Authorised Deposit Taking Institutions

ASIC to Investigate Interest-Only Loans

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On Tuesday 9 December 2014, ASIC announced that it will conduct surveillance into interest-only loans as part of a broader review by regulators of home lending standards.

ASIC states that it will look at the conduct of lenders in particular with regard to how they are complying with important consumer protection laws, including their responsible lending obligations.

The problem with interest-only loans is that while repayments are initially lower, that will only be in the initial interest-only period.  Judgement day comes when the loans revert to principal and interest repayment and increase in amount. Regulators are concerned that some borrowers are choosing interest-only loans solely on the basis is that that is the only way they can afford to buy the home they want to live in or alternatively, in the case of an investment property, to minimise the differential between rental income received and interest payments made.

Figures quoted recently indicated that some 45% of new loans appeared to be interest only rather than principal and interest. Interest only loans raise a raft of responsible lending and in particular suitability issues. They only work longer term if house prices and wages rise, but interest rates do not.

And yet this trend towards favouring interest-only loans is against a background where there is a dawning reality that the assumption that wages will always rise may no longer hold true. ” When The Sleeper Wakes”. – The Economist in an article “The Future Of Jobs – The Onrushing Wave“, published on 18 January 2014 wrote:

“Yet some now fear that a new era of automation enabled by ever more powerful and capable computers could work out differently. They start from the observation that, across the rich world, all is far from well in the world of work. The essence of what they see as a work crisis is that in rich countries the wages of the typical worker, adjusted for cost of living, are stagnant. In America the real wage has hardly budged over the past four decades. Even in places like Britain and Germany, where employment is touching new highs, wages have been flat for a decade. Recent research suggests that this is because substituting capital for labour through automation is increasingly attractive; as a result owners of capital have captured ever more of the world’s income since the 1980s, while the share going to labour has fallen.”

APRA Moves to Tighten Prudential Oversight Over Financiers and Religious and Charitable Funds Operators

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In a discussion paper released by APRA late last month, a number of proposals are made that affect current exemption orders for Registered Financial Corporations (“RFCs”) and some Religious Charitable Development Funds (“RCDFs”), many of them operated by churches.

At present, these entities are exempt from the need to be authorised as deposit-taking institutions (“ADIs”). These exemptions are generally historical in nature according to APRA.

The main concern behind these proposals as expressed by APA, is to reduce the likelihood that an investor, particularly a retail investor would confuse investments with and RFC or an RCDF  with and ADI deposit and would believe they have the same level of protection afforded under the Banking Act.

The proposals are as follows:

For RFC’s under Banking (Exemption) Order No 96

  • Restricted use of terms such as “at call” and “deposit” by RFCs in describing products.
  • Prohibiting use of certain transaction facilities such as ATM access, BPay and EFTPOS facilities.
  • Debenture offerings to have a minimum maturity of 31 days.

These restrictions and prohibitions are proposed to apply from 1 July 2013 for all funds raised from that date. A transition period of up to three years is to be allowed for existing retail debenture issues.

For RCDFs:

  • The current exemption from the need to be authorised under the Banking Act is proposed to be extended for another 12 months to 27 June 2014.
  • From 28 June 2014, RCDFs have to register as an RFC or as a registered managed investment scheme, subject to exceptions where RCDFs do not take funds from retail investors.

More than 50 entities, with assets of more than $7 billion, will be affected.

In addition to the above proposals, APRA also proposed changes to guidelines under section 66 of the Banking Act including clarification of what is a financial business and the requirements for ADIs to operate as banks and credit unions. There are no major changes in this regard.

Submissions may be made until 24 May 2013.