Tuesday, April 28, 2009

If it's an offence to sell alcohol irresponsibly...

Why not loans? It soon will be

MORTGAGE brokers, bank employees, payday lenders and retailers offering credit will face fines and even jail under new "responsible lending" rules set to become law in November.

The provisions, in draft legislation unveiled by Corporations Minister Nick Sherry will for the first time require all credit providers to be licensed and will make it an offence to supply unsuitable credit that can't be repaid.

The maximum penalty will be five years' jail and a fines of up to $220,000 for an individual and $1.1 million for a corporation.

The new laws will bring under Commonwealth control a range of practices that were previously state-regulated and will regulate others for the first time...

The Australian Securities and Investments Commission will be given an extra 200 staff in order to oversee credit providers.

"I can assure you that we will be extremely proactive in administering these laws and vigilant in their enforcement," said ASIC Chairman Tony D'Aloisio.

"We will have to register some 10,000 entities. Around 5.7 million households have some sort of debt. Around 2.9 million have a home loan; 750,000 have an investor loan and 2.3 million households have a credit loan."

Banks, credit unions and building societies yesterday attacked the new provisions as "heavy-handed", saying they would result in higher loan fees and a longer delays in approvals.

"While the Federal Government is suggesting this will improve consumer
confidence, the real question for the Government is what will this do for the
confidence of the main body of credit providers, which is much needed in the
present economic circumstances," said Bankers Association Acting Chief Executive Tony Burke. "The penalty regime is disproportionate."

Abacus, which represents credit unions and building societies, welcomed the new laws for replacing ineffective state regulations but warned they ran the risk of "burying" responsible lenders in bureaucracy.

"Focus the legislation on the poor behaviour of dodgy lenders and brokers - don't drive up the cost of borrowing with ineffective red tape," said Abacus chief executive Louise Petschler.

Senator Sherry was unapologetic, saying the Rudd government intended to crack down on irresponsible lending, and "dodgy providers of credit finance and dodgy advisers".

"For example margin lending has been of significant contention over the last 18 months. There have been individuals who only had their own home as the asset to support the lending to buy shares, and/or had a very low income. It will be practically very, very difficult for individuals to enter into margin lending with these new laws."

As previously foreshadowed Australians with mortgages of up to $500,000 will be able to apply to change their credit contract if they get into financial difficulty, an increase in the threshold from $312,400.

The Bankers Association said the provision was unnecessary as its the banks' own hardship principles already went further and did not apply a threshold.

"It is important that customers understand that if they are experiencing any problems in repaying their loans, they should contact the bank as soon as possible," Mr Burke said.

The government plans to introduce the bill in June after a four-week public consultation period and expects it to be passed in September.

* Actually there are several arguments as to why not loans. Nick Gruen spells them out.

Also if it is to be done ASIC is arguably the wrong body to do it. Is less conflicted when it comes to regulating finance providers, has a better record of getting good outcomes for consumers, and will have to deal with the "non-finance" bit of many transactions (eg the house itself) anyway.

And by adopting national rather than state regulation we lose the ability
to try things out. The Minister Nick Sherry acknowledged how useful this could be when he said in launching the new scheme:

"Payday lenders will be covered by this legislation. I think three states have a 48 per cent cap. That will be retained.

What we are doing is adding this new responsible lending principle for the first time. Those states that don't have a 48 per cent cap, we're going to ask them not to impose a 48 per cent cap, and then we will assess the outcomes; we'll look at what has happened in the states that have a 48 per cent cap and those that don't, with a responsible lending provision that has come into force, and we'll look at what the outcomes are and determine whether it is appropriate to maintain that 48 per cent cap.

It's a good example, I think, of a practical way to assess the evidence in an area where there was strong disagreement between the various people, organisations who were consulted."

But these are quibbles.