Regulation of Non-Bank Lenders – Lexology
In 2018, APRA was given the authority to regulate lenders not regulated by APRA, if APRA determines at any time that such lenders contribute significantly to financial stability risks.
These powers are drafted much more narrowly than APRA’s powers over banks (ADI).
This was seen as an appropriate balance, given that there are no depositors from the general public to protect at non-ADI lenders. Of course, there are often sophisticated investors involved in financing non-bank lenders, such as wealthy individuals or families, other developers or construction companies as well as a range of institutional investors (super funds, foreign pension funds, hedge funds and private equity firms). However, they are generally considered by regulators to be large enough to take care of themselves.
Before exercising these regulatory powers over non-bank lenders, APRA must consider efficiency, competition, contestability and competitive neutrality.
APRA said it would consider things like:
- the overall size of the non-banking sector, with particular emphasis on market shares in high-risk lending segments;
- the lending practices of non-bank lenders, to assess whether they contribute to downward pressure on industry-wide standards;
- potential spillover effects, given the possibility that a reduction in subprime lending in APRA-regulated entities could spill over to non-bank lenders; and
- information from other regulators, including the Australian Securities and Investments Commission (ASICs) given its role as the main regulator of non-bank lenders.
In assessing the market share and overall size of the non-banking sector, APRA was partially blinded by its inability to collect data from all significant non-banking lenders under the 2001 the financial sector (data collection) (FSCODA).
The definition of “registerable company” in the FSCODA was considered too restrictive in terms of APRA’s ability to collect data, as companies that engage in equipment lending activities were not always required to register.
This was confirmed in 2019, when media investigations revealed that the RBA’s Financial Stability Department noted in a memo that “limited data” was available on the scale of non-bank lending to developers.
The possibility that non-bank lenders could finance an oversupply of flats has worried RBA Financial Stability analysts at least since the start of 2017.
This inadequate data has hampered the ability of APRA and the Board of Financial Regulators (CFR)* to properly monitor the financial stability implications of the non-ADI lender sector.
APRA’s ability to collect data from non-ADI lenders was enhanced in 2018 by modifying the thresholds so that the requirement to provide statistical data applies if the lender (including non-bank lenders):
- has outstanding debts to it arising from the provision of financing that are at least $50 million; Where
- in the previous fiscal year, it made loans (or other financing arrangements) under which it provided $50 million.
Non-bank lenders in the mortgage lending industry are already heavily regulated by ASIC under the National Consumer Credit Protection Act. So it’s safe to say that to that extent and given their limited overall market share, any immediate issues can be addressed through ASIC’s existing powers. .
To date, APRA has not seen fit to impose prudential standards on the non-banking sector and industry players have noted that if it were to do so, it could have a significant impact on investors’ appetite for the capital market and securitization to continue to provide wholesale financing to the non-banking sector, thereby lessening competition, particularly in the hotly contested housing lending sector of the market.
In announcements in recent months, APRA expressed no current intention to further regulate the non-banking sector, but reiterated its willingness to do so if it believes there are heightened risks to financial stability.
It can be deduced that to date, APRA has not assessed that there is a significant risk of this type.
*Footnote: The Council of Financial Regulators (CFR) plays an important role in assessing the level of systemic risk and coordinating regulatory responses between agencies. The CFR is the coordinating body for Australia’s main financial regulatory agencies: the APRA, the Australian Securities and Investments Commission, the Reserve Bank of Australia and the Treasury.