Watching the watchmen

Australian fund managers confirm the nature and extent of regulatory oversight of the local nonbank sector is front of mind. They are comfortable with the concept of regulation but say the devil is in the detail.

Australia’s federal budget, delivered in April 2017, included a clutch of measures giving the Australian Prudential Regulation Authority (APRA) enhanced oversight over nonbank lenders. Specifically, proposed law changes will compel nonbanks to register under the Financial Sector (Collection of Data) Act and to provide additional lending data to the regulator. APRA will also have new powers to introduce and enforce rules on the nonbank sector in the interest of financial-system stability.

The purpose of these measures is to ensure nonbanks do not simply replace types of lending APRA believes endanger financial-system security and on which it has already placed restrictions when originated by authorised deposit-taking institutions.

Both federal treasurer, Scott Morrison, and APRA’s chairman, Wayne Byres, have emphasised that they see the new powers purely as a failsafe. In fact, some securitisation market sources suggest the policy move is more to do with Australian alignment with international regulatory standards than a specific local concern about the nonbank sector.

“I would seek to reassure those [nonbank] organisations – which in their own way also provide greater choice options and competitiveness in the system, and we welcome that – it is very much a reserve power, to be used solely at the discretion of the regulator, and people got a pretty clear signal from [Byres] that he sees it like that,” Morrison said.

Even so, nonbanks themselves have expressed concern at the vague nature of the proposed regulatory changes, suggesting they are prone to overreach – especially given the relatively small lending market share the sector accounts for.

Investor views

Investors in Australian nonbanks universally say they are monitoring developments in the regulatory arena as part of their ongoing due diligence of the sector.

Their biggest concern is that if a regulatory impost came in that made an issuer’s business unviable it would be a major risk for securitisation holders, so they say it is critical to stay on top of regulatory developments.

Fund managers insist they are not opposed to regulation per se but agree the potential for overreach is concerning. “Regulatory oversight of responsible lending and regulation that promotes a sustainable financial system are good things,” says Scott Barker, regional head, Asia Pacific at IFM Investors. “The challenge is getting the balance right. It’s also not productive to create a system that participants want to game – to stick to the letter rather than the spirit of the law.”

Rob Camilleri, investment manager at Realm Investment House, agrees that a regulatory regime that promotes a strong financial system is positive – especially given the dominance of Australia’s big-four banks. He also agrees with APRA’s desire not to see excessive liquidity flowing into lending areas the regulator wants to restrict.

But he notes provision of credit to individuals and entities that fall outside the banks’ sweet spot is an economic good. “Where I would get worried about regulation is if and when it reaches the point of restricting the business these lenders can write,” Camilleri tells KangaNews. “This could put us back to the situation we had in 2009-10 when – at Commonwealth Treasury’s direction – the Australian Office of Financial Management was underwriting the securitisation market and lenders were only writing the most vanilla business as a result.” Reasons for optimism

While they continue to monitor the issue closely, investors say they are hopeful of a rational landing point for the regulatory process even as they await further information and a clear perspective on market consequences.

“My suspicion is that if the regulatory oversight of nonbanks is limited to a requirement to provide additional reporting it will probably have only a very limited market impact,” argues Dylan Bourke, portfolio manager at Kapstream Capital.

Investors speaking to KangaNews say they have a degree of confidence that, in the end, the Australian government and regulator will likely not want to constrain the nonbank sector excessively given the wider backdrop of desire to promote competition in the local financial system.

In this context, they point to the volume of public and media talk about the need for competition in the financial sector and ask what the purpose would be of snuffing out a sector that has very small overall share of the lending market but also provides genuine competition to the major banks within its market segment.

SCOTT BARKER

Regulatory oversight of responsible lending and regulation that promotes a sustainable financial system are good things. The challenge is getting the balance right. It’s also not productive to create a system that participants want to game.

SCOTT BARKER IFM INVESTORS