APRA faces pressure on liar loans

The Australian 12:00am March 29, 2018

Michael Roddan

The banking regulator has repeatedly dodged questions from politicians who want to know why it overlooked “systemic” risks in the mortgage lending sector that have been uncovered in the first two weeks of the royal commission.

Appearing before the powerful House of Representatives economics committee yesterday, APRA chairman Wayne Byres said much of the bad behaviour unearthed during the first two weeks of formal hearings at the royal commission fell under the responsibility of the corporate regulator, the Australian Securities & Investments Commission.

Liberal MP Sarah Henderson, chair of the economics committee, asked Mr Byres repeatedly whether the Australian Prudential Regulation Authority could have been doing “a better job” of monitoring questionable behaviour including mortgage fraud at the nation’s major banks.

Mr Byres said APRA was not responsible for policing much of the conduct at the centre of the royal commission.

“Those laws are administered by ASIC. Instances of fraud will be pursued by the corporate regulator and the police in some cases,” he said.

“That’s not to say we don’t have an interest in these issues, because we do — the prudential interest in these issues is trying to understand the extent to which these issues indicate a failing in the governance oversight and accountability within organisations.”

Just two weeks into hearings at Kenneth Hayne’s royal commission, senior counsel assisting the royal commission Rowena Orr QC has grilled the banks on mortgage fraud, bribery, false documentation, failure to verify customer income, not assessing expenses, failure of internal controls to remediate breaches and failures to report misconduct to the corporate regulator.

Commonwealth Bank-owned mortgage broker Aussie Home Loans came under fire after executives revealed it lacked a system to detect loan fraud, while ANZ executive William Ranken revealed his bank did not check information provided by brokers about customers’ living expenses.

NAB was beset by allegations that white envelopes stuffed with money were passed across tellers’ counters to bribe bankers into giving out fraudulent home loans in a scam involving six branches in western Sydney.

Westpac was labelled by ASIC as the “most resistant” of the big four banks to obeying the law during a dispute about an apparent breach of responsible lending obligations. Mr Byres said the revelations were “very disappointing” but “not entirely surprising”.

“We have been calling out poor residential lending standards for some time and the need for those to be lifted,” he said.

“The individual case studies show the industry in a very poor light. I don’t think there’s any other way you can describe the picture that’s been painted.”

UBS analyst Jon Mott estimates Australian banks are sitting on $500 billion worth of “liar loans” where borrowers gave banks and other lenders false information to get a mortgage. “Liar loans” came to prominence in the US during the global financial crisis, which was exacerbated by mortgages that had been sold with inaccurate documentation.

Labor MP Matt Keogh said the revelations in the royal commission were symptomatic of “a systemic prudential risk” and questioned why APRA had not been more focused on bad behaviour. Mr Byres said he had been “engaged in a tug of war” with the banking industry to try to improve standards in the mortgage lending industry.

“There are clearly shortcomings in what the banks have done and I’m not in any way disputing that,” he said. “It’s not our primary task to pursue matters of conduct. Those matters are a priority for ASIC. Where we come across instances where we believe there has been a breach of the law or we think requires investigation, obviously we pass that information to ASIC.”

Martin North, principal of Digital Finance Analytics, which consults with the major banks, said APRA’s response was “shoddy”. “If they really did not have evidence of fraud, then we ask, should they have? To which I think the answer is yes — after all, you are the regulator!”

APRA in 2016 sent auditors into the major banking institutions to find shortcomings. “We’re about to embark on a round of follow-up reviews to make sure what banks have committed to do has actually been delivered,” Mr Byres said.

Ms Henderson asked Mr Byres whether the community could have confidence APRA was “up to the task” of protecting them from systemic prudential dangers.

“I can’t give you an assurance they are complying with all the relevant legislation,” Mr Byres said. “I can give you an assurance they are complying with the standards that we would apply. The issues that you talk about …. are all legislative provisions or legislative acts that ASIC administers. I don’t want to opine on whether there has been a breach of an Act or not.”

“The prudential standards are about safety. In particular, our task when it comes to banking, boiled down to its absolute essence, is: is depositors’ money safe. I don’t think anyone has questioned along the way that Australia’s banking institutions are financially sound.”

Mr Byres also told the banks to shore up their ability to fend off cyber-attacks, warning it was “almost inevitable” defences would be breached. “Australian financial institutions are among the top targets of cyber criminals seeking money or customer data, and evidence suggests the threat is accelerating,” he said. “This is increasingly one of the most important risks the financial system faces — affecting large and small institutions alike, and stretching across all industries.”