Thursday, 1 March 2018
APRA & Banking
Senator RHIANNON: In relation to your investigation into mortgage fraud, which APRA has not made public, has APRA found any evidence of illegal misconduct in the mortgage market by the major lenders?
Mr Byres: I wouldn't say what we've done is specifically a review of mortgage fraud. We've looked generally at lending practices across the board and the controls that banks have to make sure they get accurate information from borrowers et cetera and make a reasonable assessment of a borrower's ability to repay. Part of that is controls to make sure borrowers give true and fair information, but that's not the entirety of the exercise. The second part of your question, if I had it right, was: have we identified any systemic—
Senator RHIANNON: Any evidence of illegal misconduct.
Mr Byres: Illegal misconduct—not at this point; there's nothing that's been brought to my attention.
Senator RHIANNON: Brought to your attention—is it anywhere else within the organisation?
Mr Byres: I'm sure if someone had something of that nature in APRA, I'd know about it.
Senator RHIANNON: Do you need to take it on notice?
Mr Byres: I'm happy to take it on notice.
Senator RHIANNON: Thank you. Has APRA already provided this research or these findings to the royal commission?
Mr Byres: I'm not sure that the royal commission wants people to know what information we have or have not provided, but I can say that if they asked for it we would obviously give it. We would give all information that we were asked to give.
Senator RHIANNON: Shouldn't you also be proactive in providing the information?
Mr Byres: We'll wait and see what the royal commission asks. We could give them a whole raft of information, swamp them with things that are not relevant to them. We are talking with the royal commission about the issues that they are interested in. They have approached us not just for documents but for discussions on particular issues to improve their understanding, and obviously we're standing ready to help them as and when needed.
Senator RHIANNON: Has APRA in the last five years ever held back information from the public? I'm referring to information on a bank that APRA has identified as breaching mortgage lending laws.
Mr Byres: I don't think so, but I'll take that on notice. I do have to say, though, we have quite strict secrecy provisions that prohibit us from talking about information relating to individual institutions in the public. But if there was something that was a clear breach of the law then those issues would be, at the very least, handed over to other regulatory authorities.
Senator RHIANNON: I didn't ask for a specific bank. I said, 'A bank that APRA has identified as breaching mortgage lending laws.' Will you take that on notice?
Mr Byres: I'll take that on notice.
Senator RHIANNON: I'm interested, how do you actually choose to disclose or not disclose such information?
Mr Byres: Generally, the disclosures we make are not about individual institutions because of section 56 of the APRA act. As a general point, we're unable to disclose protected information, which is information about the affairs of an individual institution. We tend to talk through our discussion papers, through speeches, through other things about observations at the industry level.
Senator RHIANNON: What does it say about the job you are doing with mortgage fraud that the royal commission has prioritised this as the first issue that they are looking at?
Mr Byres: I said before this committee about three years ago that we were unhappy with mortgage lending standards. We thought they had got to very low levels and, in some cases, lacked common sense. So I can understand why the royal commission would think this is an area they want to look at. It's also the largest asset class on the balance sheet of the banking system, so if you're going to look for something that's important to the stability of the system and where most consumers are interacting with the banking system, it's an obvious place to start.
Senator RHIANNON: Is it also because you've been too slow to act on this? Is that a factor? Mr Byres: We've devoted a lot of resources to this over the last little while. I think you can always say that when regulators have to intervene in the way we've intervened that, with the benefit of hindsight, you wish you would have done something sooner. That doesn't mean what you did at the time when you made any particular decision or didn't act was necessarily the wrong decision. So, of course, you wish you had got on to issues earlier—that's always a regulator's dilemma.
Senator RHIANNON: So you do think you should have got on to it earlier?
Mr Byres: No, I've said before I wish we had. But you make decisions on the information you have at the time. The more we've looked at this, the more we've dug into it, the more we've identified the need for improvements in the industry.
Senator RHIANNON: So do you think the banks are the target of the royal commission or is it your lax regulation, these failures?
Mr Byres: That's a question for the government.
Senator RHIANNON: But you could comment on it.
Mr Byres: There's an item within the terms of reference that invites the royal commission to comment to comment on the effectiveness of regulators. I'm sure they'll do that.
Senator RHIANNON: If we can't trust the banks to be honest with the information they collate to provide to you, what implication does this have for our understanding of financial system stability?
Mr Byres: I'm not sure of the first premise that says we can't rely on the banks to be honest about information they supply to us.
