Supervision of the Responsible Lending Regimes: Theory,Evidence,Analysis and Reforms *

Abstract

National responsible lending regimes have operated in Australia since 2009, with the stated aims to encourage prudent lending, curtail undesirable market practices, and impose sanctions for irresponsible lending and leasing. This article outlines a study of the supervision of the responsible lending rules by the Australian Securities and Investments Commission (ASIC) from 2014 to mid-2017. The study finds that the Commission proactively engaged with lenders, encouraged tighter lending standards, and sought or imposed severe penalties for egregious conduct. Further, the Commission strategically targeted credit products commonly acknowledged as the riskiest or most material from a borrower's perspective, such as small amount credit contracts, interest only home loans, and car loans. Despite these positive findings, however, many households are heavily indebted and large segments of the community and the nation are highly susceptible to future harm. In this environment, we question the timeliness and sufficiency of the Commission's interventions and responses, and predict further litigation that tests the boundaries of the responsible lending rules. Moving forward, we call for more systematic supervision of responsible lending risks, practices and exposures and propose modest reforms that require lenders to better inform and engage with consumers about the risks of elevated levels of debt.