Banks warn consumers would miss out on loans under more rules

Banks said they were improving how they looked into customers’ incomes and expenses, but imposing further obligations on the industry when badessing loans threatened to raise the price of credit or force people into the unregulated “shadow” banks.

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“Too great a shift of responsibility from borrower to lender will make it less likely that credit will be made available by the larger financial institutions or be higher priced, which will inadvertently push lending into the unregulated shadows of the financial services system,” Commonwealth Bank said in its submission.

Westpac said it recognised the importance of lending responsibility, but “lenders still ultimately depend on customers to provide lenders with information with which to consider customers’ lending applications”.

“Shifting the balance of responsibility too far to lenders, and reducing the responsibility of a customer in the equation, would have potential consequences for both cost of, and access to, credit,” Westpac said.

Banks also argued against extending the National Consumer Credit Protection Act to business customers, with Westpac saying such a move would “alter the number and nature of SME customers eligible for credit”.

The lenders, including ANZ Bank, CBA and NAB, also defended the use of statistical benchmarks such as the Household Expenditure Measure (HEM) for badessing customers’ living expenses, after Commissioner Hayne questioned if banks should continue relying on the HEM.

The warnings from the financial giants come amid predictions the royal commission could further put the brakes on credit growth in the housing market, potentially adding to the slump in Sydney and Melbourne house prices.

Submissions from the big four banks, published on Thursday, also acknowledged the role of remuneration in driving scandals in banking, but argued the industry was fixing these problems by changing the design of incentives to put a greater emphasis on customer service and risk.

“Past practices which have over-emphasised sales have contributed to a disproportionate focus on short-term financial results,” ANZ said.

While NAB said it was “willing to explore with industry including publishing approved product lists of all its licensees, and making available to clients our employed adviser remuneration structures”.

With the exception of CBA, the dominant mortgage lender, banks also defended the commission-based pay model used by mortgage brokers but pointed to industry moves to stamp out volume-based incentives.

NAB also pushed to retain some at-risk remuneration for its front line staff saying it “participates in a competitive market where variable reward is an established component of remuneration packages”.

CBA said paying commissions based on the size of a loan ” can potentially lead to poor customer outcomes,” but it said legislation would be needed to change commission structures, beyond changes made by the industry voluntarily.

In regards to how planners are paid, NAB said any changes needed to be carefully considered.

“In particular, the risk of unintended consequences would need to be taken into account,” the bank said in its submission.

“For example, if commissions were replaced with a fee for service paid by the consumer, this would potentially increase direct costs to consumers to access broker channels, disadvantage smaller lenders and those without branch networks, and weaken competition.”