COVID-19 regulatory impacts for finance sector
The speed and size of the regulatory response to the COVID-19 pandemic is unparalleled. We summarise below the key developments to date for the financial services sector. This update does not include measures relating to tax relief or households and individuals. We expect that further changes may occur on a frequent basis.
Legislation to implement a number of the initiatives described below passed through the Commonwealth Parliament on 23 March 2020. Important information including fact sheets on the Federal Government initiatives outlined below can be found on the Treasury website here: https://treasury.gov.au/coronavirus
Credit
Coronavirus SME Guarantee Scheme: The Government will provide a guarantee of 50% of loans to small and medium enterprise (“SMEs”) for new unsecured loans to be used for working capital. Eligible borrower businesses will be SMEs with a turnover of up to $50 million. The maximum loan size will be $250,000 per borrower. The loans will be up to 3 years with an initial 6 month repayment holiday. The scheme is to commence by early April 2020 and to continue until 30 September 2020. The Government has committed $20 billion to support $40 billion in SME loans. Details will be set out in a legislative instrument issued by the Minister.
Responsible lending: The Government has said that it will provide “an exemption from responsible lending obligations for lenders providing credit to existing small business customers” for a period of 6 months. The responsible lending obligations do not apply to business finance, but the Government fact sheet says that the exemption means that small businesses will be able to get access to credit quickly and efficiently, because it can otherwise take time and effort for lenders to be satisfied that the money borrowed meets the business use test that exempts a loan from responsible lending.
Reserve Bank facility: On 19 March 2020 the Reserve Bank of Australia (“RBA”) announced that it would provide a term funding facility for the banking system. The RBA will provide not less than $90 billion in funding to the banks at a fixed interest rate of 0.25%. The facility will offer additional low-cost funding to banks if they expand their business lending, with incentives that apply for new loans to SMEs. This is in addition to the reduction in the cash rate to 0.25%.
Securitisation and investment: The Government will provide the Australian Office of Financial Management (“AOFM”) with $15 billion to invest in structured finance markets used by smaller lenders. AOFM will be able to invest in assets that support small business, including both unsecured and secured loans, as well as consumer lending. The Government has also been authorised to invest in the Australian Business Growth Fund and $100 million has been appropriated for that purpose.
Banks’ Small Business Relief Package: In addition to the Government measures outlined above, the Australian Banking Association (“ABA”) announced on 20 March 2020 a Small Business Relief Package which will apply to more than $100 billion of existing small business loans. The Australian Competition and Consumer Commission has granted urgent interim authorisation for the package.
Prudential
Capital expectations: On 19 March 2020 the Australian Prudential Regulation Authority (“APRA”) announced temporary changes to its expectations regarding bank capital ratios. APRA advised all banks that they may need to utilise some of their current capital buffers to facilitate ongoing lending to the economy. APRA said that, “provided banks are able to demonstrate they can continue to meet their various minimum capital requirements, APRA would not be concerned if they were not meeting the additional benchmarks announced in 2017 during the period of disruption caused by COVID-19.”
Support packages: In a statement issued on 23 March 2020, APRA advised its regulatory approach to the COVID-19 support packages being offered by banks and other lenders. APRA said that 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, and that loans granted a repayment deferral as part of a COVID-19 support package need not be regarded as restructured. APRA announced that it will be writing to all authorised deposit-taking institutions to advise them of the specific reporting treatment for loans subject to these support arrangements. APRA also confirmed that the Coronavirus SME Guarantee Scheme would be regarded as an eligible guarantee by the government for risk-weighting purposes.
Insolvency
Creditor demands: The following initiatives will apply for a period of 6 months:
For corporate insolvencies, the minimum threshold for a creditor to issue a statutory demand on a company will increase from $2,000 to $20,000, and the statutory timeframe for a company to respond to a statutory demand will be extended temporarily from 21 days to 6 months.
For personal bankruptcies, the threshold for the minimum amount of debt required for a creditor to begin bankruptcy proceedings will increase from $5,000 to $20,000, and the time for a debtor to respond to a bankruptcy notice will be increased temporarily from 21 days to 6 months. In addition, the timeframe during which a debtor is protected from enforcement action by creditors after presenting a declaration of intention to present a debtor’s petition has been temporarily increased from 21 days to 6 months.
Directors’ personal liability: For a period of 6 months, directors will be relieved of their duty to prevent insolvent trading with respect to any debts incurred in the ordinary course of the company’s business. Dishonesty and fraud will still be subject to criminal penalties, and any debts incurred by the company will still be payable by the company.
