APRA to shine light on the shadows: New powers targeted at non-bank lenders

On 17 July 2017, Treasury released draft legislation, the Treasury Laws Amendment (Non-ADI Lender Rules) Bill 2017 (Draft Bill), for public consultation.  The proposal is seen as a significant step towards achieving greater transparency and regulation over the non-bank lending sector.  The  Draft Bill follows recent consultation by APRA regarding the proposed Banking Executive Accountability Regime, and is another initiative arising from the 2017 Federal Budget.  It aims to give APRA more power to promote the stability of the Australian financial system. 

The Draft Bill proposes to: 

• amend the Banking Act 1959 (Banking Act) to provide APRA with rule-making powers in respect of the lending activities of non-ADI lenders (Non-ADI Lender Rules), as well as a new power to issue directions and impose penalties for any failure to comply with the Non-ADI Lender Rules; and
• amend the Financial Sector (Collection of Data) Act 2001 (FSCODA) to widens the class of corporations which must be registered under the FSCODA, so as to create a broad class of non-ADI lenders that will potentially be subject to the Non-ADI Lender Rules. 

These amendments have significant implications for corporations that engage in business activities in Australia that involve the provision of finance, and particularly on those that engage in lending activities in the primary market.  These finance activities may well become subject to tougher lending criteria and other specific requirements regarding lending practices under APRA's new rule-making powers.

In this update, we consider the key concepts and amendments under the Draft Bill and their potential implications for financiers.

What is a "non-ADI lender"?

Under the Banking Act, an entity that carries on "banking business" in Australia must be authorised as an authorised deposit-taking institution (ADI) and is subject to APRA's prudential requirements and ongoing supervision.  However, "banking business" involves both the lending of money and taking of deposits.  Currently, entities that only engage in one of those two activities would not be required to hold an ADI authorisation and consequently, many non-bank lenders are not currently subject to the oversight of APRA in respect of their lending activities.  The Government, as part of the 2017 Federal Budget announcements, identified this gap as potentially hampering APRA's ability to promote financial stability, as inappropriate practices that APRA has curtailed or prohibited for ADIs may continue to be applied by non-ADI lenders.

Under the Draft Bill, a "non-ADI lender" is defined as a "registrable corporation" under FSCODA.  The concept of who will be a registrable corporation is propose to be extensively amended by the Draft Bill, in order to create a new (and expanded) class of non-ADI lenders.

What is a "registrable corporation"?   

Under the current FSCODA, a registrable corporation includes: a corporation whose sole or principal business activities in Australia includes the borrowing of money or provision of finance; and a corporation where more than half of its assets in Australia consist of debts arising as a result of transactions entered into in the course of providing finance.

Under the Draft Bill, the corporations that are to be treated as registrable corporation is proposed to be substantially expanded.  The proposed changes will result in corporations whose business activities in Australia include the provision of finance, or who have been identified (in a determination made by APRA) as a class of corporations that are to be treated as registrable corporations for the purposes of FSCODA.

Importantly, under the proposed changes, there will no longer be a need for the corporation to be substantially involved in lending activities before it will be a registrable corporation.  Accordingly, although the primary aim of the Draft Bill is to bring "non-ADI lenders" within the scope of APRA's rule-making powers, the proposed broadening of what will be treated as a registrable corporation under FSCODA will have wide ranging implications for other corporations that engage in the "provision of finance".  This means that corporations that are not currently focused on lending activities may well become required to register under FSCOCA, and thereafter may become subject to the Non-ADI Lender Rules.

Certain carve-outs from the requirement to register will, however, still apply under the proposed amendments.  Significantly, the Draft Bill excludes corporations from being registrable if:

• the sum of the relevant corporation's assets in Australia consisting of debts due to the corporation resulting from transactions entered into in the course of the provision of finance by the corporation, does not exceed $50 million (or any other amount prescribed by regulations); and 
• the sum of the values of the principal amounts outstanding on loans or other financing, as entered into in a financial year, does not exceed $50 million (or any other amount prescribed by regulations).

