Role of APRA and ASIC in Financial Regulation in Australia

This article discusses the role of APRA and ASIC in financial regulation in Australia, their responsibilities, concerns, and actions proposed by them. It also highlights the recent case of ASIC pursuing Westpac over alleged contraventions of lending laws.

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Law of Finance
Assignment (Part 1)
03-Apr-18
(Student Details: )

Law of Finance
Introduction
In Australia, the financial regulation is quite detailed and extensive. The financial regulation is
split in the nation between Australian Prudential Regulatory Authority, i.e. APRA, and
Australian Securities and Investments Commission, i.e. ASIC. Both APRA and ASIC, have
different regulatory roles when it comes to the financial services sector and this includes banking
(Tyree, 2014). In reference to the lending practices of Australian banks, both the bodies have
published their concerns. This discussion is focused on highlighting the role of the two and the
manner in which their responsibility is different from each other. Further, a summary would also
be provided in context of the concerns of these two and the actions proposed by them.
APRA and ASIC
APRA
APRA on the other hand, has the responsibility of licensing and for the prudential supervision of
ADIs, i.e. the Authorized Deposit-taking institutions, superannuation funds, and life and general
insurance companies. The APRA regulated financial institutions are obligated to submit period
reports to APRA (Lui, 2016). It has also brought forth the capital adequacy guidelines for the
banks, which match the Basel II guidelines. Such investment banks which are not operated under
the ADIs, are not regulated under the Banking Act, 1959, and are not licensed under this
legislation, are not subjected to the APRA’s prudential supervision (OECD, 2017). Though, the
majority of investment banks have to provide APRA with the statistical information based on the
Financial Sector (Collection of Data) Act, 2001 (Pearson and Batten, 2010). APRA is basically
an integrated prudential regulator which has the responsibility for deposit taking institutions like
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credit unions, banks and building societies, along with the friendly societies. The prudential
policies have to be developed by APRA which balance the financial safety and competitive
neutrality, competition, efficient and contestability (Reserve Bank of Australia, 2018).
ASIC
ASIC has the responsibility for consumer protection, market integrity, and for the regulation of
finance companies and investment banks. Though, when it comes to the practical aspect, this
function is manifested by application of EDRs, i.e. External Dispute Resolution schemes.
Presently, there are two EDRs approved by ASIC. And in this, the prominent one is FOS, i.e. the
Financial Ombudsman Service (Australia). FOS gets around thirty thousand complaints every
year. The second one is CIO, i.e. the Credit and Investment Ombudsman, which for the year of
2015-16 got 4,769 complaints (CIO, 2016). CIO and FOS are both nongovernmental and not for
profit organizations which are funded through the members, included in which are the financial
advisers, banks and the other financial service providers. So, there is a major self regulatory and
private element in the banking regulators (Pearson, 2009). ASIC basically administers and
enforces a number of legislative provisions which are related to financial products, financial
markets and the financial sector intermediaries. The goal is to safeguard the consumers and
market from unfair practices, manipulation and deception, whereby the confident participation in
financial system by the consumers and investors is promoted (Reserve Bank of Australia, 2018).
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Concerns of APRA and ASIC
APRA
APRA has decided to intensify its scrutiny over the lending practices of banks for the present
year. Included in this is investigating on the possibility of banks overriding the policies drawn by
them in an inappropriate manner. This indicates that the lending restrictions placed on the
investor borrowers would continue to apply even with the housing figures showing the easing up
of demand for loans. As per APRA, there was a need for improving the assessment of the
repaying ability of the borrowers and there was a need to be conservative regarding the consumer
sending’s benchmark estimates. As per APRA, there was a need for the banks to monitory the
use of discretion by the bankers in a closer manner, for overriding the lending policies. This was
because there was no use of stronger policies where these could be overridden and also where the