Corporate and regulations
Relief from the Corporations Act: For a period of 6 months, the Treasurer has been given a temporary instrument making power in the Corporations Act 2001 to amend temporarily provisions of the Act, in order to provide relief from specific obligations or to modify obligations to enable compliance with legal requirements during the crisis.
Deferral of sunsetting: The Legislation Act 2003 has been amended so that the relevant Minister for an Act or legislative instrument that is scheduled to sunset on or before 15 October 2020 may determine a new day on which the legislation sunsets.
Regulator priorities
Council of Financial Regulators: The Council of Financial Regulators, the coordinating body for Australia’s main financial regulatory agencies (APRA, the Australian Securities and Investments Commission (“ASIC”), Treasury and the RBA), released a statement on 16 March 2020.
The RBA will conduct one-month and three-month repurchase (repo) operations until further notice and conduct repo operations of six-months maturity or longer at least weekly, as long as market conditions warrant.
Council members will examine how the timing of regulatory initiatives might be adjusted to allow financial institutions to concentrate on their businesses and assist their customers.
APRA and ASIC will “take account of the circumstances in which lenders, acting reasonably, are currently operating during the prevailing circumstances when administering their respective laws and regulations. Both agencies also stand ready to deal with problems firms may encounter in complying with the law due to the impact of COVID-19 through a facilitative and constructive approach. In particular, each agency will, where warranted, provide relief or waivers from regulatory requirements. This includes requirements on listed companies associated with secondary capital raisings, annual general meetings and audits. ASIC will also work with financial institutions to further accelerate the payment of outstanding remediation to customers as soon as possible.”
ASIC: ASIC announced on 23 March 2020 that it would adjust its regulatory priorities in light of the COVID-19 pandemic. ASIC will:
focus its regulatory efforts on challenges created by the COVID-19 pandemic;
until at least 30 September 2020, give priority to matters where there is the risk of significant consumer harm, serious breaches of the law, risks to market integrity and time-critical matters;
work “constructively and pragmatically” with the firms it regulates, mindful of the difficulties that they may encounter complying with their regulatory obligations due to the impact of COVID-19;
suspend a number of near-term activities which are not time-critical, including consultation, regulatory reports and reviews;
suspend its enhanced on-site supervisory work such as the Close and Continuous Monitoring Program;
when issuing information-gathering notices, be mindful that many notice recipients may be facing significant disruption;
provide relief or waivers from regulatory requirements if warranted. This will include requirements on listed companies associated with secondary capital raisings and audits;
adopt a 'take no action' stance in relation to the timing of AGMs until 31 July and the conduct of AGMs by electronic means;
work with financial institutions to further accelerate the payment of outstanding remediation to customers;
take account of the circumstances in which lenders, acting reasonably, are currently operating when administering the law; and
maintain key business as usual functions including registry operations and services, receipt of whistleblower, breach and misconduct reports and general contact points for industry.
APRA: APRA issued a statement on 23 March 2020 setting out its revised agenda to prioritise the COVID-19 response.
APRA has suspended the majority of its planned policy and supervision initiatives, including consultations on prudential and reporting standards. It does not plan to recommence consultation on any non-essential matters before 30 September 2020.
APRA may continue to progress certain data reporting initiatives if critical to meeting its mandate in the current environment.
APRA’s primary supervision focus will be on monitoring the impact of COVID-19 on the financial and operational capacity of regulated institutions.
APRA’s refocused supervision effort will involve frequent communication with entities, monitoring key financial settings, such as capital and liquidity, and responding accordingly. These engagements will be conducted virtually, unless absolutely necessary.
APRA is reconsidering implementation dates and transition timeframes for prudential and reporting standards recently finalised but not yet implemented.
APRA will work with financial institutions to balance the need for timely data and information on current conditions with institutions’ ability to effectively manage their own responses.
On 24 March 2020, APRA separately announced that it would be temporarily suspending its program to replace APRA’s Direct to APRA (D2A) data collection tool with APRA Connect.
Other legal issues
The legal issues presented by the COVID-19 pandemic and the flow on economic effects extend beyond the regulatory initiatives outlined above. Other issues include:
For lenders, issues of default, hardship, material adverse change clauses and financial covenants.
For contracts, the application of force majeure clauses to excuse performance.
Work health and safety and privacy.
We can help
Please contact us if you need advice on any matters mentioned in this update.
Patrick Dwyer and Kathleen Harris
Legal Directors