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25.08.2017

News

Closing the gap – new rules for non-bank lenders

The financial press has recently been reporting on proposed changes to extend APRA's powers to non-bank lenders.

With the tightening of traditional credit from the major lenders and the influx of new entrants to the credit market, some form of regulatory response was probably expected.

Here, partner Langton Clarke discusses the changes and questions whether the devil will be in the detail.


Where is the gap?

Australia's banking sector has always been highly regulated (and having withstood the global financial crisis, it would be fair to say effectively so). To be regulated as a bank (or an authorised deposit-taking institution (ADI) if we want to get technical) a company must provide finance, and also take deposits. For some time there have been entities in Australia who, like ADIs, provide loans but are not deposit takers. Given there are no depositors to protect, these companies are not required to be licensed as ADIs nor prudentially regulated by APRA.

APRA has significant powers to address financial stability risks posed by the lending activities of ADIs, but has no such ability for non-ADI lenders. There is a concern this gap potentially undermines APRA's ability to promote financial stability.


Closing the gap

It is now proposed APRA be given new rule making powers over non-ADI lenders. That should be concerning for the likes of Alec Baldwin and the Latitude business he hilariously promotes. But the recent plethora of mortgage fund operators should also be asking if this regulation could extend to them.


Will the devil be in the detail?

Whilst Australia is often criticised as being over regulated, it is fair to say these new rules are not a sledgehammer smashing a walnut:

  • APRA must first identify material risks of instability in the Australian financial system before rules can be made.
  • It must also consider efficiency, competition, contestability and competitive neutrality under the APRA Act.
  • APRA will not prudentially regulate and supervise non-ADI lenders as it does with banks. Therefore, the rules won't see non-ADI lenders slapped with huge capital adequacy requirements.
  • Unless a company's loan book exceeds $50 million, it will not be subject to the new rule making power.
  • Intra-group lending within a corporate enterprise is also carved out.

All that said, with the government's encouragement of lending competition creating companies with big enough loan book assets, plenty of non-ADI lenders will now come under APRA's new power. Just what amounts to a "material risk of instability in the Australian financial system" will rest on APRA's interpretation. What types of rules they will make will have some non-ADI lenders very nervous (APRA's recent prudential intervention to cap interest-only lending showed just how far the regulator's powers can go).

Most non-bank lenders are funded by external investors and the one thing that will send investors running is uncertainty. These lending entities are therefore seeking as much clarity as possible from the Government about the motivation for these new laws and how far they could reach.

We will keep you up to date with any changes and what they mean for business.


Authors

Langton Clarke

Langton Clarke

Partner

Contact McMahon Clarke

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