Those that remember the dim dark distant days of the Global Financial Crisis, or GFC, would be aware that a lot of the financial pain was caused due to a number of financial institutions around the world who for a number of years had been lending large amounts of money to those that couldn’t necessarily afford the payments and relying on security that was in essence useless. To an extent, the Australian Government of the time, led by Kevin Rudd mitigated the effects of the GFC by injecting significant funding into the economy. The solution was more or less copied recently by the current Government during the current pandemic with a far larger (in percentage terms) injection despite the Coalition campaigning for the previous 10 years on the ‘reckless’ spending of the ALP.
One of the strategies Rudd employed to ensure that there was little chance of a subsequent Australian Financial Crisis was to legislate to require banks to actually assess if the borrower could realistically afford to repay the debt. That being said, all banks still have some level of default as they assess your ability to make the necessary repayments up to 30 years into the future based on your current circumstances. Sometimes the assessment is incorrect, sometimes circumstances change. That is a large part of the reason why banks charge a risk premium called interest for the borrowing of money over and above the cost of the bank finding the money to lend.
Prior to the introduction of the laws by the Rudd Government, the consumer was pretty much responsible for alerting the bank they couldn’t afford the repayments while applying for a loan. So, the borrower who has just signed on the dotted line for the shiny new car or the property that belongs in the pages of Home Beautiful was responsible for saying to the bank that I really want to make the purchase, please give me the money, but I can’t afford to repay it. Given that the voluntary full disclosure probably never happened, the legislation made it harder for people to get themselves into financial difficulty.
Recently the Australian Treasurer Josh Frydenberg announced he was considering winding back the legislated protections for those that take out a loan. Frydenberg claims the reforms will
increase the flow of credit to households and businesses. 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.
It seems a fair response to a significant lessening of demand for lending, and lending does assist the economy to recover from a recession. It is probably a good thing. But is there a lessening of demand which is the premise for the initiative? According to the ABC News article linked above — apparently not
The Commonwealth Bank recently said that the flow of credit is above pre-COVID levels and that lending is growing at a strong pace,” noted the Consumer Action Law Centre’s CEO Gerard Brody. And none of the big banks opposed the responsible lending laws at the recent House of Representatives Economics Committee hearings.
If you can’t recall the GFC, you probably have a better chance of remembering the Royal Commission into Financial Institutions conducted by the Hon. Kenneth Haynes. The final report was delivered to the government in 2019. The Commission was set up to demonstrate that ‘industry superannuation’ funds were suspect due to undue interference from unions; the outcome was somewhat different. The Coalition had forgotten the basic rule of an enquiry — don’t ask the question if you don’t know the answer.
His Honour was less than impressed with the Finance industry’s ethics and culture of sales above (almost) everything else as noted in the Interim Report Summary. If you really need something to do, the full report in three volumes is available here and is equally as damning. The report made 76 recommendations. None of them were calling for a reduction in regulation or removal of legislation.
Frydenberg wants to reduce regulation which is a ‘barrier to lending’, implying the banks can’t find people to lend to and fundamentally banks are trustworthy. According to others, banks are already providing credit at ‘better than pre-COVID’ levels. As recently as 2019, a Royal Commission found that the sales culture in banks was rampant. To top that off, Westpac was taken to court in 2018 by ASIC for failing to ensure customers had the ability to repay loans. Both Commonwealth Bank and Westpac have also been taken to task over industrial scale money laundering. It seems Frydenberg’s theory doesn’t stack up.
Why would Frydenberg believe that suddenly the banks have seen the light and will behave appropriately when demonstrably they haven’t always been ethical in the past? The probable response is that he is living up to his conservative ideology and attempting to reduce regulation, which usually disadvantages those who don’t have the resources to be treated equally at the bargaining table. You could also accuse Frydenberg of ignoring the elephants in the room, namely past history, the recent court cases and the Royal Commission that gave him, as the responsible Minister, a three volume report in 2019 essentially suggesting that banks will chase the profits regardless of the consequences.
Consider this action in parallel with other actions taken by the Morrison Government in recent weeks to
- reduce JobSeeker despite the current economic recession,
- trash the environment through a ‘gas’ led industrial and energy policy,
- argue over border closures with only one or two out of four jurisdictions using the practice to minimise COVID19 within their states,
- continue to use refugees for political gain rather than treating all people humanly,
- attempt to blame shift the aged care home COVID19 mess of the past six months away from the federal regulators
- spin the massive backflip on the NBN fibre to the home rollout being 10 years late as a positive.
We’re not ‘all in this together’ — Morrison and his government are back to their ideological worst. And we had a chance to create a new and better normal.
What do you think?