In last week’s budget announcement, it was revealed by the Hon. Scott Morrison MP, Treasurer of the Commonwealth of Australia, that the financial services regulator would be given power over non-authorised deposit-taking institutions (ADIs).
While the non-bank sector is bound by responsible lending regulations, it is not currently subject to macroprudential controls imposed by APRA, such as the recent caps on investor lending growth or interest-only loans.
Several industry heads have said that the crackdown has been a boon to the non-banks, including Liberty Financial’s chief operations officer James Boyle, and — notably — APRA boss Wayne Byres.
Speaking at an event in Sydney in March, Mr Byres highlighted that regulatory efforts to tighten certain forms of credit — such as investor and interest-only home lending — have simply resulted in loans being picked up by alternative lenders “beyond APRA’s remit”.
Mr Byres explained that the most important impact of the regulator’s macroprudential measures to date –including a 10 per cent limit on investor loans growth, higher serviceability buffers and interest-only loan caps – has been to reduce the competitive pressure on banks to loosen lending standards as a means of chasing market share.
“Of course, lenders not regulated by APRA will still provide competitive tension in that area and it is likely that some business, particularly in the higher risk categories, will flow to these providers,” he said.
However, if the new APRA powers announced in the budget are passed by the Senate, the non-banks could, potentially, also be subject to similar controls.
While the details of what the oversight could look like in practice have not yet been revealed, the budget documents state that the “new powers complement APRA’s existing macroprudential power”, and the new funding will “allow APRA to collect data from these entities for the purposes of monitoring the non‑ADI lending market”.
The budget documents read: “These changes will form part of a modernisation of the Banking Act 1959 (the Banking Act) to better support APRA’s use of the Banking Act for macroprudential purposes. This will include making clear APRA’s responsibility for using geographically‑based restrictions on the provision of credit where APRA considers it appropriate.”
Indeed, Mr Morrison said on Tuesday evening that government would “explicitly allow [APRA] to differentiate the application of loan controls by location.”
Non-bank lender reaction
Speaking to Mortgage Business, Bluestone’s national head of sales and marketing, Royden D’Vaz, said he expected that this would be of particular benefit for lending to the regions.
He said: “When he says location, he means more regional areas… in the mining towns, for example. I can see what he means; be prudent, don’t lend too much in the areas that are struggling in relation to values.”
Mr D’Vaz notes that any “good, prudent manager would be doing that anyway”, adding that he is not concerned by the new APRA jurisdiction.
He explained: “It's neither positive nor negative. I see it as a formalising of them saying that they are going to keep an eye of it, to see if our businesses are governed well.
“I don’t think we should be wary of them coming to make sure we are doing the right thing, we should be doing the right thing anyway.”
Nick Young, managing director of Trail Homes agreed, saying it was "entirely appropriate" for APRA to be given powers over the non-bank sector.
He told Mortgage Business: "I've been broadly supportive of APRA's actions up until now and I think that we've seen foreign lending boom in the non-bank market, it's got to be uniform across banking. I think the alternative is actually silly. Everyone needs to be playing on an even playing field."
He likened the lack of oversight to having a speed limit for cars, but not for motorbikes.
Mr Young continued: "The point of APRA is not to give a particular sector an inside run, its job is to deal with everybody in a uniform and fair fashion.
"Their premise is to address an investor market that has seen a lot of activity and arguably does need some control to keep it under control."
He concluded: "I think it's appropriate that everyone is treated evenly or fairly."
Moves aim to avoid 'systemic risk'
According to Aris Allegos, co-founder and CEO of Moula, the decision to expand APRA's role to include non-banks is a result of the burgeoning non-bank market.
He said: "Despite the non-bank market only accounting for between 6 and 7 per cent of the financial system, our growing population combined with tightening credit standards, should see the non-bank market continue to increase in size. Accordingly, APRA are stepping in to ensure this growth doesn’t pose a systemic risk to the economy."
Moula's CEO said that APRA's controls could include "[moves] limiting exposure by a bank in the senior tranche of a non-bank securitisation (i.e. introducing a 20 per cent cap), though we anticipate more direct measures (e.g. restricting interest only loans) to be introduced".
He concluded: "There’s no doubt, a segment of the non-bank market will be impacted; fortunately, established non-banks with sensible underwriting standards should be left unscathed.
"APRA's intention is to ensure that those more questionable lending standards out there don’t spread too far into the economy."
Likewise, Kieran Gill, director of Semper Capital, told Mortgage Business that while “we haven’t seen what they are going to do yet”, he said that APRA is “logically… concerned about the fact that we have very high house prices in Sydney and Melbourne, stagnant wages, historically high household debt, very low interest rates and a competitive market”.
“All signs point to the fact there is a property bubble and they are trying to prevent a bust where nobody wins. The changes are to prevent the flooding of bad debt into the retail space and loose lending practices”, Mr Gill said.
He added that, “in the short-term for interest-only loans, the non-bank space will benefit [from the investor speed limits on banks]”.
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Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.