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Scrapping responsible lending laws a 'disaster' that could drown Australians in debt, consumer groups say

<span>Photograph: AAP</span>
Photograph: AAP

Consumer groups have urged crossbench senators not to approve government legislation tearing up responsible lending laws, describing the idea as a disaster that could drown Australians in debt.

The treasurer, Josh Frydenberg, said in September that abolishing responsible lending laws would help the economy recover from a coronavirus-induced recession by increasing the flow of credit.

However, in a report delivered to Frydenberg almost two years ago, the banking royal commissioner, Kenneth Hayne, recommended that the law remain unchanged.

Guardian Australia reported on Tuesday that more than half of Hayne’s recommendations have either been abandoned or are yet to be fully implemented, sparking fears among consumer groups that cleaning up the financial services industry is no longer a government priority.

Related: Banking royal commission: most recommendations have been abandoned or delayed

Rex Patrick, the independent senator for South Australia, said he was sceptical about striking the law from the books.

“I am yet to be convinced about the merits of lowering standards that were put in place to safeguard both consumers and banks,” he told Guardian Australia.

The Reserve Bank of Australia governor, Philip Lowe, has publicly supported ditching responsible lending laws but an internal RBA analysis, released on Friday under freedom of information laws, revealed staff fear that “looser lending standards” and “optimistic assessments of risk”, combined with low interest rates and soaring house prices, could entice Australians to take on too much debt.

Consumer groups said they have been lobbying crossbenchers to reject any legislation killing the responsible lending laws for about three months. None have so far committed to voting against it, they said.

“We are getting a really good hearing, and they understand what’s at play here,” Fiona Guthrie, the chief executive of Financial Counselling Australia, told Guardian Australia.

Guthrie said victims of domestic family violence, people with mental health problems and people with low financial literacy were at risk of being loaded up with debt they would struggle to repay. “Because there’ll be fewer protections in the laws, it will be much easier for lenders to take advantage of borrowers,” she said.

Because credit is a complex product, one bad decision can have long-lasting consequences. “If you’re a young person, for example, if you default on a credit card you may not be able to get a home loan,” Guthrie said.

Australians would “walk through fire” rather than default on loans, she added.

“They cut down on medications, they cut down on food, they cut down on heating. It creates enormous strain on peoples’ relationships, it affects how children are raised because it’s difficult when there’s not much money.”

Drew MacRae, a policy officer at the Financial Rights Legal Centre, said it was vital that crossbenchers “not support this essentially misguided legislation”.

“The problem at the moment is that there is too much debt and not enough income,” he said. “The government’s solution is for people to take on more debt, with fewer protections.”

The Choice chief executive, Alan Kirkland, said the government’s policy was “a disaster”.

Responsible lending laws were introduced in 2009 “because we saw the risks when banks weren’t required to lend with care”, he said. “We’ll go back to those bad old days if we got back to those laws.”

Kirkland said Choice had been happy with the government’s original timetable to bring in Hayne’s recommendations and a six-month delay due to Covid was reasonable.

“But we would not want to see any further delay, and there are some very big issues the government has to grapple with, such as setting up a compensation scheme.”

Related: No accounting for banks? Frydenberg's response to the royal commission is on hold

Hayne recommended setting up a “last resort” scheme so that victims would be guaranteed a payout even if the person or company that ripped them off went broke.

However, the government has yet to introduce legislation for such a scheme.

The opposition frontbencher Andrew Leigh accused Frydenberg of breaking a promise to act on all 76 of Hayne’s recommendations.

“We see in particular the abandonment of the Hayne royal commission’s number one recommendation, that responsible lending laws not be wound back,” he said.

“Australia has some of the highest household debt levels in the world, there is simply no need to be urging a surge of irresponsible lending to Australian households.

“The government’s approach seems to be driven far more by its corporate donors than by the interests of regular Australians.”

Nick McKim, the Greens economic justice spokesman, said the delays made it clear the Coalition government was “quite happy for people to continue to fall victim to the banks’ predatory conduct”.

“They are also trying to scrap responsible lending laws, which will lead to more people landing in unsustainable debt,” he said. “With unemployment and underemployment high in the middle of a global pandemic, there has never been a worse time to let banks off the leash.”