APRA consults on updates to credit standards

The Australian Prudential Regulation Authority (APRA) is consulting on changes to its Prudential Standard APS 220 Credit Risk Management (APS 220), given the incoming reforms to consumer credit laws.

While APRA finalised a new APS 220 standard in December 2019, which was due to be implemented from 1 January 2021, the new version was delayed by 12 months once COVID-19 hit.

However, since then, the government has proposed (and yesterday introduced to Parliament) a bill to reform consumer credit laws, including the repeal of responsible lending obligations (RLOs) for authorised deposit-taking institutions (ADIs) and new lending requirements for non-ADIs.

As such, APRA is now looking to amend its credit-related prudential standards and guidance to reflect the consumer credit reforms. 

However, it notes that the proposed changes will only move forward should the government’s reforms pass as legislation. Therefore, only should the consumer credit reforms – which repeal RLOs – pass both houses and gain royal assent, will the APS 220 be updated.

The standard will be updated to introduce a requirement for ADIs to assess an individual borrower’s repayment capacity without substantial hardship, similar to the government’s proposed requirements of non-ADI lenders. 

In a letter to banks, APRA deputy chair John Lonsdale outlined that an additional sentence will be added to paragraph 41 of APS 220, which states: “For exposures to individuals, an ADI must assess the individual’s capacity to repay credit without substantial hardship.”

Mr Londsdale said, “In APRA’s view, this amendment is consistent with APRA’s existing requirements, and will not impose additional burden on ADIs.”

He added that APRA is also proposing to more closely align the implementation date of the new APS 220 with the government’s proposed consumer credit reforms, if this is earlier than 1 January 2022. 

“In APRA’s view, an earlier implementation date is unlikely to create material additional regulatory burden for ADIs. Industry has been aware of the details of the new APS 220 since late 2019 and APRA expects most ADIs would already be complying with the new APS 220 requirements. APRA will not implement the new APS 220 any earlier than 1 April 2021,” he said. 

In his letter to banks, Mr Lonsdale concluded: “APRA’s proposed changes to the new APS 220 will be contingent on the passing of legislation for the government’s proposed consumer credit reforms. If the government’s proposed reforms are not passed as legislation, the changes are unnecessary and APRA will not progress the proposed revisions. 

“The proposed changes to the new APS 220 will not change APRA’s approach to supervising ADI lending practices, or enforcing this prudential standard. APRA’s objective in implementing the new APS 220 is to set prudential requirements of ADIs for sound lending practices, which support the financial soundness of ADIs and the stability of the Australian financial system.”

APRA has said that the proposed updates to the standard will not impact the proposed timeline for the Reporting Standard ARS 220.0 Credit Risk Management (ARS 220.0), which it is consulting on now.

The proposed first reporting period for ARS 220.0 will remain for the quarter ending 31 March 2022.

The regulator also told banks that it expects to finalise Prudential Practice Guide APG 220 Credit Risk Management (APG 220) in the first quarter of 2021.

Mr Lonsdale added: “APRA may also consult on amendments to APG 223 Residential Mortgage Lending (APG 223) around this time, depending on the outcome of the government’s proposed credit reforms. 

“On the basis of the current proposals, APRA does not expect that revisions to APG 223 would be material.”

The consultation on the revised APS 220, which will be subject to a public consultation, will be open until 29 January 2021.

[Related: New credit risk management standard released]