data deficiencies meant that the policy was not complied with or being fully monitored (Eyers,
2017).
APRA has asked the banks to take on a more strict assessment of borrowers. Since APRA is not
convinced that the banks actually follow this policy in a comprehensive manner, there was a
need at the actual lending practices, where additional assurance was sought out regarding the
tighter loan policies actually resulting in more prudent lending decisions. A comprehensive
credit reporting reform was also suggested, whereby the banks would be made to report
regarding the positive credit history to bureaus, along with the history of default. These measures
are expected to make certain that the earlier debts of the borrowers in existence were known and
can be properly factored in the assessment of these loans (Eyers, 2017).
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ASIC
ASIC too has worked on the issue highlighted by APRA and is aggressively pursuing Westpac
over the alleged contraventions of lending laws. Civil proceedings have been started by ASIC
against Westpac for their alleged failure in assessing the repaying capability of the borrowers in
a proper manner. The main allegations were related to the reliance placed by Westpac on the
index HEM for determining the money which could be given to the borrowers. The claim of
ASIC was that this was an improper measure and that Westpac should have properly analysed
the repaying ability of the borrowers on the basis of their actual spending. This was because Hem
only represented the estimates of consumption of the Australian families and had not been
formed by making reference to the expenditure data which was collected during the relevant time
frame. This was because the data relied on by Westpac was one 2009-10 when the loans were
issued in between December 2010 to March 2015. Westpac on the other hand claimed that the
HEM benchmark was an objective measure which was not dependent on quality of estimation of
consumer expenses. They also stated that there was reliance on other factors as well, and HEM
was not solely relied on. They also provided that HEM was commonly used as a measure for
providing loan (Mather, 2017).
Conclusion
Thus, from the discussion undertaken in the previous segments, it can be concluded that APRA
and ASIC are two crucial financial regulatory bodies in the nation. Both of these bodies have
separate roles and yet both have an important role to play. Due to the recent cases, both bodies
have taken a proactive role in checking the lending practices of the Australian Banks. The case
which the ASIC was present pursuing against Westpac only proves the contentions put by APRA
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in the previous segment as being truer, as there is indeed a need for stricter measures to be
adopted in a proper manner and a need for analysing the lending practices of the Australian
banks.
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References
CIO. (2016) Annual Report on Operations 2016. [online] Available from:
https://www.cio.org.au/publications/annual-report-on-operations/annual-report-on-operations-
2016.html [Accessed 03/04/18]
Eyers, J. (2017) APRA to ramp up scrutiny of bank lending practices. [online] Available from:
http://www.afr.com/real-estate/residential/apra-to-ramp-up-scrutiny-of-bank-lending-practices-
20170908-gydmfb [Accessed 03/04/18]
Lui, A. (2016). Financial Stability and Prudential Regulation: A Comparative Approach to the
UK, US, Canada, Australia and Germany. London: Taylor & Francis.
Mather, J. (2017) ASIC's responsible lending battle with Westpac heats up. [online] Available
from: http://www.afr.com/business/legal/asics-responsible-lending-battle-with-westpac-heats-up-
20170904-gyabdc [Accessed 03/04/18]
OECD. (2017) Global Forum on Transparency and Exchange of Information for Tax Purposes
Global Forum on Transparency and Exchange of Information for Tax Purposes. Paris: OECD
Publishing.
Pearson, G. (2009) Financial Services Law and Compliance in Australia. Victoria: Cambridge
University Press.
Pearson, G., and Batten, R. (2010) Understanding Australian Consumer Credit Law: A Practical
Guide to the National Consumer Credit Reforms. North Ryde: CCH Australia Ltd.
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Reserve Bank of Australia. (2018) Council of Financial Regulators Annual Report – 2002.
[online] Available from: https://www.rba.gov.au/publications/annual-reports/cfr/2002/aus-fin-
reg-frmwk.html [Accessed 03/04/18]
Tyree, A.L. (2014) Banking Law in Australia. 8th ed. Sydney: LexisNexis Butterworths.
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