Josh Frydenberg’s decision to dump laws requiring banks to meet responsible lending standards will enable a return to the kind of misbehaviour that sparked the Hayne royal commission, consumer groups say.
The treasurer on Thursday bowed to behind-the-scenes lobbying by the banks and said he would revoke the laws, which require lenders to make an effort to figure out whether would-be borrowers can afford to repay their debt.
Bank stocks soared on Friday morning, with Westpac shares up 6.5%, NAB up 6.3% and ANZ up 5.3%. Australia’s biggest bank, the Commonwealth, rose a more modest 3.1%.
It is not clear whether or how deeply the Australian Securities and Investments Commission, which administers the responsible lending laws, was consulted about the change, with one well-placed industry source telling Guardian Australia the regulator was “blindsided”.
The move means Frydenberg has abandoned his commitment to implement all 76 recommendations made by Hayne in his final report, which was handed to the treasurer in February last year.Hayne’s first recommendation was that the credit law “should not be amended to alter the obligation to assess unsuitability”.
In a joint statement on Friday morning, four leading consumer groups slammed the move, saying it would strip banks of their responsibilities towards customers and allow them to engage in predatory behaviour.
Gerard Brody, the chief executive of the Consumer Action Law Centre – which provided case studies to the banking royal commission – said there was no evidence the responsible lending laws had stifled the flow of credit.
“Commissioner Hayne concluded that the existing laws were appropriate, they did not need to change, and banks should apply the law as it stands,” he said.
“Winding back from this will just give the green light to all the harrowing stories we saw at the royal commission to be repeated.”
Choice, Financial Counselling Australia and the Financial Rights Legal Centre also blasted the move.
Karen Cox, the chief executive of FRLC and a witness at the royal commission, said ditching responsible lending rules was “a shortsighted fix for a flailing economy”.
“Watering down credit protections will leave individuals and families at severe risk of being pushed into credit arrangements that will hurt in the long term,” she said.
“Our service helped thousands of Australians drowning in debt and we continue to see legacy debt that predates the Hayne royal commission. How can we have so quickly forgotten the hard lessons from the GFC and the Hayne royal commission?”
The Australian Banking Association, which on its website claims to support the existing standards, welcomed the death of the responsible lending rules.
“Ensuring the flow of credit to families and businesses, with the right customer protections, is paramount,” chief executive Anna Bligh said.
It is understood the ABA will consider stripping responsible lending rules an industry code of conduct it administers during a regular review of the code scheduled to take place next year.
Asic has been contacted for comment. The move is likely to dismay the regulator, which has spent the last year defending the laws against a lobbying effort led by Westpac and attacks from Frydenberg and a ginger group of government backbenchers.
In a speech in November, Asic commissioner Sean Hughes said the idea, pushed by Frydenberg, that the rules crimped small business lending was “misinformation”.
Speaking in Canberra on Friday, Frydenberg defended the move.
“Our current regulatory framework, with respect to lending, is not fit for purpose,” he said.
“It’s become overly prescriptive, and responsible lending has become restrictive lending.”