New game, new rules

It's legit - after years of bandying about the need for nationwide regulations, the mortgage industry will finally be regulated under one umbrella. MPA breaks it down

New game, new rules

The Federal Government's draft National Consumer Credit Protection Bill and its related legislation is not light reading. Spanning 300 pages plus (more if you count the commentary and explanatory notes!), it gives both Dostoevsky's Crime and Punishment and the King James Version of the Bible a run for their money. 

Despite being heavy reading, one of its selling points is that it cuts up to 2,500 pages of multiple state laws down to one national regime.

Released on 27 April, the document creates a single consistent consumer credit law "built on responsible lending and consumer protection" and it covers all lenders and credit service providers.
At the time of writing, industry participants were invited to comment on the bill and make submissions up until 22 May. MPA did the rounds to find out how different sectors of the industry felt about the document and what areas they would like to see altered or clarified before the draft becomes law.

Both the Australian Bankers' Association and Abacus, the industry body representing credit unions and building societies, have called the new credit laws heavy handed.

Shortly after the National Consumer Credit Protection Bill was released, the ABA released a comment stating that the legislation would create red tape for responsible lenders and could result in higher loan fees and longer loan approval times.

Tony Burke, acting chief executive of the ABA, said: "Banks recognise that many of the provisions in the regime are designed to put an end to predatory and other unacceptable lending practices by fringe credit providers, rather than the banking sector.

"However, some of these rules go much further and will impose a greater and unnecessary regulatory burden on mainstream lenders who have responsibly provided credit to consumers in accordance with their needs for decades.  The lending performance of banks in this country is in marked contrast to overseas lenders."

"The additional regulation will inevitably mean an increase in costs for banks in providing consumer credit, there will be more paperwork and it will take longer to deal with loan applications than is now the case."

The ABA also criticised the penalty regime calling it "disproportionate". 

Abacus chief executive officer Louise Petschler similarly stressed that the new laws will bury 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," Petschler says.

The draft legislation takes responsibility away from borrowers and places it squarely on lenders, says FirstMac's CFO James Austin.

"From our initial review of the draft legislation it seems to mirror many of the elements currently practically covered by the Uniform Consumer Credit Code (UCCC). The main variation of the draft legislation is the introduction of national licensing (ACL) for credit activities. Under the draft legislation it appears the ACL is designed such that the onus falls back to the ultimate lender - entities which are already licensed under AFSL and with UCCC obligations," he says.

According to Austin, the draft legislation appears to be influenced by the events in the United States and associated 'Cram Down' legislation. He says it is important to recognise that Australia has not experienced the poor lending issues of the United States.

"As an industry we should be proud of the fact that Australian residential mortgages remain the best performing in the world with defaults materially less than 0.5% of total lending. Australian credit provision has remained responsible as evidenced by extremely low levels of defaults."
To this end, Austin says it is important that the legislation strikes a balance. "As credit providers we acknowledge and accept the responsibilities we have. In turn, consumers also need to take responsibility for their actions. Deviation from the path of borrowers needing to take responsibility for their own actions will have implication for the availability and flow of credit." 

Mortgage managers
Despite its name, Firstfolio's CEO Mark Forsyth says he's not convinced the National Consumer Credit Protection Bill will keep consumers safe. "The problem is I don't think any legislation ever has completely protected somebody from 'rogue traders' - in the US there is significant consumer credit protection legislation yet we still see a number of high profile cases where consumers are being taken advantage of."

In fact, Forsyth isn't convinced the bill is even necessary calling the perception of dubious lending across all boards "overstated".

"I am also concerned that the legislation still does not address the issue of borrowing levels, and people's propensity to get themselves into debt. Singapore has very strict consumer credit lending criteria and policies, yet it still has not had the desired impact."

By and large the current requirements for brokers and lenders are sufficient, Forsyth says, with the exception of tertiary qualification requirements for brokers which could possibly go one step beyond Certificate IV.

The legislation is burdensome and will require significant investment from everyone right across the industry to adapt to the new regulations, he says.
And despite the measures, Forsyth fears that there is a possibility lenders and brokers could be unfairly held accountable for customers who lie about their finances.

"And how do we stop this taking place - with more legislation?"

Choice CEO Brendan O'Donnell heralded the draft legislation as an important step in providing consumers with protection and for being a significant milestone for the industry.

"The industry has been asking for it for some time - particularly as a process for developing our industry and increasing our professional reputation and client service offering," he says, adding that while Choice members operate in accordance with the MFAA code as well as its own standards, there are a small number of rogue brokers who continue to ply their trade.

In many ways, the legislation only reinforces what the industry has already achieved, although the level of professionalism varies from state to state, O'Donnell says. "While we have not had standard and formalised legislation to date, in full effect we have managed to evolve the broker industry over the years to become a professional and respected sector of the financial services industry. I think the integration of new legislation will only support the growth and development we've managed to this point."

The consultation with industry stakeholders has been extensive over the years, O'Donnell says, but there are a few points it would like clarified before it becomes law. For instance, he says there is a possibility that brokers could be unfairly held accountable for customers who lie about their finances.

