Impact of Royal Commission on Lending Practices

This report discusses the impact of the Royal Commission on lending practices in the banking industry, including the effects on loan applications, lending policies, and the construction industry. It also explores the aftermath of the release of the final report by the Royal Commission.

Running head: BUSINESS LAW
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Executive Summary
The primary role of Royal Banking Commission is to ensure that the Australian major
banks and financial institutions are maintaining their usual conduct and not indulging into
any sort of misconduct toward the customers, after there have been several reports of forged
documents, bribery, mis-sold insurance and infringement of lending practices. In 2009, a
major reformative change related to ethical standard in the banking industry was brought by
way of the National Consumer credit Protection Act (NCCP) and it was mentioned that the
reforms effected by the Royal Commission enquiry would be added in the NCCP reforms.
This report looks forward to discuss about policy of the Royal Commission affecting the
application for loan as well as the lending policy to the Developers. It further discusses the
aftermath of the release of the final report by the Royal Commission to showcase the
situation of the construction industry and its investors.

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Table of Contents
Introduction....................................................................................................................2
The Inquiry Affecting the Application for Loan as well as the Lending Policy............2
Credit Crunch Hitting the Developers............................................................................4
Approach of the Royal Commission..............................................................................5
The after-math of the release of the Commission’s final report....................................6
Conclusion......................................................................................................................7
References......................................................................................................................8

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Introduction
The primary role of Royal Banking Commission is to ensure that the Australian major
banks and financial institutions are maintaining their usual conduct and not indulging into
any sort of misconduct toward the customers, after there have been several reports of forged
documents, bribery, mis-sold insurance and infringement of lending practices. In 2009, a
major reformative change related to ethical standard in the banking industry was brought by
way of the National Consumer credit Protection Act (NCCP) and it was mentioned that the
reforms effected by the Royal Commission enquiry would be added in the NCCP reforms
(Devenish 2019). Until the end of February 2019 when the reports came out, there were
uncertainties across the banking and other financial institutions and later it made the industry
even more strict and inflexible with their lending procedures and practices. AMP was the first
among the many casualties who stood down which disseminated a paranoia within the
banking and financial industry, more so among the four banking giants, namely
Commonwealth bank, National Australia Bank, Westpac and ANZ who were to be put under
the radar of scrutiny before any other financial institutional, for more the transaction, the
greater is the possibility to mis-handle customers and their funds (Devenish 2019).
The Inquiry Affecting the Application for Loan as well as the Lending
Policy
The stringent inquiry procedure and compliance check started by the Royal
Commission is proving to be detrimental to the homebuyers, developers and new businesses
as the loan application process has been made more complex and time consuming and the
borrowers are now required to share more information than they were asked before. The
lending buffer time has been extended in recent times to complete the overall procedure by
completing all the necessary documentations and paper work (Devenish 2019). This has been

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introduced to ensure that the borrowers do not default their loans; like the commercial banks
are frequently asking for bank statements from the borrowers for passing a personal loan.
Previously, certain subjectivities were enough for approving a loan, while now a fine line has
being drawn which checks the borrowing history of the borrower and a clean background
would be necessary to get a loan approved; an extremely black and white procedure is
followed now. Such an approach has affected the lending and borrowing capacity and the
availability of money for lending has reduced due to the reduction in the number of
borrowers for the added complexities and time-consuming process of lending that has been
imposed by the Royal Commission (Devenish 2019).
In this situation, the small bankers and second-tier lenders are rejoicing due to the
stringent condition of the big banks who are being scrutinised by the Royal Commission on
every move. This has opened more options for the borrowers as well, for they are getting
more options to choose from due to uprising of the small banks and second tier lenders. 70%
of the borrowers are now approaching to the small banks for borrowing as held by a recent
survey. The survey was conducted by MyState Bank Survey after a public disclosure of the
Royal Commission’s inquiry into the misconduct of the big banks in the Banking,
Superannuation and Financial services Industry (Mitchell 2019).
Such situation has led to the revision of the lending policy by big banks in order to
fulfill the criteria of Royal Commission by adopting different lending policies that are
reasonable as well as in compliance with the directions of the Royal Commission. The
stringent policies for lending that includes background and past record check of the
borrowers along with lengthier time taken for approving the loan is giving a hard time to the
big banks and at the same opening avenues for the smaller and second tier lenders (Devenish
2019).

