Scrapping of responsible lending rules bypassed regulators

Last month we were left flabbergasted when, out of nowhere, Treasurer Josh Frydenberg announced that the government would axe responsible lending rules:

If you want proof that Australia’s economic managers are really just bubble managers, here is your smoking gun.

This is a watershed moment in Australian banking and property history.

Consumer groups promptly slammed the decision:

CHOICE, Consumer Action Law Centre, Financial Counselling Australia and Financial Rights Legal Centre have responded to the Government’s announcement that it will remove credit protections for borrowers saying right now what people need is more income, not more debt.

Government’s proposed reforms will remove bank responsibility to customers, opening up new opportunities for banks to aggressively sell debt.

Now it has been revealed that Australia’s financial regulators were not consulted on the move:

Financial regulators weren’t asked for their assessment on the scrapping of responsible lending laws before the government’s surprise announcement, according to testimony, leaving the head of a leading regulator to learn about the controversial decision in media reports.

Commissioners from ASIC and APRA were questioned about the scrapping of responsible lending laws before a parliamentary committee last week, where they revealed they were given little-to-no notice and were not asked for their views on the decision.

“When was ASIC first informed of the government’s intention to scrap responsible lending obligations?,” Dr Andrew Leigh asked, shadow treasurer for Labor.

“I’m the commissioner with responsibility for credit,” Sean Hughes replied, commissioner at ASIC, “and I was first advised when I read the Treasurer’s media statement through the media on the morning of 25 September.”

“That’s extraordinary,” Dr Leigh replied. “So you got no heads-up … You weren’t asked to provide any advice?”

This has the RBA’s and Treasury’s dirty fingers all over it.

Recall that these ‘institutions’ in July white anted ASIC’s “wagyu and shiraz” responsible lending suit against Westpac:

The Australian Securities and Investments Commission has decided not to appeal to the High Court its case against Westpac for alleged responsible lending failures, after the heads of the Reserve Bank of Australia and Treasury both privately warned it would exacerbate economic uncertainty caused by COVID-19…

Then in August, RBA Governor Phil Lowe told the Standing Committee on Economics that Australian mortgage restrictions had become too strict and were constraining the economy:

“The pendulum has probably swung a bit too far to blaming the bank if a loan goes bad, because the bank didn’t understand the customer; if it had done proper due diligence—this is the mindset of some—the bank would never have made the loan. So some of the banks have had this mindset, ‘Well, we can’t make loans that go bad'”.

This came despite the Hayne Banking Royal Commission explicitly recommending that Australia’s responsible lending laws remain:

If there were concerns around complexity, then the solution was not to trash the responsible lending laws altogether. Rather, the government should have engaged in stakeholder consultation to redraft the laws into a streamlined (less ambiguous) form that maintains the current spirit and intentions.

The lessons of the Hayne Royal Commission and the Global Financial Crisis should not have been so easily discarded.

The last thing Australia needs is for banks, free of regulatory accountability, to begin lending to anybody with a pulse and creating a US-style subprime mortgage bubble with potential to take down the financial system and economy.

Sadly, that’s the sort of irresponsible policy you get in Australia, which increasingly resembles the property equivalent of a narco state.

Unconventional Economist
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  1. 18 months away and all that crap but this reeks of desperation for a bubble that is in it’s death throes. It’s popping soon and they know and fear it.

      • Samuel Reynolds

        18 months, I’m sure

        On a serious note, this is going since more than 18 years and nothing ever will stop it. Better get used to the reality.

    • bcnich (gfy)MEMBER

      We have now started that is into the worst financial crisis in 100 years
      Australian house prices are going to crash next year into rising interest rates

      GFC 2.0 has started & is going to accelerate

      No local economist or analyst knows what they are talking about

      They are only looking straight ahead at internal Aust RBA etc

      They are not seeing the freight train that’s going to hit them from the side

      This crisis will be so powerful the RBA will not be able to do anything to prevent it

      House prices are going to crash next year

      They’ll be down 10 to 20% going into Easter time

      None is these local factors responsible lending rents QE etc will make any difference

      Get under the pillow there will be nowhere to hide


      • Two trailer park girls go round the outside
        Round the outside, round the outside
        Two trailer park girls go round the outside
        Round the outside, round the outside

        Guess who’s back, back again
        bcnich’s back, tell a friend

        Guess who’s back, guess who’s back?
        Guess who’s back, guess who’s back?
        Guess who’s back, guess who’s back?
        Guess who’s back?

