Responsible Lending: What Impacts Will Josh Frydenberg’s Proposes Have On Stocks

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On Friday last week, Josh Frydenberg, Australia’s Treasurer, was the talk of the markets.

Josh Frydenberg’s announcement of a rollback of responsible lending laws that were enacted after the financial crisis in 2008 has caught the attention of the nation.

Lending standards, after the proposed changes to the Credit Act announced last week, will fall under the jurisdiction of APRA, a bank regulator. The Australian Securities and Investment Commission (ASIC) was previously enforcing strict measures.

Josh Frydenberg wrote on his blog, feature on his website, last week that these changes are necessary for helping the speed of recovery and free up credit flow within the economy.

Heated debates within the commentariat were immediately started after the announcement was made. The debate was only enhanced by the 2018 banking royal commission.

The day before Frydenberg release his statements, it was announced that Westpac had taken the settlement offer of $1.3 billion over their current money-laundering charges being investigated by the Australian financial crimes authority AUSTRAC.

However, many have been focusing their attention on another Westpac case in relation to Frydenbergs proposal – the “Wagyu and Shiraz” trial.

According to the ASIC, Westpac had allegedly breached their lending obligations by using a simplified benchmark, the Household Expenditure Measure (HEM), to assess expenses for applicants of home loans.

In federal court, it was ruled, in favour of Westpac, that expenses were not necessary to loan applications due to the fact that they could be cut by the borrower if necessary.

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This ruling is similar to what the government is now proposing.

The entirety of responsibility for meeting obligations of loans will be placed on the consumers, according to the new legislation, rather than banks being forced to stick to risk assessment producers that are extremely strict.

3.71 per cent of the ASX financials index rallied, prompting Australia’s largest, and besieged, banks to surge after the announcement made by Frydenberg.

If this proposal is successful in passing through parliament, Australian Security Exchanges fintech sector such as Wisr (ASX:WZR) and MoneyMe (ASX:MME) will be impacted.

Anthony Nantes, Wisr CEO, states that the new law is welcomed by his company. As a way to help support lenders who have been disrupted by the current worldwide situation, Nantes says that this proposal is a great way to follow up the Australian Office of Financial Management’s (AOFM) $15 billion funds.

According to Nantes, Wisr, is “pleased with the decision from the Australian Government to change the responsible lending law”.

“It clearly shows they are actively thinking about this sector, and we agree it will provide consumers with more choice, and encourage them to seek out a better deal.”

“Following the AOFM support for the Australian credit market, today’s decision demonstrates their understanding of the very important role credit plays in the economy for everyday Australians,” Nantes continues.

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Skyjed, a regtech compliance platform, CEO Lecia Ison has also provided her own view of what the new proposal from Frydenberg could mean for the current credit landscape in Australia.

Ison states that consumer rights groups are “rightfully” concerned with the proposed new laws, however, “in our view, it’s the banks that still need to be aware, and they still have the most to lose”.

Currently, in Australia, unemployment and wage growth are extremely low, which is a primary concern for many consumer rights groups. This is concerning because debt loads may increase during this time.

“Poorly targeted products will be investigated. The regulatory environment today is far more stringent and complex, and provides a much more robust safety net for consumers.”

According to Ison, AUSTRAC has “spent a good deal of time signalling to the market that they are on the hunt for more high-profile cases”. She believes that the $1.3 billion settlement with Westpac will be on the banking sector mind for a long time.

She continues, “Whilst the move is certainly a positive for growth as we recover from COVID, there is every reason to believe the banks will be treading far more cautiously with their product governance this time than they have in the past.”