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The horror stories of consumers in financial strife that emerged during the banking royal commission more than five years ago led to stronger regulations aimed at better protecting consumers, and caps on bonuses paid to bankers.
But the major banks are calling for some of these regulations to be wound back as they face tougher competition and fight harder to retain profit margins in lending to consumers and businesses.
Nowhere has competition been tougher than in the home loan market. That's why the Commonwealth Bank has said it is planning to increase the commissions it pays to its home loan bankers.
It has decided to stop its best-performing bankers leaving by lifting the maximum bonus it can pay from 50 per cent of base pay to 80 per cent of base pay, defying concerns that this creates conflicts of interests that could incentivise risky and harmful lending.
This is happening as the CEOs of ANZ and NAB have called on the government to ease current rules around lending, saying they are so restrictive that it has created an inequitable system where banks can loan to wealthier people but medium and low-income households are often locked out of financing.
"Our view that it's the unintended consequence of that is that it is harder to get a home loan or a credit card in Australia or New Zealand today than it has been in 30 years," ANZ boss Shayne Elliott told investors in November last year.
Mr Elliott has made similar public comments in the past week arguing that access to credit is "becoming the preserve of the well-off".
"…If you want a loan, you have to be better off or you have to essentially be rich," Mr Elliott had warned.
"Now, from a bank's perspective, that means it's safe. The people we're onboarding are really, really good, robust clients and that's why you're not seeing them fall into as much trouble as they might have historically."
This, he says, leaves the big banks safe, but "comes at the cost of economic dynamism and aspiration in the economy".
"Is that a society that we want … where people can't get a home loan or can't get a loan to start a business? That has consequences."
Mr Elliott's comments were echoed this week by incoming NAB chief executive Andrew Irvine.
"The challenge that I think we're seeing now is that the collective effect of all of that regulation, has added complexity and, in aggregate, has made it challenging for bank participants to serve the needs of lower income households," Mr Irvine told ABC radio's The World Today program.
"We're certainly seeing that our portfolios in our consumer bank are performing quite a bit better than I would have expected at this stage of the economic cycle.
"And one might then think that is that because some of the customers that we would have typically banked in prior times are no longer borrowing from us."
Mr Irvine said how regulations can be changed is "a conversation that could be had with governments and regulators".
"Ultimately regulators need to make those decisions themselves and to the extent they ask us for our views, we will share them," he said.
"The point here as it's never just one specific regulation, it's the commingling of all regulations that make it harder for banks to lend."
More Australians are stuck in a mortgage prison unable to refinance
So what regulations are they talking about?
There are two major laws that restrict the ability of banks to lend.
The first are rules imposed by banking regulator APRA that require lenders to assess someone who wants to borrow for a home loan at a rate that's 3 per cent above the current rate on offer.
These buffers only apply to lenders regulated by APRA (not non-banks) and were increased in 2021, after problems started emerging of people being lent loans on deposits of 10 per cent or less and at more than six times their income.
But now, as more borrowers roll off cheap fixed loans onto higher variable rates, many Australians are stuck in a mortgage prison.
Mortgage broker Redom Syed says about 40 per cent of his customers can't refinance with a bank.
He says that's because of regulations around serviceability buffers.
"They [would-be borrowers] don't pass the stringent tests that are in place at the moment, particularly from larger banks," he says.
"It's pushing some of these low- and middle-income borrowers to non-banks to simply refinance their loan."
Mr Syed says buffers should be removed for people refinancing if they have a good history of repayments and lowered for those buying a new home.
He says rather than create financial stability issues, "it will simply allow more people on the sidelines who don't have access the ability to go and purchase a home and it might put less pressure in the rental market".
Calls to roll back responsible lending laws met with concern
The other regulation that restricts a bank's ability to lend are responsible lending laws, passed during the Rudd Labor government in 2009, and backed by Kenneth Hayne's royal commission final report, which found that many banks were not applying them correctly.
