The announcement on Wednesday 17 October 2018 of a Senate inquiry into “credit and financial services targeted at Australians at risk of financial hardship” continues the current forensic examination into the state of financial services in Australia.
Over the course of the last year Australians have watched a proposed Senate inquiry into the banking and financial sector transform into the Royal Commission into misconduct in the banking, superannuation and financial services industry (Hayne Royal Commission), a continuing Senate inquiry into Macquarie Bank, a number of ASIC prosecutions of the big four banks for alleged manipulation of the bank bill swap rate as well as significant insurance and anti-money laundering scandals.
Now it is the turn of non-bank lenders to face their own public inquiry.
Why another inquiry?
The Senate inquiry was proposed by the Labor party, which has been vocal in arguing for an extension to the Hayne Royal Commission to adequately allow victims of financial scandals to be heard at the Commission and to examine the conduct of financial service providers outside of the big banks, superannuation funds and insurers.
Labor received support from the Greens, independent Derryn Hinch and Centre Alliance senators Rex Patrick and Stirling Griff, which allowed the motion to pass the Senate.
The terms of reference for the Senate inquiry are to examine credit and financial services targeted at Australians at risk of financial hardship, specifically considering:
- payday lenders and consumer lease providers;
- unlicensed financial service providers including ‘buy now, pay later’ providers and short term credit providers, and
- debt management firms, debt negotiators, credit repair agencies and personal budgeting services.
The terms of reference require the Senate to examine the current regulation of these service providers and whether that conduct meets community standards and expectations, or whether reform is needed, as well as the capacity and capability of the financial counselling sector to provide services to the financially stressed members of the community.
Wait – don’t we have a Royal Commission into these issues already?
Well, yes, we do but Labor has initiated the motion on the basis that the Hayne Royal Commission does not sufficiently cover this area of the financial services industry.
The terms of reference for the Hayne Royal Commission define a “financial services entity” as:
- an authorised deposit-taking institution (ADI) under the Banking Act 1959 (Vic);
- an insurance (or reinsurance) business;
- a person or an entity that holds an Australian Financial Services Licence (AFSL);
- registrable superannuation entities; and
- a person or entity that holds itself out as acting as an intermediary between borrowers and lenders.
Non-bank lenders do not obtain deposits, and, as such, are not ADIs and many do not require, and therefore do not hold, an AFSL. This means that they are generally not covered by the terms of reference for the Hayne Royal Commission.
What are non-bank lenders and what role do they play in the economy?
A non-bank lender is a financial institution that offers credit and loan products. They are not a bank, building society or a credit union. This means they cannot offer deposit accounts (savings accounts, transaction accounts and term deposits), and they are not regulated by the Australian Prudential Regulation Authority (APRA), although they are subject to regulation by ASIC, including under the National Consumer Credit Protection Act 2009. Non-bank lenders source their funding for loans from the wholesale money market, as they do not have access to deposits for funding.
Demand for services from non-bank lenders is growing in Australia. In addition, to ‘buy now pay later’ companies like Afterpay, non-bank lenders hold approximately 10% of the home loan market in Australia and expectations are growing that they will fill the void left by the big banks’ declining appetite for higher risk business lending and residential housing credit.
Recent reports have indicated increasing demand for short and long-term finance from brokers, but also directly from developers whose financing needs do not meet the major lenders’ requirements, given tightening lending criteria. It is anticipated that direct lending by non-banks is expected to rise further as the Hayne Royal Commission and APRA continue to scrutinise the big banks. Greater levels of funding for non-bank lenders from private investors and funds are anticipated, given the opportunity for greater returns in this market.
So, the upshot is that the Hayne Royal Commission has not examined the conduct of a growing – and less regulated – area of the Australian financial services sector, and one that has significant risks for some Australians. The Senate will now start that process.
What can we expect from the Senate inquiry?
The approach of a Senate inquiry is determined by its terms of reference. In this case, the terms of reference are currently directed more at the payday lenders and debt management firms than larger non-bank lenders. The terms of reference can expand, but this expansion can only occur via motion passed by the Senate, as the inquiry only possesses the authority delegated to it by the Senate itself.
The inquiry has the following powers:
- to take evidence under oath;
- to summon witnesses to attend the inquiry; and
- to require documents to be produced.
However, these powers of compulsion are rarely used. Inquiries usually invite witnesses to make oral and written submissions and to provide documents without exercising compulsory powers.
It is important to note that the terms of reference for the inquiry contain the catch-all term of reference allowing the inquiry to investigate “any other matters”. So, although the inquiry may currently be limited we have seen previous inquiries expand outside of their anticipated boundaries, and this may happen here.
But, wait there’s more …
And, one final thought – should the Government change at the upcoming election, the Labor party has already committed to extending the Hayne Royal Commission. We expect scrutiny of the non-bank lending sector generally may well form part of any extension.
And so the cycle of scrutiny continues …