Exclusive: One-third of non-bank funding could disappear if EU reform isn't amended

Some nerve-wracking days lay ahead for the Australian non-bank sector as it waits to see if the EU will amend a reform that would restrict European investors buying Australian residential mortgage-backed securities. MPA can report that the European Parliament is due to decide on March 10 whether to remove the prohibition on securitisation at the request of the Australian Government, after intense lobbying from the Australian Securitisation Forum (ASF) and the Australian Financial Markets Association (AFMA) brought to light the impact the reform would have on the non-bank sector.

Firstmac CFO James Austin told MPA that about half of non-bank residential mortgage-backed security (RMBS) investors currently come from overseas, with a good proportion of these from Europe. He also said UK investors would be impacted by the legislation despite Brexit because many operate under dealing mandates that are consistent with European rules.

He said the reform was targeted at anti-money laundering and anti-terrorism financing and that Australia was included in a list of countries that were deemed by the EU to fall within those categories. The legislation has already been approved and written up by the European Parliament, but following lobbying from the ASF and the AFMA, Treasurer Josh Frydenberg has intervened and requested an amendment.

Read more: Could EU reforms hurt Australian non-bank lenders?

“As I understand, it’s being taken up in the European Parliament on March 10 with a view to removing the prohibition on securitisation,” said Austin. “It would be materially bad for securitisation funders from Australia if it was not removed - about a third of total funding is coming from this jurisdiction.”

He added that banks would also be impacted by the legislation, but not to the extent of non-banks, which get all of their funding via SPVs.

“A lot hangs on what happens on March 10,” he said.

If the amendment is not passed, the legislation would be a significant blow to Australian non-banks, which are already feeling the pressure of competing with ADIs, which have access to the RBA’s term funding facility (TFF).

“The TFF provides bank funding at 10 basis points, whereas non-banks are raising funds in the open market - which has been around 100 points,” said Austin. “That’s a significant difference and that’s resulting in a lot of outflow, a lot of discharges from non-banks to the banks who are offering cashback deals and cheap fixed rate offers.

“This would put further pressure on non-banks because it means that roughly a third of their investors out of Europe would not be allowed to invest in these transactions. It’s supply and demand - if you don’t have enough demand from investors, the price is likely to rise.”

Austin said Firstmac had been participating with the ASF in lobbying Treasury on the change.

He said non-banks were offering some of the most competitive variable rates in the market – something brokers should consider for their clients.

“Brokers should be mindful that the current offers that are seen in the market, the upfronts, the three-year fixed rates, the incredibly tight rates - they’re likely to disappear come July with the TFF finishing,” he said. “If you look at where the banks are offering mortgage rates, their variable rates are not down, they’re still very expensive.

“Those fixed rates will disappear but customers who have been put into these sub-2% rates, at the end of three years they are going to be repricing fairly heavily to the bank’s standard variable - so just question whether that’s in the best interest of the customer.”