APRA issued a consultation letter to the authorized deposit-taking institutions regarding potential changes to APS 220, the prudential standard on credit risk management. This consultation will ensure appropriate alignment with the non-authorized deposit-taking institution lenders' regime, which has been closely based on certain requirements in the new APS 220. The regime of non-authorized deposit-taking institution lenders is one of the key elements of the government reforms proposed in September 2020. The proposed changes will be contingent on the related government reforms passing as legislation. APRA is seeking feedback on these proposals by January 29, 2021.
APRA had finalized the new APS 220 In December 2019, for implemented from January 01, 2021. However, with the onset of the COVID-19 pandemic, APRA had delayed the implementation of APS 220 by 12 months. Then, in September 2020, the government announced a series of proposed reforms to consumer credit laws. One key element of the proposed reforms is that authorized deposit-taking institutions would no longer be subject to the Responsible Lending Obligations, which had been administered by the Australian Securities and Investments Commission (ASIC). The other element is that non-authorized deposit-taking institution lenders would be subject to new lending requirements, administered by ASIC, based largely on certain requirements in the new APS 220. APRA is not planning material revisions to the credit-related prudential standards or guidance. However, some amendments will be necessary in the event that the proposed credit reforms of the government are passed as legislation.
Therefore, APRA is commencing a consultation on the new APS 220 to ensure appropriate alignment with the regime for the non-authorized deposit-taking institution lenders. Consequently, APRA is proposing the following changes:
- APRA is proposing an amendment to the new APS 220 that would require authorized deposit-taking institutions to assess the capacity of an individual borrower to repay credit without substantial hardship. This is similar to the government’s proposed requirements of non-authorized deposit-taking institution lenders. APRA will give effect to this amendment through an addition to paragraph 41 of the new APS 220. This amendment is consistent with the existing requirements of APRA and will not impose additional burden on authorized deposit-taking institutions.
- APRA is proposing to more closely align the implementation date of the new APS 220 with the proposed consumer credit reforms of the government, if this is earlier than January 01, 2022. An earlier implementation date is unlikely to create material additional regulatory burden for authorized deposit-taking institutions. Industry has been aware of the details of the new APS 220 since late 2019 and APRA expects that most authorized deposit-taking institutions would already be in compliance with the new APS 220 requirements. APRA will not implement the new APS 220 any earlier than April 01, 2021.
If the proposed government reforms are not passed as legislation, APRA will not progress the proposed revisions. APRA anticipates that it will finalize APG 220, the Prudential Practice Guide on credit risk management, in the first quarter of 2021. Depending on the outcome of the proposed credit reforms of the government, around this time, APRA may also consult on amendments to the APG 223 on residential mortgage lending. On the basis of the current proposals, APRA does not expect that revisions to APG 223 would be material. From October 2020 to January 2021, APRA is also consulting on ARS 220.0, the draft reporting standard on credit risk management. APRA highlights that the changes proposed in this letter will not affect the proposed timelines for ARS 220.0. The proposed first reporting period for ARS 220.0 will remain for the quarter ending March 31, 2022.
Comment Due Date: January 29, 2021
Keywords: Asia Pacific, Australia, Banking, APS 220, Credit Risk, COVID-19, Regulatory Capital, APG 220, ARS 220, Residential Mortgage Lending, Basel, APRA
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