exploit the system, with damaging effects for individuals and families.”
According to a report by Women’s Legal Service Victoria, the effects of financial abuse can wreak havoc in the lives of victims. Often, those on the receiving end are left with little to no money for basic essentials and, sometimes, can incur huge debts against their name, leading to bankruptcy. The resulting financial hardship is often a key factor influencing a person’s ability to leave an abusive relationship, the report highlights.
Less justice for victims
As well as making it harder to commit acts of financial abuse from the outset, RLOs provide an avenue for remediation, giving victims the right to compensation if responsible lending standards are not met, Mr. Brody said.
“If RLOs are removed, it will be harder for victims to get compensation, meaning they will stay victims for longer – some never recouping the damage they were subjected to,” he said.
Brody believes this aspect of RLO protection has not featured as extensively as it should have been in the debate about whether to maintain the status quo in financial services regulation. This is despite some reports claiming financial abuse has reached ‘epidemic proportions‘ in Australia.
“The debate has unduly focussed on the financial literacy of general consumers and the economic effects of looser credit lines. Very little emphasis has been placed on the more insidious loopholes of an under-regulated system,” he said.
A more dangerous environment for consumers in general
His argument adds to earlier commentary about the dangers of unregulated loan products, resulting from complex contract terms and consumer biases.
“Removing obligations and instead relying on the lenders’ own systems and processes limits the accountability needed to ensure lenders are meeting the needs of consumers. Without this accountability we will inevitably see a rise in defaults, distress sales, repossessions and bankruptcies,” he said.
At around 120 per cent of GDP, Australians already have the world’s second-highest household debt figures, globally, with debt growth outpacing that of assets and income in recent years. According to ABS Statistics, around three in ten households were classed as over-indebted in 2015-16, with 77 percent lacking sufficient liquid assets to cover a quarter of the value of their debts.
“In my view, over-indebting Australians will do more harm than good to the economy than looser credit lines,” Brody said.
As well as ignoring a raft of harmful consumer side effects, Brody believes the rationale for watering down consumer protections is weak.
“Credit has continued to flow into the economy since the introduction of RLOs. Home lending is at its highest ever levels – including owner-occupier loans – and credit card lending is on the increase after being in decline for several years,” he said.
“To be fair to the Treasurer, the repeal was announced in September when the government was anticipating a greater impact on credit flow. However, this hasn’t turned out as expected and I urge him to reconsider his proposal,” he concluded.
Gerard Brody is Chief Executive at the Consumer Action Law Centre and a renowned commentator on financial services regulation.
Join him for a heated debate on the controversial decision to repeal RLOs at the Responsible Lending & Borrowing Summit, due to take place in March 29-30 at the Grace Hotel, Sydney.
Mr. Brody will feature on a panel alongside Professor Kevin Davis from the University of Melbourne and Chris Parker from the Banking & Finance Oath.
Other headline speakers include Assistant Treasurer, The Hon Michael Sukkar MP and Tim Gough Senior Executive Leader at ASIC.
Learn more and register.