APRA identifies supervisory issues

In a recent speech by APRA Chairman John Laker he identified issues relating to financial institutions that APRA was monitoring against a background of:

• the "inexorable" process of consolidation...in the last five years, the number of banks, building societies and credit unions — known as authorised deposit-taking institutions (ADIs) — has fallen from 281 to 223; general insurers from 162 to 133; life insurers and friendly societies from 84 to 62; and superannuation funds, where licensing has spurred the process, from 4,233 to 1,147.
  


• the intensification of competition across a range of financial products...in mortgage and small business lending, in on-line deposit accounts and in classes of life and general insurance business.
  

He said APRA's supervisory monitoring had identified the issues of credit standards, pricing for risk, product innovation, ‘offshoring’, and pandemic planning.

In respect of credit standards Laker observed that:

industry is shifting from traditional rules of thumb under which debt servicing is constrained by gross income, to what are called ‘income surplus’ models under which debt servicing is constrained, ultimately, by the need of the borrower to maintain ‘subsistence’ spending. Put another way, many lenders now assume that borrowers will accept near or actual subsistence levels of family consumption in order to maintain mortgage payments. These models allow ADIs to materially increase the maximum amount they areprepared to lend to a given borrower. The old ‘30 per cent of income rule’ is giving way to the ‘50 per cent of income rule’, and beyond!

Our analysis also shows a wide dispersion in maximum loan amounts across institutions. The most aggressive ADIs appear to be willing to lend almost twice as much as the most conservative ADIs to a hypothetical household with the same basic characteristics. For example, the maximum owner-occupied loan ADIs are prepared to offer a couple with a gross annual income of $150,000 and one child ranges from $300,000 to almost $600,000.

In the area of pricing for risk he observed in respect of lenders:

The concern is whether the higher risk of default of low-doc loans is being factored into their pricing. Low-doc loans are now being advertised at rates comparable to the ‘headline’ rate for fully verified mortgages, and the spread between actual rates paid on low-doc and conventional loans has halved over the past few years. Time and an adverse turn in Australia’s economic circumstances will tell whether this margin for risk is adequate.

On the topic of product innovation he expressed caution in respect of reverse mortgages:

Put in simple terms, a reverse mortgage is a race between interest rates and housing price growth, with the finish line set at the borrower’s death or moving. High interest rates and low housing price growth, combined with greater longevity, would make this a risky race for the lender.

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Consumer Credit Code e-commerce update

The Consumer Credit Amendment Regulation (No.1) 2006 was gazetted on 4 August 2006 and will commence on the proclamation of the e-commerce Code amendments.

The amendments will not take effect until after the Queensland election on 9 September.

The objective of this regulation, as set out in the Explanatory Notes accompanying it, is to amend the Consumer Credit Regulation 1995 to facilitate the application of electronic transactions legislation.

The regulation:
• amends a number of sections to clarify how they apply if there is an electronic communication;
• inserts print or type requirements for electronic communications; and,
• lists the transactions, documents or information that must not be made, given or provided by electronic communication.

These amendments to the Consumer Credit Regulation 1995 complement the electronic transactions amendments to the Consumer Credit Code made by the Consumer Credit and Trade Measurement Amendment Act 2006.Section 2 provides that the commencement date for this amending regulation will be the day that s8 of the Consumer Credit and Trade Measurement Amendment Act 2006 commences.

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