"Still a lot of work to be done" with responsible lending practices

The House of Representatives Standing Committee on Economics says there is still a lot of work to be done to improve responsible lending practices in the financial services sector.

The committee was tasked with reviewing APRA’s 2017 annual report and thoroughly questioned the regulator’s chairman Wayne Byres in March about its measures to reinforce sound lending practices.

“The disturbing evidence coming out of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry suggests that, in a number of cases, the major banks are moving from a low base when improving their responsible lending practices,” the committee’s chair Sarah Henderson wrote in the report.

APRA has been given additional oversight tools, such as the Banking Executive Accountability Regime (BEAR), which comes into effect on 1 July. And it has new crisis management powers which will “empower APRA to better prepare, and take decisive action, to more quickly and effectively address crises in Australia’s financial system”, she said.

APRA responds to royal commission

When Byres was questioned by the Economics committee in March about UBS’s report on mortgage mis-selling and the problems unearthed by the royal commission, he responded that “there has been a general sloppiness in the processes banks have pursued” and “corners have been cut”.

He said making proper inquiries about the borrower and their capacity to service the loan is “at its heart, in the responsible lending obligations” and apply to “not just banks but all licensed credit providers”.

“We are working with ASIC to see how we can do more to re-enforce and mutually re-enforce that issue,” he said at the time.

When probed about what the revelations from the royal commission reveal about APRA’s role in enforcing prudential standards, Byres said the regulator is “trying to understand the extent to which they indicate failings in the governance, oversight and accountability within organisations and then the extent to which those failings or shortcomings or areas for improvement might jeopardise the prudential soundness of those institutions”.

He noted that there are “clearly shortcomings in what the banks have done” and admitted that APRA has at times been in a “tug of war with the industry to try and improve standards across the board”.

That said, Byres tried to reassure the committee by saying that the system is in a much better place than it was three or four years ago when standards were “horribly low”. In 2016, the regulator audited the larger institutions to identify actions they could take to close gaps in their processes.

“The prudential standards are about safety. In particular, when it comes to banking, our task, boiled down to its absolute essence, is: is depositors' money safe? I don't think anyone has said, anywhere along the way, that Australian financial institutions are not financially sound,” Byres said.