What do the proposed new responsible lending laws mean for small business financing?

On 25 September 2020 the Federal Treasurer released a fact sheet foreshadowing a suite of changes to Australia’s credit laws. Details are limited at the time of writing. Financiers and their advisers eagerly await more information about the proposed changes, which are expected to commence (subject to the passing of legislation) from 1 March 2021. 

The key changes proposed by the Government are to the responsible lending obligations governing consumer credit activities covered by the National Consumer Credit Protection Act 2009 (NCCP Act) and the National Credit Code (Code), (Regulated Finance). But to what extent do the changes impact on small business lending too, given that the intention underlying the Government’s reforms is to ‘enable the more efficient flow of credit to consumers and small businesses’ [emphasis added]?

At present, a financier providing Regulated Finance is constrained from entering into – or suggesting or assisting a consumer to enter into – a Regulated Finance contract if the credit contract is unsuitable for the consumer. In contrast, under the proposed changes financiers will broadly be allowed to rely on the information provided by consumers, unless there are reasonable grounds to suspect it is unreliable. Consumers will be made more accountable for providing accurate information to inform financing decisions. Therefore, the need for extensive verification procedures to assess unsuitability will diminish. This is intended to simplify the finance application process. The Government also intends to reduce the burden faced by consumers when seeking finance, by reducing barriers to switching between financiers, encouraging consumers to seek out better terms or a lower interest rate.

Responsible lending obligations will continue to apply to higher risk Regulated Finance products such as small amount credit contracts and consumer leases.

Here are the key ‘takeaways’ for financiers of small business  

Limited impact on small business lending – only relevant where Regulated Finance is partly for business purposes

The responsible lending obligations in the NCCP Act that are proposed to be changed relate to Regulated Finance, not small business finance.

However, a degree of overlap exists between Regulated Finance and small business finance. For example, an individual may obtain a loan which is provided or intended to be provided predominantly for personal, domestic or household purposes (ie, it is Regulated Finance), which is also partly for the purposes of a small business operated by the individual (whether alone or with others). The Government has enacted temporary COVID-19 relief measures so that the credit licensee making this loan does not have to comply with many of the responsible lending obligations presently set out in the NCCP Act.[1] The credit licensee must, however, continue to comply with other Regulated Finance obligations, including NCCP Act  requirements to provide a credit guide and Code obligations about precontractual disclosure, terms of the contract, interest charges, hardship situations and enforcement of the contract.

The effect of the reforms outlined in the Government’s fact sheet appears to be that the temporary COVID-19 relief measures will effectively be made permanent.[2] In other words, a financier providing Regulated Finance will not need to comply with the amended responsible lending obligations that will be set out in the NCCP Act, to the extent that the relevant loan is partly for the purposes of a small business operated by the individual (whether alone or with others). If the Government maintains the structure set out in the COVID-19 relief measures, a ‘small business’ would in general be a business that has either fewer than 100 employees or revenue of $ 5 million or less in the previous financial year (or its year to date revenue is $5 million or less if it started carrying out business in the current financial year).[3]

Other responsible lending’ type obligations continue to apply

As noted above, the Government’s proposed reforms seem to contemplate that Regulated Finance provided to an individual (which is also partly for the purposes of a small business operated by the individual, whether alone or with others) will not be governed at all by the – generally less onerous – responsible lending provisions proposed to be included in the NCCP Act. Importantly, the Government’s proposed reforms would appear not to remove or directly affect the operation of the following ‘responsible lending’ obligations, where they apply to a small business financier:

• In cases where the small business financier is required to comply with the Banking Code of Practice, there continues to be a requirement for the financier to exercise the care and skill of a diligent and prudent banker when assessing finance applications.[4]
• In cases where the small business financier is a member of the Australian Financial Complaints Authority, the Authority has jurisdiction to hear complaints about maladministration (ie, a failure to meet a legal duty or obligation) in lending, loan management or security matters.[5]

Industry participants and their advisers eagerly await more detail on the proposed responsible lending changes.

Impact on RegTech innovations

The need to comply with the present responsible lending obligations in Regulated Finance has been a significant driver for numerous ‘RegTech’ innovations, many of which rely on the consumer data right reforms too. Among other things, these innovations will assist financiers to make responsible lending suitability assessments using machine learning / AI tools to review the applicant’s machine-readable bank account data. Even if the existing responsible lending obligations are made significantly less onerous, we suggest ‘RegTech’ innovations will continue to be invaluable for credit assessments generally.

This article is current as at 30 September 2020. This article was prepared with the assistance of Eva Jane-Klepner

[1] See the National Consumer Credit Protection Regulations 2010, Regulation 28RA, inserted by the National Consumer Credit Protection Amendment (Coronavirus Economic Response Package) Regulations 2020, registered on 2 April 2020.

[2] However, the temporary COVID-19 relief from responsible lending provisions extends beyond loans to cover consumer leases also. It is unclear if the Government’s amendments will extend to consumer leases given the specific comment in the fact sheet that responsible lending obligations will remain for consumer leases.

[3] See National Consumer Credit Protection Regulations 2010, Regulation 28RA(7) referencing the definition of ‘small business’ in section 5 of the Australian Small Business and Family Enterprise Ombudsman Act 2015. 

[4] Australian Banking Association Banking Code of Practice (1 March 2020 Release) Chapter 17.

[5] Australian Financial Complaints Authority Rules and GuidelinesRule C.1.3; Rule E1 definition of “maladministration”, Operational Guidelines pp 37, 107, 137-138, 154, 157.

Queries

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Disclaimer

This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.