It was announced in the budget earlier this year 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 macro-prudential controls imposed by the Australian Prudential Regulation Authority (APRA), such as caps on investor lending growth or interest-only loans.
However, non-ADIs do have “indirect oversight” from APRA, given that the majority of warehouse lines are provided by ADIs, and they are also regulated by ASIC under the National Consumer Credit Protection Act 2009.
While Pepper was party to a joint submission prepared by King & Wood Mallesons on behalf of Firstmac, Liberty Financial, RESIMAC and Pepper Group, the non-major lender has now submitted an individual response to “emphasise [its] significant concerns about the impact the proposed legislation may have on the availability of finance to ordinary Australians”.
Writing in the submission, Michael Culhane, Pepper Group CEO, said: “While we acknowledge that the stability of the financial system should be of critical concern and an aim of government regulation, we believe the legislation as proposed is too broad and will lead to regulatory uncertainty.”
Noting that the proposed legislation could make it possible for APRA to “suddenly impose capital adequacy requirements on non-banks”, Mr Culhane argued that it could result in investors in the debt capital markets (particularly offshore investors who "do not have a good appreciation of the Australian regulatory environment") taking a “conservative view of risk and considering the ‘worst-case scenario’”.
He added that the concerns of these investors would unlikely be allayed by public statements which suggest that the powers will only be used in limited circumstances.
He suggested that investors would therefore have a “legitimate reason to be concerned by the proposed legislation that APRA might in future take regulatory action that could have negative retrospective impact on investments in [residential mortgage-backed securities] issues from non-banks”.
Changes could 'limit choice for customers who need it most'
While acknowledging that the government is unlikely to be “sympathetic to the concerns of institutional investors in securitisation transactions”, Pepper said that it should be “very focused on the consequences for ordinary Australians, particularly self-employed, blue collar, migrant families and first home buyers, if, as a result of this legislation, non-bank lenders, like Pepper, have more limited access to the debt capital markets, or the cost of accessing those markets greatly increases”.
Mr Culhane explained: “[The changes] will mean that Pepper’s borrowers, who cannot meet the bank’s lending criteria, will be unable to get a loan to purchase a house, or will have to pay significantly more to do so. It will mean that first home buyers, who can’t get a loan from a bank because their parents are helping them with the deposit, may be further locked out of the housing market.
“Without non-bank lenders like Pepper, borrowers like these who have the capacity to repay, but who the banks will not lend to, will be disenfranchised.
“Furthermore, the stated aim of the government and APRA to encourage more competition in financial services will be significantly compromised as uncertainty caused to funding, coupled with a risk of the homogenous application of lending rules across both the bank and non-bank sector, will limit choice for customers who need it most.”
The group concluded: “Given that the non-bank represents less than 5 per cent of the home loan lending market, it is not unreasonable to question whether additional regulation of non-banks is necessary, efficient or warranted.”
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.