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Payday lenders, mortgage brokers also in banking royal commission's sights

The royal commission into the banking and financial services sector will be expanded to include mortgage brokers and pay-day lenders as part of the largest investigation into the financial system in Australian history.

Commissioner Kenneth Hayne will now be empowered to investigate all agencies that hold an Australian credit licence, including unscrupulous lenders outside of the major banks, during the 12-month inquiry.

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What the banking inquiry will cover

The government has revealed the terms of reference for the banking royal commission and not everyone is happy.

The Turnbull government was initially criticised for limiting the inquiry to the narrower field of Australian financial services licence holders – mostly made up of major financial institutions – but it is now understood to be broadened when the final letters patent is released.

"In the context of all unsuitable lending, mortgage brokers had to be covered," said Maurice Blackburn lawyer Josh Mennen, whose firm has been discussing the royal commission with hundreds of clients.

Prior to the expected announcement of the changes to the letters patent, Mr Mennen had been urging the government to take on some of the terms of reference from the rebel bill launched by Nationals senator Barry O'Sullivan.

Senator O'Sullivan's bill referred specifically to all agencies that are capable of issuing or giving advice on credit to customers under the Australian credit licence.

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In September, a report from UBS found that up to $500 billion worth of loans could be classified as "liar loans" – containing inaccurate information on the financial viability of the loan.

The report found up to 40 per cent of loan applications through a mortgage broker had at least one misrepresentation, potentially putting some at risk of default.

Payday lenders such as Cash Converters will also come under the scope of the inquiry after an independent review last year found high interest loans were being inappropriately targeted at low-income and vulnerable Australians, trapping them in a debt cycle.

The government has already moved to strengthen protections for customers of last resort advance loans after the Consumer Law Advocacy Centre warned they were being used as a repeat source of funding at exorbitant rates of interest.

An investigation by the Australian Securities and Investments Commission last year found Cash Converters was lending to vulnerable customers who did not have the capacity to repay their loans. The company was forced to refund $10.8 million to customers and paid a $1.35 million fine.

There have also been calls for the commission to be expanded to examine excessive bank fees, termination of business loans and unfair contracts which may not be classified as "misconduct" but fall short of community expectations and remain within the broad scope of the terms of reference.

Justice Hayne will be given the power to compel witnesses to give evidence under oath, and make it an offence to fail to attend or produce documents to the royal commission, or to conceal, mutilate or destroy any documents.

The commission will be able to refer matters to the Director of Public Prosecutions, followed by criminal prosecutions.

It is expected to hand down its findings in February 2019.