        • Jumping jack flash

          Yes, they would LOVE some inflation and they decoupled interest rates from inflation a while back.

          Unless banks move up independently due to the risk. But there’s no risk. Ever.

        • Many reasons Alex
          I’ve written a few times

          We are going to have a deflationary crash, the created huge credit risk similar to GFC but bigger, forcing funding costs through the roof
          Once we’ve had the deflationary crash, inflation will arrive
          We are heading back into STAGFLATION down the track
          The party is over Alex
          Money for nothing is over

          You’ll see next year – home loan rates will start rising out of cycle next year

          • Forgive my ignorance but it still doesn’t make sense. I get the deflation, I get the risk of inflation once money printing starts.
            But what I don’t get is why rates would rise quicker than the inflation (and subsequent wage inflation). Rising rates bankrupt the groups lifting them (RBA or the banks) – the only game I see is to let inflation run hot if and when we ever get it.

          • BCN – Don’t you not think the RBA will simply extend the TFF to the entire debt pool of the ADI’s? This would reduce the need for offshore funding requirements which could cause large scale out of cycle rate increases.

            There is $1.7T in ADI home loan debt in AU. Blended 3% is $51B a year in interest and $56B a year in principal, banks are making about 1.5% as margin, so circa $25B. Interest rates going to 9% means $153B interest on that debt, which is 50% higher on interest alone than the current PI loan pool. Assuming 4m mortgages at $420K each, how many of those could afford a 50% increase on their repayments? Probably 20-30%, the rest would be in trouble.

            Not saying it cannot happen but I would argue the RBA would have their hand forced to extend the TFF to cover the entire $1.7T and keep rates low.

          • @Alex

            Direction of interest rates are a function of 2 different things

            1. INFLATION
            2 CREDIT RISK

            2 is going to cause rates to rise not 1

            Number 1 comes later

            Number 2 triggers the deflationary crash which has already started
            We are in the first stages

            The deflation is going to trigger the credit risk then will match up and magnify each other

            Everyone in AUST is only talking about 1

            The global capital destruction is upwards of $50 Trullij
            They’d have to print $50 Trillion

            CB aren’t even at 1/4 of the printing required to stop the deflation

            It’ll become apparent to everyone in next 6 months that CBS are finished

            Then when the realisation comes

            The financial panic will beyond anyone’s belief

            It’s going to be brutal

            Australian house prices are now at a multi year decline bear market are the 30 year global bond bull market is now over

            We are heading into a global bond bear market

      • “They’ll be down 10 to 20% going into Easter time”

        Oh cmon. Every time I see you post your forecast is 6 months down the track. First it was July this year, then it was end of 2020 and now it’s Easter?

        • Bob what you don’t understand is that they are already down 10 to 20% but it’s being hidden by all this fake rubbish
          Free money from RBA that won’t be repaid, free loan holiday repayments free rent holidays
          Don’t be fooled Bob the rug is about to be pulled

          And if anyone should know it’s Bobby Skilton

          The whole thing has become a complete joke

          Don’t be sucked in

          Central bankers are regulators are shixing themselves

          They’ve lost control it’s just everyone hasn’t worked out

          FED is done

  2. happy valleyMEMBER

    DL-S’s “evil Anna” needs to watch out – she has serious competition in the wings?

  3. In 2011, Dunning wrote about his observations that people with substantial, measurable deficits in their knowledge or expertise lack the ability to recognize those deficits and, therefore, despite potentially making error after error, tend to think they are performing competently when they are not: “In short, those who are incompetent, for lack of a better term, should have little insight into their incompetence—an assertion that has come to be known as the Dunning–Kruger effect”.[8] In 2014, Dunning and Helzer described how the Dunning–Kruger effect “suggests that poor performers are not in a position to recognize the shortcomings in their performance

    • chuckmuscleMEMBER

      Unfortunately this is a feature of the system.

      My hypothesis is >75% of ASX100 Boards and C-Suite’ers suffer from this condition. It’s debilitating for productivity, however not for the sufferer; one of those not so unusual occurrences where what’s good at the micro (better salary, more prestige as one’s help drops the kids off at Shore, etc etc) is terrible at the macro.

      I also think the effect is non-linear, that is, below some point of concentration, say 10%, D-K afflicted people get pushed out by actual thinkers, whereas past that point the D-K effect is too overwhelming for the group and it spreads like wildfire as people who think, which is hard and requires a lot of energy, run out of resources to fight off stupidity and all that is left is a circle-jerk of D-K thinking.