This particular carve-out means that corporations that do not engage in reasonably substantial lending activities would not become subject to oversight by APRA.

An additional complication is that the assessment of the relevant value of the loans or other financing is to be assessed as at the end of a particular financial year.  Accordingly, corporations that engage in the trading of debt with a flow of debt through their books with the residual position at the end of the financial year that are less than the threshold would not be registrable.

However, for the purposes of this carve-out, in determining whether the entity reaches the particular monetary threshold of $50 million (or any other amount prescribed by regulations),  related bodies corporate are treated as forming part of the relevant entity.  Therefore debt assets and values of principal amounts outstanding on loans or other financing owing to related bodies corporate must be aggregated for this purpose. 

What are the Non-ADI Lender Rules?

Under the Draft Bill, if APRA considers that activities engaged in by non-ADI lenders in relation to "lending finance" materially contribute to risks of instability in the Australian financial system, APRA may make rules on matters relating to lending finance that must be complied with by all or certain non-ADI lenders, or by a class of non-ADI lenders. Failure to comply may result in directions to comply, or penalties.

The definition of "lending finance" proposed to be included in the Banking Act is: 

• lending of money, with or without security; or 
• any other activities which either directly or indirectly result in the funding or originating of loans or other financing.

This definition is broad given the reference to "other financing" and potentially picks up a range of funding activities. It is noted in the draft explanatory memorandum that the clear intention of this definition is to capture corporations that provide finance indirectly, such as through interposed corporations or trusts. Amongst other things, the changes may capture many non-bank originators that obtain funding through securitisation.

This definition of "lending finance" is narrower than the concept of "provision of finance" under FSCODA, and therefore not all registrable corporations which engage in the provision of finance (for example, when acting as an intermediary in debt trading arrangements or an acquirer of debt on the secondary market) would necessarily be subject to the Non-ADI Lender Rules, even if they would technically be classified as "non-ADI lenders" under the Banking Act. 

Nevertheless, these rule-making powers are very broad (as they relate to lending finance), as APRA will have the ability to exercise powers and discretions under rules made by it, including but not limited to discretions to approve, impose, adjust or exclude specific requirements. Rules made by APRA under this provision may be varied or revoked from time to time, as determined by APRA.

Interaction with consumer credit regime

Many non-bank lenders also engage in consumer credit activities and hold an Australian credit licence administered by ASIC.  It is contemplated by the Draft Bill that APRA will consult with ASIC before making any Non-ADI Lender Rules, to ensure that the rules interact appropriately with other regulatory requirements such as responsible lending obligations and other obligations on a credit licensee.  However, whether the Non-ADI Lender Rules will fit in seamlessly with ASIC requirements remain to be seen, and therefore credit licensees that are non-ADI lenders should be particularly mindful of the potential of the interaction between the regimes.

So what does this all mean?

These amendments should also be viewed in the context of APRA's additional funding and resources for its enforcement activities which were also announced as part of this year's federal budget.  It is probably fair to say that compliance with the current registration requirements under FSCODA is somewhat variable, largely due to lack of appreciation of the scope of its application.  On introduction of the proposals, APRA may become more focussed on ensuring that entities that are registrable under FSCODA are registered.

Although the implications of registration are presently not significant (as the obligations under FSCODA relates only to reporting of certain information), the non-ADI lender status associated with registration could have meaningful impact if and when APRA develops the Non-ADI Lender Rules.  

If the proposed amendments become law, corporations that engage in activities involving the provision of finance will need to consider the following.

• If the corporation is not already registered as a registrable corporation under FSCODA, will the amendments result in the entity becoming registrable?
• If the corporation is already registered or will become registrable under FSCODA, will the entity be engaging in "lending finance" such that it may become subject to the Non-ADI Lender Rules? 
• If the corporation is potentially subject to Non-ADI Lender Rules, the entity will need to consider the impact of any rules APRA may make from time to time on its lending activities and business.

The consultation on the Draft Bill will close on 14 August 2017.