Quarterly Statement by the Council of Financial Regulators – December 2020
The Council of Financial Regulators (the Council) held its regular quarterly meeting on Friday, 27 November.
Council members welcomed recent positive news on containing COVID-19 in Australia and the progressive opening-up of state borders and economies. These developments will aid the economic recovery and in turn reduce some of the stresses faced by households, businesses and the financial system. Nonetheless, the shock to the economy has been large and path to recovery is likely to be uneven.
A key means of support for households and businesses has been the deferral of loan repayments offered by lenders. Council members discussed the critical transition to normal repayment schedules as deferrals come to an end. The majority of deferrals expired in September and October. To date the transition has progressed relatively smoothly, with most borrowers recommencing scheduled repayments. The share of loans with deferred repayments fell to 3 per cent of credit in October, from a peak of around 10 per cent mid-year. Council agencies will continue to closely monitor developments, including the treatment of customers in hardship, as further deferrals expire in the coming months.
Members discussed credit conditions more generally. Owner-occupier housing credit has continued to grow at a moderate pace, while demand for credit by investors remains subdued. The demand for credit by businesses also remains subdued, largely reflecting caution given the uncertain outlook and a reduced need for funding as a result of the various support measures. Members discussed developments in the non-bank lending sector, including funding arrangements, which were disrupted with the onset of the pandemic. Funding conditions have since improved, including as a result of policy initiatives.
The policy responses to the pandemic have resulted in a very low rate of business insolvencies during 2020, despite difficult trading conditions. Members discussed the expected increase in insolvencies in 2021. They discussed the implementation of the Government's proposals to reduce the complexity, time and costs of insolvency processes for small businesses, along with measures to increase the capacity of insolvency practitioners to manage an increase in insolvencies. The new framework should improve outcomes for some creditors. Nevertheless, it will remain important for lenders to adequately provision for possible loan losses in the period ahead.
The Council discussed the significant operational outages experienced by the Australian Securities Exchange (ASX) in recent weeks. Members expressed concern about the potential impact of the outages on market functioning and investor confidence. The Council noted that Chi-X's trading facilities were operational throughout the outages of ASX systems in the week of November 16. The Australian Securities and Investments Commission (ASIC) and the Reserve Bank have been in close contact with ASX during this period and will also be closely involved in ASX's review processes. Members have asked to be kept informed of the outcomes of the review and ASX's response.
The Council has been closely monitoring the progress of efforts to test the validity of pandemic exclusions in business interruption insurance policies. The New South Wales Court of Appeal recently ruled in favour of policyholders on one key issue, though other areas of uncertainty remain. Council members noted a number of insurers had increased their provisions for potential claims in light of the Court decision. They encouraged the industry to work with the Australian Financial Complaints Authority and to move as quickly as possible to resolve any remaining uncertainty and promptly pay out valid claims.
The Council continues to pursue several work streams on cyber security. Members endorsed a work plan that will focus on coordinating agency approaches on incident response, regulatory frameworks and testing. Council agencies also continue to engage with the Department of Home Affairs on the development of an enhanced framework for the security and resilience of critical infrastructure, including in the financial sector. The Council expects to release its pilot framework for a threat intelligence based testing regime (CORIE) in the near future.
Members also discussed a number of other policy developments and initiatives, including:
- ongoing digital identity initiatives, including work under way by the Digital Transformation Agency (DTA) and the private sector through the Australian Payments Network. A Council subcommittee will engage with the DTA on these issues.
- several current Australian Prudential Regulation Authority (APRA) policy initiatives, including proposed enhancements to the capital regime for authorised deposit-taking institutions (ADIs), a review of ADI licensing arrangements, and APRA's proposed remuneration prudential standard
- the Government's Review of the Australian Payments System.
Council of Financial Regulators
The Council of Financial Regulators (the Council) is the coordinating body for Australia's main financial regulatory agencies. There are four members: the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC), the Australian Treasury and the Reserve Bank of Australia (RBA). The Reserve Bank Governor chairs the Council and the RBA provides secretariat support. It is a non-statutory body, without regulatory or policy decision-making powers. Those powers reside with its members. The Council's objectives are to promote stability of the Australian financial system and support effective and efficient regulation by Australia's financial regulatory agencies. In doing so, the Council recognises the benefits of a competitive, efficient and fair financial system. The Council operates as a forum for cooperation and coordination among member agencies. It meets each quarter, or more often if required.