"This is a concern and will be addressed in our submission.  From a Choice perspective I do not believe that it is the role of a broker to verify all information provided by a consumer - this should be undertaken by a lender while they are assessing an application and considering whether to offer finance," he says.

As for criticisms that there some ambiguity in the bill when it comes to defining terms such as "responsible" in relation to lending and "unsuitable" in respect to credit contracts, O'Donnell says: "Perhaps, but this is not really dissimilar to the Financial Services Regulation Act (FSRA): rather than being prescriptive, ASIC provides guidance." 

Mortgage Choice's Michael Russell echoes O'Donnell's support for the new legislation. "Since 2002 Mortgage Choice has been pushing for national regulation of the industry and we regard any form of regulation that provides consumer protection and confidence in our industry as an improvement," he says.

But like O'Donnell, Russell said it would also be making a submission to the committee.  

"There still needs to be some fleshing out of more the logistical implementation of some of the issues. We're hoping to get answers back pretty quickly on that," he says.

Comments from indicate that there may be some unresolved issues in the legislation for brokers. One broker commented that "anyone that is happy with it has not read the draft in full. What happens when the client lies to you about affordability? Should they fall in arrears and get foreclosed on, you as the broker, according to the new legislation, will face criminal (not civil) charges for giving a loan to client that can't afford it."

Another broker said that the current requirements are sufficient. "The new laws are overkill, penalizing the majority of brokers who are trying to earn a decent living in a professional services industry. It's not as if a dodgy broker is currently immune to termination of membership and accreditation, and prosecution and judicial punishment." 

Bruce Finch commented: "Now that ASIC is taking over the administration and responsibility of 'surveillance and compliance' of brokers, do we still need the MFAA? The MFAA doesn't represent or help brokers in any tangible way and only appear to be the banks' puppet. With our commissions and trails reduced and with no united voice to defend us (which I believe the MFAA and FBAA was supposed to do), we're probably better off without the MFAA. At least we'll save on multiple annual membership fees".

On this note, Andrew Brumby, director of Develop & Invest says "I'm a member [of the MFAA] and I'll support them, but with this legislation there probably needs to be a fundamental change to what they do."

As for complying with the legislation Brumby says it will involve some extra work but probably won't be too onerous for the experienced broker.

Industry bodies
The MFAA has been working with the government from the ground up to prepare the draft legislation. In an effort to get brokers' views on the bill it has been holding seminars around the country before it made its submission to the committee in May.

"I've spoken to 1,000 members around Australia and I haven't heard anyone who has been critical of what's proposed," says MFAA CEO Phil Naylor.

While brokers have been asking many questions about the bill, Naylor says they've concentrated on the finer aspects. "They're interested on how the licensing works, how the concept of credit representative works, it's more those matters of details."

In his seminar on the draft legislation, Naylor outlined several sticky points that the MFAA addressed in its submission. For instance, Naylor identified that "if you're a credit representative for a broker, at the moment theoretically you've got to sit down in front of the client and say here's the licensee's credit guide and here's mine. Now they're both substantially the same and we think that's a bit of an oversight. It seems nonsense to have to hand out two documents."

Another point identified by the MFAA is the possibility that consumers could be confused by the term "credit guide". "We're a little concerned that the document you're going to give as brokers is called a credit guide and the document that the lender provides is also called a credit guide. So we're suggesting to the government that maybe the document brokers give is called something different."

With regard to disclosure, the MFAA is pushing it to be limited to the person who actually sits in front of the customer.

"We don't want the credit representative saying well these are my details and these are commissions I'm going to get and the broker/licensee has to do the same and at the lender level there's disclosure as well. We basically want to get it how it works [currently] in NSW." 

Other issues discussed by the MFAA are the need to make sure the NSW exemption for margin disclosure for mortgage managers is in there and the necessity of keeping the licensing process simple.

"We now just have to wait and see," Naylor says of the recommendations the MFAA made to the commission.

Similarly, the FBAA president Peter White is hoping the commission takes its concerns on board.

"I won't put my hand on my heart and say it's perfect, but nothing is," he says, adding that there is always room for further changes to be implemented in Phase Two of national regulation.

In its submission regarding the draft bill, the FBAA stated: "The definition of financial products must include finance/credit products for not only the funding of investment property and property for residential use but also for commercial, plant and equipment and business finance and the like."

It also advises that the concentration on advice and regulating the finance/mortgage broker is sound "but must not be uncoupled from risk.

"A 'one fit for all' solution, while good in theory, may not be appropriate for all finance and credit products, especially if there are risks that vary markedly from product to product and lender to lender."

In its submission, the FBAA stressed that: "Levels of debt and debt exposure are the responsibility of lenders and not the finance/mortgage brokers or intermediaries. Whether or not to lend or advance the loan funds is a decision for lenders alone.

Ultimately it is the lender that approves and settles the loan."

For a complete look at the MFAA's presentation for brokers on the draft bill visit

To view the FBAA complete submission to the parliamentary commission go to