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Credit Crunch Hitting the Developers
The low circulation of money in the lending-borrowing circuit due to the stringent
banking policy laid down by the Royal Commission has created a credit crunch that has hit
the builders, developers as well as other investors that has led to the fall of the construction
industry and fewer homes being made. As argued by the Managing Director of the BIS
Oxford Economics, Rob Mellor, the developers are the one who are among the most affected.
The impact of the Royal Commission has its effect on the banking regulator as well,
instigating the financial institution to be stricter with the investors and risky borrowers,
brewing a storm in the construction industry, both residential and commercial (Lambrinos
2019). Housings are facing a decline in the price due to the withdrawal of the foreign buyers
due to higher prices and taxes. Rob Mellor further discussed that a decline in the housing
price is noticeable every month, for the disinclined investors made it tough for the builders to
arrange for funds to start new projects. Such situation has led to the drop of mortgage rate by
some banks, particularly for the owners, even though more restrictive and stringent terms for
funding was expected due to the intricate and stricter inquiry of the Royal Commission
(Lambrinos 2019).
BIS Shrapnel forecasted that there will be a fall in dwelling start by 23% over the
years to come if the approach of the Commission stays the same. There will be a fall of 10%
in case of House Starts, 20% in case of medium density while a fall of 50% in the high rise
apartment sale, as argued by Shrapnel (Theaustralian.com.au 2019). As put forwarded by
Rob Mellor, Sydney, having the heaviest investor density, would face the most slowdown in
the business, which has already faced a falloff 9% in the dwelling house sale in the last
financial year and would see a 26% drop in the next two years (Theaustralian.com.au 2019).
As researched by CoreLogic analyst Cameron Kusher, the investors were held responsible for
54.8% of the total value of the new housing loans in May 2015, before the investors were

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charged with high mortgage rate. He had mentioned that the investors would be accounted for
the new lending by 42% which would be the lowest since 2012 August. Martin North, an
analyst from Digital Finance argued that the borrowers having a sizable deposit can expect to
receive a good deal from the bank while the ones with high-risk profile may not be that lucky
as they may face certain hurdles. It was also argued that the buyers as well as developers with
low deposits to be cautious when applying for a loan or if already having an investment
portfolio more than $1 million (Theaustralian.com.au, 2019).
Alike any other borrower, the developers and the builders are also asked to bring in
more documents supporting their reliability to return the lending by providing their income
and expense report, as informed by Martin North. The property developers has been facing a
hard time to borrow due to the higher mortgage rate due to the fallen stock of several big
banks by 20% in some of the areas of Sydney, Brisbane and Melbourne, where several high-
rise builders and developers were found to be objecting regarding the situation
(Theaustralian.com.au 2019). On the other hand, small developers were not facing as much
issue like the giant developing moguls; they had easy access to the approval of loans. The big
developers are put to go through a critical scanner before being approved of a loan or a
mortgage for it involve a huge risk, not only due to the stricter policy of the Royal
Commission that is time-consuming and complex, also because of the falling share price of
the big banks due to the lower approach of the borrower due to the strict as well as fixed
amount of mortgage or loan amount that has been pre-decided by the Royal Commission
policy. A further fall in the price of the construction industry could be assumed due to the
tight loan procedures that discourage developers to approach for newer projects
(Theaustralian.com.au 2019).