Senator RHIANNON: So you're satisfied with the information they provide to you? I thought that was—
Mr Byres: At a general level, yes. We've got substantial information-gathering powers, if we need to use them. There have been improvements needed in bank reporting in recent years, but it's not been a case of deliberate misreporting or other sorts of things that might suggest any sort of untoward behaviour.
Senator RHIANNON: A report in August last year by LF Economics, a macroeconomic research body, stated:
The unfortunate reality for victims of mortgage control fraud is that our regulators do not investigate allegations brought to their attention despite forensic evidence (paper trails) demonstrating evidence of fraud.
The evidence strongly suggests the regulators have done nothing to combat white-collar criminality in the mortgage market. That is a very serious allegation that points right at APRA from a research house that has spent a few years researching illegal conduct by mortgage lenders. Is there any truth to their opinion?
Mr Byres: To the extent that there were shortcomings in the way banks had been making credit decisions. As I said, we've been working to get those credit standards improved. When it comes to meeting responsible lending obligations to individual customers, that's primarily ASIC's responsibility. The responsible lending laws are enforced by ASIC. We work together on this issue. As I said, we've spent a lot of time focused on this issue over the last three or more years; in fact, we've devoted a very large amount of resources to it; and it's probably been one of the biggest commitments we've made.
Senator RHIANNON: I'll just go back to the question again. I asked: is there any truth to their opinion? The way you answered it, it sounded like a yes.
Mr Byres: I don't have their report in front of me, so I'm not sure of their precise opinion. If their general—
Senator RHIANNON: But I read it out quite clearly and I'm happy to read it out again.
Mr Byres: Could you, please?
Senator RHIANNON: LF Economics stated: The unfortunate reality for victims of mortgage-controlled fraud is that our regulators do not investigate allegations brought to their attention, despite forensic evidence (paper trails) demonstrating evidence of fraud. The evidence strongly suggests the regulators have done nothing to combat white-collar criminality in the mortgage belt.
Mr Byres: Their particular conclusion there, that regulators have done nothing, I think is clearly wrong.
Senator RHIANNON: In terms of the statement, though, the way you have answered in the more fulsome way, it sounded as though there was agreement or considerable agreement. Is that a fair comment?
Mr Byres: No. As I said, it's difficult for me. There's a subtle but an important distinction: issues around lender fraud are largely ASIC's responsibility. We have been focused on potential fraud—mechanisms by which banks prevent fraud by borrowers. We work together on those issues. But, again, I would make two points: we have recognised that there's a need for improved standards in the industry and we've been slowly but surely seeing that improvement. But I would certainly reject the idea that there's been no action at all.
Senator RHIANNON: I won't push it any further, but, when you say 'have recognised a need for improved standards', that certainly suggests you have some common position with that. In Britain, their financial regulator has capped mortgage lending to borrowers at 4.5 times their incomes. Should there be a similar cap on mortgage loan-to-income ratios here in Australia?
Mr Byres: We've certainly contemplated that, but decided that wouldn't be one of the tools we'd use at this point in time. We do keep track of it, and it is one of the charts—in the bottom right-hand side of the charts that were attached to my opening statement. I don't have the 4½ times; I have a six-times figure. We flag that as something we watch carefully, because we do think that's a higher-risk form of lending, obviously. The reason we haven't gone down that path and we've chosen to use other methods is that the loan-to-income ratio is not the best measure of borrower leverage. What you actually would like to know is the borrower's total debt rather than just the individual loan. Unfortunately, until now, we haven't had a way in which banks can identify a borrower's full set of liabilities. I've called that previously a blind spot that exists in the system. The new comprehensive credit reporting regime that the government is mandating will help fix that blind spot.
Senator RHIANNON: Thank you. Chair, I just have two short questions and then I'm finished. Could I ask them, please?
CHAIR: As long as they take less than two minutes, yes.
Senator RHIANNON: Thank you. If APRA were to hypothetically ban lenders from providing property investors loans to purchase an investment property where the rent will not cover the interest repayment costs and other running costs, such as negative gearing, would this make house prices more affordable and reduce risks in Sydney—
CHAIR: I think that's beyond hypothetical, Senator Rhiannon.
Senator RHIANNON: and Melbourne housing markets? Okay. Does APRA have data on what the average cash—not equity—deposit is relative to the size of the purchase price in Sydney and Melbourne?
Mr Byres: We may have, but I'd have to take that on notice. Particularly, I'm not sure that we have city-by-city data, but I'll take it on notice.
Senator RHIANNON: Thank you.