Regulation of Non-Bank Lenders

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By Peter Kennedy, Partner and Nicholas Arndt, Lawyer

In 2018, APRA was given powers to regulate non-APRA regulated lenders, if APRA determines at any time that those lenders are materially contributing to financial stability risks.

Those powers are drafted much more narrowly when compared to APRA’s powers over banks (ADI’s).

This was considered to be an appropriate balance, given there are no general public depositors to protect in non-ADI lenders. There are of course often sophisticated investors involved in funding non-bank lenders, such as wealthy individuals or families, other developers or construction firms together with a range of institutional investors (super funds, foreign pension funds, hedge funds and PE firms). However, they are typically considered by regulators to be big enough to look after themselves.

Before exercising these regulatory powers over non-bank lenders, APRA is required to consider efficiency, competition, contestability and competitive neutrality.

APRA has stated that it would consider such things as:

  • the overall size of the non-bank sector, with a particular focus on market shares in higher risk lending segments;
  • the lending practices of non-bank lenders, to assess whether they are contributing to downward pressure on industry-wide standards;
  • potential spill over effects, given the possibility that a reduction in higher-risk lending at APRA-regulated entities could flow to non-bank lenders; and
  • insights from other regulators, including in particular the Australian Securities and Investments Commission (ASIC) given its role as the primary regulator of non-bank lenders.

In assessing the market share and overall size of the non-bank sector, APRA was partially blinded by its inability to collect data from all material non-bank lenders under the Financial Sector (Collection of Data) Act 2001 (FSCODA).

The definition of ‘registrable corporation’ in FSCODA was considered to be too limiting in terms of APRA’s ability to collect data, as corporations which engage in material lending activity were not always required to register.

This was borne out in 2019, when media investigations revealed that the RBA’s Financial Stability Department had noted in a memo that “limited data” was available around the scale of non-bank lending to developers.

The possibility that non-bank lenders could finance an excess supply of apartments is one that is said to have concerned analysts within the RBA’s Financial Stability at least since early 2017.

This inadequate data inhibited the ability of APRA and the Council 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 improved in 2018 by an alteration of the thresholds so that the obligation to provide statistical data applies if the lender (including non-bank lenders):

  1. has outstanding debts due to it resulting from the provision of finance which are at least $50 million; or
  2. in the previous financial year it made loans (or other financing arrangements) under which it provided $50 million.

Non-bank lenders in the home loan sector are already heavily regulated by ASIC under the National Consumer Credit Protection Act, so it may be argued that to that extent and given their overall limited 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-bank sector and it has been noted by industry players that if it was to do so, this could materially impact on the appetite of capital market and securitisation investors to continue to provide wholesale funding to the non-bank sector, thereby diminishing competition, especially in the hotly contested home loan sector of the market.

In announcements over recent months, APRA expressed no current intention to further regulate the non-bank sector, but repeated its willingness to do so if it assesses there to be heightened risks to financial stability.

It can be assumed from this, that to date, APRA has not assessed there to be a material risk of this kind.


*Footnote: the Council of Financial Regulators (CFR) has an important role in assessing the level of systemic risk and coordinating regulatory responses across agencies. The CFR is the coordinating body for Australia’s main financial regulatory agencies: APRA, the Australian Securities and Investments Commission, the Reserve Bank of Australia and the Treasury.

For further information, please do not hesitate to contact us.

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