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Approach of the Royal Commission
Kenneth Hayne, the commissioner of the Royal Commission in his
final report held that the Commission do not recommend the banks to
tighten their grip pertaining to the banking as well as lending standards
(Danckert 2019). To this, the Chief Executive of Westpac, Brian Hartzer
and some other investors had commented that the policies of the Royal
Commission has never been successful to scare the banks to lend by
forcing an unnecessary credit squeeze on it (Lambrinos 2019). Kenneth
Hayne further stated that he acknowledges the stringent steps that the
commission had recommended to the banks, which was for strengthening
their home lending practices and also for reducing the bank’s reliance on
the household expenditure measure (HEM), with an intention to improve
compliance of the provisions of National Consumer Credit Protection Act
(Danckert 2019).
The after-math of the release of the Commission’s final report
Chris Bowen, the Shadow Treasurer pledged to follow and implement the
recommendations and policy laid down by the Kenneth Hayne Commission to the fullest.
As held by The Sydney Morning Herald, the banks were extremely annoyed for being kept
away from the release of the commission’s report (Lambrinos 2019). The developers in the
East Coast have taken the decision to keep their stock on hold and put the apartments on hold,
rather than selling them out on a lower price. The developers and builders were informed that
they were to be neglected by the big banks due to the implementation of the new policy of the
Commission, involving strict regulation and credit control (Lambrinos 2019). The high net
worth individuals known as the ‘sophisticated investors’ are taking the advantage of the

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situation and are taking an active role as syndicate lenders to big and small property and land
developing firms like Chifley Securities. Companies like Chifley that are enjoying a growth
pertaining to the lending business are providing loans and mortgages to landowners and
developers for projects that is having viability as well as a stable equity (Lambrinos 2019).
Conclusion
From the thorough and critical research of the situation that has been lurking since the
implementation of the policies and control by the Royal Commission on the lending industry,
big banks have been facing serious issues and a decline in their business ever since. However,
this scenario has helped the small banks and second tier investors to expand their business of
investment and fetch a high return out of it. The small bankers and second-tier lenders are
rejoicing due to the stringent condition of the big banks who are being scrutinised by the
Royal Commission on every move. This has opened more options for the borrowers as well,
for they are getting more options to choose from due to uprising of the small banks and
second tier lenders. The low circulation of money in the lending-borrowing circuit due to the
stringent banking policy laid down by the Royal Commission has created a credit crunch that
has hit the builders, developers as well as other investors that has led to the fall of the
construction industry and a fewer homes being made. The Commission is of the view that the
policy has been recommended for strengthening the home lending practices of
the banks and investors, and also for reducing the bank’s reliance on the
household expenditure measure (HEM), with an intention to improve
compliance of the provisions of National Consumer Credit Protection Act.
Even after the implementation of such strict policies, the big banks and
the giant investors have commented that the policies of the Royal

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Commission has never been successful to scare the banks to lend by
forcing an unnecessary credit squeeze on it. However, investor firms like
Chifley Securities have been taking the advantage of the situation and are taking an active
role as syndicate lenders to big and small property and land developing firms.

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References
Danckert, S. (2019). Hayne delivers final report on banking royal commission to GG.
[online] The Sydney Morning Herald. Available at:
https://www.smh.com.au/business/banking-and-finance/hayne-delivers-final-report-on-
banking-royal-commission-to-gg-20190201-p50v2c.html [Accessed 15 May 2019].
Devenish, D. (2019). How has the Banking Royal Commission impacted lending practices.
[online] Blog.westminsternational.com.au. Available at:
https://blog.westminsternational.com.au/how-has-the-banking-royal-commission-impacted-
lending-practices [Accessed 15 May 2019].
Lambrinos, D. (2019). Royal commission could be good news for non-bank lenders. [online]
The Sydney Morning Herald. Available at:
https://www.smh.com.au/business/companies/royal-commission-could-be-good-news-for-
non-bank-lenders-20180329-p4z6we.html [Accessed 15 May 2019].
Mitchell, J. (2019). More customers asking for smaller banks: Survey. [online]
Theadviser.com.au. Available at: https://www.theadviser.com.au/breaking-news/38090-
more-customers-asking-for-smaller-banks-survey [Accessed 15 May 2019].
Theaustralian.com.au (2019). Subscribe to The Australian | Newspaper home delivery,
website, iPad, iPhone & Android apps. [online] Theaustralian.com.au. Available at:
https://www.theaustralian.com.au/nation/nation/credit-crunch-hits-developers-builders-
wouldbe-homeowners/news-story/a6476d1838c1f57e60594875c76fcfc7 [Accessed 15 May
2019].