Shadow banks to face crackdown from regulators in new year
Financial Services Minister Bill Shorten said at the weekend that the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority needed to consult more widely with industry early next year on proposals to better regulate the debenture industry.
The move follows the $660 million collapse of Banksia Securities in October, and comes just days after non-bank lender Southern Finance finalised its quick fire sale to Bendigo and Adelaide Bank - a sale that was designed to prevent a run on Southern Finance by spooked investors.
The proposals include the introduction of mandatory minimum capital and liquidity requirements for retail debenture issuers, and restrictions on the ability of debenture issuers to offer "at call" investments or to use "bank-like" terms to describe their products. They also include proposals to improve continuous disclosure to investors, and to allow trustees to better monitor issuers' financial performance and compliance with their legal obligations.
Mr Shorten said the proposals were designed to reduce the likelihood of debenture issuers failing as a result of poor lending decisions or a run by investors.
They also aimed to more clearly differentiate debenture issuers from banks, building societies and credit unions that are regulated under APRA's prudential framework, he said.
"The recent collapse of Banksia Securities highlights the need to place the industry on a more sustainable footing and restore investor confidence," Mr Shorten said. "Investors need to appreciate that investments in finance companies carry higher risks and are not the same as deposits with ADIs [authorised deposit-taking institutions] that are actively supervised by APRA."
The International Monetary Fund in November warned that Australia needed to tighten its rules allowing non-bank lenders to offer banking services without any oversight from the banking regulator.
Bendigo and Adelaide Bank announced on Friday that it would acquire the $290 million loan book and other assets from Southern Finance, with the purchase price to repay Southern Finance noteholders.
Frequently Asked Questions about this Article…
Shadow banking refers to non-bank lenders and finance companies that offer credit and investment products outside traditional bank regulation. Australian regulators (ASIC and APRA) are planning tougher rules after events such as the $660 million Banksia Securities collapse and investor runs on firms like Southern Finance, driven by concerns about consumer risk and the need to restore investor confidence.
The proposals include mandatory minimum capital and liquidity requirements for retail debenture issuers, limits on offering “at call” products or using “bank-like” descriptions, improved continuous disclosure to investors, and stronger trustee powers to monitor issuers’ financial performance and legal compliance.
Limiting at-call offerings and bank-like marketing is intended to reduce confusion and liquidity risk: it should make clear that debentures are not the same as bank deposits with authorised deposit-taking institutions (ADIs), and help prevent investors from treating these products as easily withdrawable or as low-risk as bank savings.
The $660 million collapse of Banksia Securities highlighted the risks in the debenture and finance company sector and was cited by officials as a key reason to place the industry on a more sustainable footing, prompting proposals to reduce failures from poor lending decisions or investor runs and rebuild trust.
Southern Finance was sold quickly to Bendigo and Adelaide Bank in a deal designed to prevent a run on the company. Bendigo and Adelaide Bank agreed to acquire a $290 million loan book and other assets from Southern Finance, with the purchase price intended to help repay Southern Finance noteholders.
Everyday investors should recognise that debentures carry higher risks than bank deposits, read continuous disclosure and product documents carefully, check whether an issuer is subject to APRA supervision, be cautious with offers described as ‘bank-like’ or ‘at call’, and look for trustee reporting or other signs of third‑party oversight.
Financial Services Minister Bill Shorten said ASIC (the corporate regulator) and APRA (the prudential regulator) will jointly develop plans and consult with industry early next year on proposals to better regulate the debenture industry and differentiate non‑bank issuers from banks, building societies and credit unions regulated by APRA.
The International Monetary Fund warned that Australia needed to tighten rules allowing non-bank lenders to offer banking services without oversight from the banking regulator, underscoring international concern about regulatory gaps in the shadow banking sector.
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