Government to wind back responsible lending obligations to kickstart economy

The Morrison government wants to roll back standards legislated a decade ago which were intended to stop consumers signing up to unaffordable loans and unsuitable credit products.

In an effort to increase the flow of credit to help kickstart economic activity, the government wants to pare back responsible lending obligations that require Australian credit providers to make inquiries about the customer’s financial situation to ensure products are suitable.

The government will announce plans on Friday to transfer due diligence responsibilities from lenders to borrowers, allowing credit providers to rely on the information provided by borrowers unless there are reasonable grounds to suspect the information they are providing is unreliable.

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Banks have complained about the responsible lending obligations regime being too onerous and complicated, and the government says the current consumer protection framework has created an atmosphere of excessive risk aversion among lenders, which has restricted the flow of credit.

While winding back regulation for some loans and credit products, the government plans to strengthen controls on higher risk credit, like payday loans and consumer leases, reviving reforms that were stalled after a backbench revolt led by the Queensland Nationals MP George Christensen.

Under the controls, companies leasing goods like consumer appliances may charge a one-off fee establishment of 20% of its base price but regular monthly repayments will be limited to 4% of its total cost, for up to four years.

Payday lenders will be barred from offering loans to people who receive more than half their income from Centrelink if repayments exceed 10% of their income, rising to 20% if the person receives less than half from Centrelink. Similar caps apply to consumer leases.

The safeguards reproduce the provisions of a draft bill first released by the Turnbull government in October 2017, which Labor has urged the Coalition to legislate in part due to fears the summer bushfires and Covid-19 crisis have driven people to payday loans.

The move to free up credit follows reforms to the insolvency regime telegraphed earlier this week. Those reforms are intended to ensure that more small businesses make it through the current recession rather than go into administration as a consequence of the downturn.

The government also on Thursday confirmed it had thrown out its previous fiscal strategy because austerity would not promote economic recovery after the pandemic.

The treasurer Josh Frydenberg said the Coalition would now prioritise reducing the unemployment rate ahead of debt reduction, and would not begin the task of fiscal consolidation until the unemployment rate was “comfortably” back under 6%.

But Frydenberg said all the pump priming would need to be accompanied by a substantial reform program, including deregulation to kickstart business activity, and labour market reform.

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The government is expected to use the looming budget to bring forward income tax cuts, provide further support to businesses, unleash significant spending on infrastructure, and help Australians into jobs, as cuts to income support through the jobseeker and jobkeeper payments will be made at the end of September.

In a statement issued ahead of Friday’s announcement about the lending overhaul, the treasurer said: “As Australia continues to recover from the Covid-19 pandemic, it is more important than ever that there are no unnecessary barriers to the flow of credit to households and small businesses”.

He said that credit underpinned home ownership and business investment. “By simplifying the loan application process for borrowers it will reduce barriers to switching between credit providers, encouraging consumers to seek out a better deal.”

“Maintaining the free flow of credit through the economy is critical to Australia’s economic recovery plan.”