      Which helps explain why actions like removing any semblance of responsible lending so close to the BRC and GFC, appear mind-blowingly stupid to most on this site. What else would we expect when all that is left at the top of regulators and politicians is a self-reinforcing loop of “good call minister” or “good call Phil”?

  4. When? My colleague said banks are checking every expense, he can’t borrow as much still. Plenty of equity, but wife is on job keeper.

      • chuckmuscleMEMBER

        They also end up in YOUR super. What do you think all those “Cash plus” or “Australian Credit” funds own to deliver RBA+50?

      • Jumping jack flash

        Interesting that the total amount of super is pretty much the same size as the total amount of outstanding mortgage debt….

        Not that it was planned that way im sure, but i can just imagine our fearless leaders with planet sized brains saying to their advisers “what’s that enormous pile of money there?”
        “Oh that, its the colossal pile of debt that weighs on our economy like the proverbial anvil nd stops anything we plan to fix it from working properly”
        “Oh, hmm. Maybe we could pay it back? Lets take a look…”
        “Yes.. err”
        “With THAT! Whats that juicy pile of money in that other column there? More debt?”
        “Oh, no that’s the people’s super savings sir”
        “It looks to be the same size and shape, we should use that to fix everything”
        “Ah, yes, um, no. I mean”
        “It’ll be fine, well take their super and then give everyone a pension credit or something. It doesn’t matter about the detail because by the time we need to worry about it I’ll be long out of office.”

  5. Yep this is just what happens when you paint yourself into a corner
    At some point you realize that you either need to jump out of the corner and risk leaving a big footstep OR you slow down but keep painting and hope the paint dries before you run out of corner.
    Of course there is the option where you speed up and plan to jump out the window leaving those left behind to sort out the mess.
    Looks like Australian regulators like the window option.

  6. This is what you do when you’ve used all your interest rate cut ammo before the boss fight.

  7. Some people point to the abandonment of any form of probity in lending as a sign that this government is run by irresponsible fools, but there is much better evidence for that conclusion: the fact that happy clapper Morrison and his microcephalic henchmen will not commit to net zero carbon emission limits … by any date. That takes irresponsibility to a cosmic level.

  8. Holiday In ScomodiaMEMBER

    There is some really nasty devil in the details of this latest bit of LNP scumbaggery- speaking to some solicitors who help victims of domestic (financial) abuse they are fuming- currently, when a perpetrator has made the victim take out debts in their name and then left them with the debt, or uses the debt to control them/keep them in the relationship, the origination documentation and responsible lending requirements can be valuable evidence to try and unpick the financial situation and help the victim leave or challenge debts to be waived. This is more great legislation in the face of skyrocketing rates of DV in our community. But hey, its the LNP- who cares about DV victims anyways- they shoulda had a better go I guess. Wrote my local Labor member (Shadow Finance minister so especially relevent)- form letter response waffling on about helping business access to credit or whatever- weak as pss the lot of them.

  9. Jumping jack flash

    “…right now what people need is more income, not more debt.”

    True, but according to their failed theory, one man’s debt is another man’s income. Conveniently, they forget the interest component of the mind bogglingly huge pile of nonproductive debt that results because of this ridiculous theory a 2 year old would know better than to put together. Every. Single. Time.

    “…Australian mortgage restrictions had become too strict and were constraining the economy:”

    Indeed! The debt hasnt been growing fast enough for about a decade and this is the result. Businesses closing, rampant wage theft, stagnant and falling incomes. All before the virus was a thing.

    And when this fails to restart the debt engine of the New Ecomomy, next stop, NIRP and very likely a UBI or some kind of equivalent government subsidy to be used to obtain more debt with.

  10. kierans777MEMBER

    > So some of the banks have had this mindset, ‘Well, we can’t make loans that go bad’”.

    And the RBA sees that as a bad thing!!! WT actual F!

    BTW is there a reference for that quote, I want to share.

    • Easy for a good loan to go bad
      And once we gone (gone)
      Best believe we’ve gone forever
      Don’t be the reason
      Don’t be the reason
      You better learn how to treat us right
      ‘Cause once a good loan goes bad
      We die forever

  11. If RBA goes negative close the curtains and switch the light off it’s all over
    Negative rates are a disaster

    • Jumping jack flash

      I want them to do it as soon as possible!

      Pity Phil is still researching about their effects before he feels comfortable pulling the NIRP lever.
      If he works it out he’ll be the first one on the planet to actually know.

  12. Arthur Schopenhauer

    If it was working, a house in the area listed $300k below peak would have sold by now. Still on the market…

    It’s not as if they can give it away!