Repayment holidays need not be treated as arrears: APRA

Following on from the announcement that many of Australia’s lenders will enable impacted customers to defer their loan repayments for six months in response to the economic fallout from the coronavirus outbreak, the Australian Prudential Regulation Authority (APRA) has confirmed its regulatory approach to the COVID-19 support packages being offered by lenders to their borrowers.

As foreshadowed by credit reporting agencies and lenders, the regulator advised banks that they “need not treat the period of the repayment holiday as a period of arrears”.

In an update on Monday morning (23 March), APRA outlined: “Many banks have recently announced COVID-19 support packages that provide affected borrowers with an option to defer their repayments for a period of up to six months. These packages have mainly been offered to small business and home loan customers. 

“Where a borrower who has been meeting their repayment obligations until recently chooses to take up the offer not to make repayments as part of a COVID-19 support package, the bank need not treat the period of the repayment holiday as a period of arrears. 

“Similarly, loans that have been granted a repayment deferral as part of a COVID-19 support package need not be regarded as restructured,” the regulator said.

It added that it will be writing to all authorised deposit-taking institutions (ADIs) to advise them of the specific reporting treatment for loans subject to these support arrangements. 

APRA will also require banks to report the nature and terms of any repayment deferrals and the volume of loans to which they are applied, adding that this information will also be publicly disclosed.

“ADIs must also still continue to provision for these loans under relevant accounting standards. APRA also confirmed that the Coronavirus SME Guarantee Scheme announced by the Commonwealth government [on Sunday] is to be regarded as an eligible guarantee by the government for risk-weighting purposes,” it said.

The statement came as the mortgage broking industry awaits answers on how the repayment deferrals could impact the payment of trail commissions.

Following on from the Australian Banking Association’s (ABA) announcement last week that its members would suspend principal and interest loan repayments for distressed small-business customers for six months – with several lenders offering repayment holidays for mortgage borrowers, too – questions had been raised around how trail would be treated on loans with deferred repayments.

A spokesperson for the ABA has since said that the ABA and its members “acknowledge that mortgage brokers play an important role in supporting competition in the home-lending market” and are “conscious of the fact that brokers are small businesses in their own right and will require support”.

“Member banks are aware that these difficult circumstances may be impacting upon brokers,” the spokesperson said, outlining that individual banks will be in touch with brokers to confirm their approach on issues around commission arrangements “in coming days”.

ASIC and APRA prioritise COVID issues

Given the ongoing changes being announced in response to the COVID-19 pandemic, APRA has suspended the majority of its planned policy and supervision initiatives in order to focus on monitoring the impact of COVID-19 on the financial and operational capacity of regulated institutions. 

According to APRA, this will largely involve remotely communicating with regulated entities, monitoring key financial settings (such as capital and liquidity), and responding to any changes.

It is therefore suspending all “substantive” public consultations and actions to finalise revisions to the prudential framework that are currently underway or upcoming, including consultations on prudential and reporting standards. 

APRA said it does not plan to recommence consultation on any non-essential matters before 30 September 2020.

APRA chair Wayne Byres said it was “essential” that both APRA and financial institutions were able to give their fullest attention to the impact of COVID-19.

"Australia’s financial system is strong and resilient, and a key reason is that APRA’s current prudential framework is fundamentally sound and incorporates international best practice,” he said.

While noting that APRA had set out its policy and supervision agenda in January, he added that “right now it is more important that banks, insurers and superannuation trustees – as well as APRA – devote their energy and resources to responding to the impact of COVID-19”.

“We will be working with financial institutions to balance the need for timely data and information on current conditions with institutions’ ability to effectively manage their own response,” Mr Byres continued. 

“Given the rapidly evolving environment in which everyone is operating, we will continue to closely monitor the extent and impact of COVID-19 on APRA-regulated entities to consider if any further modifications to our supervisory and policy activities are necessary,” he concluded.

ASIC to focus on COVID-19 challenges

Like APRA, the Australian Securities and Investment Commission (ASIC) has said it will focus regulatory efforts on “challenges created by the COVID-19 pandemic” until 30 September.

This includes suspending its enhanced on-site supervisory work such as the Close and Continuous Monitoring Program.

However, it will still prioritise issues relating to “the risk of significant consumer harm, serious breaches of the law, risks to market integrity and time-critical matters”.

“ASIC is committed to working constructively and pragmatically with the firms we regulate, mindful they may encounter difficulties in complying with their regulatory obligations due to the impact of COVID-19,” the regulator said. 

“By taking these actions, industry participants will be better placed to focus on their immediate priorities and the needs of their customers at this difficult time,” it added.

ASIC went on to state that, where warranted, it may also provide relief or waivers from regulatory requirements, such as requirements on listed companies associated with secondary capital raisings and audits. 

Moreover, ASIC said it would be working with financial institutions to further accelerate the payment of outstanding remediation to customers and will “take account of the circumstances in which lenders, acting reasonably, are currently operating when administering the law”. 

“ASIC will maintain its enforcement activities and continue to investigate and take action where the public interest warrants us to do so against any person or entity that breaks the law. However, it will focus on action necessary to prevent immediate consumer harm, egregious illegal conduct and other time critical matters,” it said.

[Related: Repayment holidays unlikely to impact credit reports]