In 2021 the then treasurer Josh Frydenberg tried to pass a bill looking to wind back these laws, but it was rejected by the Senate crossbench, with both Labor and Greens senators expressing their opposition.
Now that the banks are again agitating for changes, consumer groups are worried.
"Lending laws are in place to make sure that credit and lending is safe," says Stephanie Tonkin, chief executive of the Consumer Action Law Centre.
"By easing those [responsible lending] laws, what we're looking at doing is creating more risk. People who cannot afford or at high risk of being unable to afford a loan, will be able to access credit. And right now, we're seeing people in high amounts of mortgage hardship."
One in four calls this year to the National Debt Helpline have been from Australians who face mortgage hardship, including some who have been forced to sell their homes.
"This is unprecedented … and it really reflects a changing face of people presenting to the National Debt Helpline for financial counselling support," Ms Tonkin says.
"These are people earning incomes, sometimes dual income households, who are stretched beyond their means and struggling to afford essentials."
She warns the move by CBA to increase banker bonuses is also problematic, noting that in 2017 the Australian Banking Association gave a commitment to cap commissions at 50 per cent.
"The entire reason for those caps was tied up in some of the big problems that we saw in the royal commission into banking misconduct … were linked back to the impact of commissions and bonuses," Ms Tonkin says.
"It (commissions) creates a culture of sales and a culture of really stretching the lines of the rules. And in the context of talk of easing responsible lending, I'm really concerned that what we're going to see is even more hardship on the National Debt Helpline as people cannot afford loans that they've been provided."
'A race back to the bad old days'
Other consumer groups warn that even small tweaks to responsible lending laws could cause financial turmoil.
"What we're seeing here is a race back to the bad old days of greed that led us to the royal commission in the first place," says Karen Cox, chief executive of Financial Rights Legal Centre.
She was one of the first witnesses at the banking royal commission, which kicked off its hearings in 2018 and ended with a final report in early 2019, detailing stories of despair that were coming from Australians who'd been given loans they couldn't afford to repay.
She says the stricter enforcement of responsible lending laws and caps on bonuses that occurred after the royal commission is what has kept a lid on mortgage arrears rates even as interest rates have surged by the most in more than three decades.
Arrears are still relatively low by historical levels. Data from APRA released for the December 2023 quarter shows as a share of credit outstanding, the proportion of mortgages 30-89 days past due is just 0.60 per cent.
And non-performing loans, where the borrower has missed a mortgage repayment by 90 days or more, as a share of credit outstanding, it is also low by historical standards, sitting at 0.85 per cent.
"The conditions that we're seeing we would have much higher arrears again, if we didn't have those laws," Ms Cox says.
"Clearly, they [big bank bosses] are attempting to dog whistle changes here. I don't see any rational justification for the relaxation of the laws."
She says banks are operating in a highly competitive environment where their market share has been under threat, "and they are looking for ways to compete and they're looking in the wrong places".
The latest ABS lending Indicators data released on Friday shows the banks still hold the lion's share of housing loans.
In fact, the major banks have increased their market share of new lending with borrowers opting to send 74 per cent of all new loans in March to a big four bank.
This has increased from 69.8 per cent in March 2022, before the first cash rate rise in the current hiking cycle.
However, the data showed a slow down in refinancing activity, with a 2.5 per cent decrease in activity over the month.
More than $16 billion in loans switched to a new lender compared to the peak of $21.5 billion in July 2023.
AMP chief economist Shane Oliver says there might be scope to reduce buffers for people refinancing — the banks already have some room to do that — but cautions against significant changes to lending laws.
"We've gone through a very difficult time in the economy in terms of the massive rise in interest rates, and we've come through — so far anyway — at a relatively low level of arrears," he notes.
"That partly reflects the responsible lending that the banks have been undertaking over the last few years. If we had to take a dramatic easing in lending standards, and the rules around that, the risk is that the next cycle could be far worse."