By Peter Kennedy, Partner and Nicholas Arndt, Lawyer
Financiers which are not regulated by the Australian Prudential Regulation Authority (APRA) ADI’s or consumer credit code regulated credit providers are sometimes disparagingly referred to as ‘shadow lenders’. With “big banks” being somewhat constrained by regulation and responsible lending requirements in their lending practices, shadow lenders are coming more into the limelight with competitive pricing often matching traditional financing options.
Not infrequently, calls are made for government regulation of the non-bank sector out of concerns for the rapid post GFC growth of the sector both globally and in Australia, and the systemic risks it may pose to the financial system.
Last year the Federal Treasurer Josh Frydenberg announced that banks would be policed under less prescriptive lending standards than those which are currently overseen by APRA.
The government also proposed that some non-bank lenders also be regulated in this way.
However, the draft legislation did not find enough political support and has not proceeded.
Similar calls have been made for the regulation of the buy now pay later (BNPL) sector (noting that the sector is regulated in some States of the USA and is proposed to be regulated in the UK).
95% of the BNPL Australian market is controlled by 8 BNPL companies of which the largest is Afterpay. Because BNPL providers don’t charge interest, they are not regulated by the National Credit Code.
Conscious of the risk of further regulation in Australia, the BNPL sector and the Australian Finance Industry Association (AFIA) launched a voluntary BNPL industry code of practice on 1 March this year which will see providers undertake a customer assessment before a customer can make a purchase. Predictibly, each of the aforementioned BNPL providers are signatories to the voluntary code. Additionally, complaints will be managed by the Australian Financial Complaints Authority (AFCA).
The banking sector of course has had its own code of practice for many years. The banking code developed by the Australian Banking Association (ABA) was introduced in 1993. And more recently, AFIA and Australia’s leading on line small business lenders (Fintech’s) adopted their own code of practice.
Despite the banking code being updated earlier this year, in part to take account of criticisms arising from the Hayne Royal commission, public calls have been made by consumer groups (represented by the Consumer Federation of Australia) for banks to further review the code to strengthen customer protections, and for BNPL and pay-day lending products to be treated as if they too were regulated by the national credit code.
In recent years speculation was running hot that APRA would seek to regulate non-bank lending, but that there may be carve outs in so far as there would be no capital adequacy requirements, a non-lender’s loan book would have to exceed $50m and inter-company loans would be excluded.
The non-bank sector is an integral part of the Australian finance system and is growing in market share. One recent survey* suggested that for SME’s in 2021, the two main ways to fund new growth are by using their own funds (the top option for 89.1% of respondents) and by borrowing from a non-bank lender (now at a new high of 28.3%).
We have acted for several such lenders in the commercial real estate, construction and receivables finance/supply chain finance sectors. Consumer groups continue to agitate for further regulation. Needless to say, many non-bank lenders in the non-consumer space would be wary of prescriptive legislation which may see their activities curtailed or their competitive advantages eroded. The jury is out as to whether self-regulation and codes of conduct will be sufficient to hold the regulators at bay and for how long.
- Scotpac / East and Partners March 2021 SME Growth Index
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