New controls on non-banks will kill competition: Tuttle
Canberra’s plans to widen APRA’s powers over the non-banks is a massive overreach and risks killing a healthy and viable source of competition within the Australian home lending market, according to an industry specialist.
While the market is heavily fixated on the bank levy, Patrick Tuttle, the former chief executive of the Pepper Group, has pointed to a more sinister prospect – the Federal Treasurer’s announcement on budget night that the government would allocate $2.6 million over four years to APRA to slap controls over the provision of credit by non-bank lenders.
Tuttle fervently believes the potential unintended consequences of APRA’s intervention could result in the regulator imposing excessive controls, which he fears would impede the functioning of Australia's non-bank sector.
“The government keeps banging on about improving competition especially in mortgages yet they are tinkering with this highly efficient market and the key source of competitive funding for Australia’s non-bank financial institutions,” he argued.
Assume the worst
The former chief executive further pointed out that over the past 15 years, the non-bank originators have developed most of the innovation in product design. Tuttle claimed that in the absence of any detail, “one can only assume the worst.”
“But by seeking to excessively regulate the non-bank sector which is already subject to comprehensive regulation by ASIC, there is a real risk that the supply of credit to legitimate borrowers for legitimate purposes will dry up altogether, depriving consumers of genuine choice, and inadvertently accelerating a credit crunch and a sharper than anticipated correction in house prices,” he said
While the non-banks are bound by responsible lending regulations, they are not currently subject to macroprudential measures like the recent caps on investor lending growth or interest-only loans.
“The natural assumption is that the non-banks are out there making hay since the banks have effectively had a handbrake put on the riskier lending. That’s nonsense. We could never take up the slack because we could never fund ourselves in the securitisation market," argued Tuttle.
The former Pepper co-head absolutely refutes the perception that that non-banks re not as stringent with their lending practices as the major banks.
“What problem is the government seeking to fix?,” he queried, adding that this plan could potentially create regulatory chaos between APRA and ASIC.”
“Fair enough that APRA has implemented macroprudential controls to limit the overall proportion of ADI lending directed towards investment property loans and interest-only loans. This has eased some excessive lending volumes in these loan products across the broader market, particularly within the major banks,” Tuttle claimed.
“That said, is the government, through the auspices of APRA, now seeking to effectively dictate consumer credit and lending policies and practices for all non-bank financial institutions in Australia? If so, when was this objective ever stipulated in APRA’s mandate? Isn’t ASIC responsible for overseeing Australia’s non-bank financial institutions, their compliance with responsible lending practices, and their adherence to the consumer credit code?
“By their very definition, non-bank financial institutions do not function in the same way as regulated banks do. They do not accept, nor are they licensed to accept, retail deposits from customers.
“Non-bank lenders are far from being too big to fail and are almost exclusively funded via the wholesale debt capital markets, meaning that they rely on the issuance of mortgage-backed securities (RMBS) to highly sophisticated financial investors."
These highly sophisticated or professional fixed income investors, he stated, do not need the government or APRA to protect them from themselves.
“Nor are they the mum and dad investors or retail depositors, who APRA is primarily mandated to protect. So where in APRA’s charter does it name as beneficiaries who need to be protected?"
Today, Australia’s non-bank lenders represent less than 7 per cent of total mortgage lending. Moreover, non-banks are almost exclusively funded via the wholesale debt capital markets and rely on the issuance of residential mortgage backed securities (RMBS).
Finally, Tuttle claimed that sophisticated investors effectively regulate the types of mortgages underwritten by Australia’s non-bank lenders by requiring them to only issue securities backed by high quality mortgage pools that do not have excessive concentrations of loans by geographic region or product type, such as investment loans, interest-only loans, high loan-to-value loans, or loans to consumers in low socio-economic regions.