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Connexus : Issue 42
ASIC reforms in the wind The ASIC taskforce is looking at possible regulatory and legislative responses to the Banksia collapse. Among them are reforms to the capital and liquidity requirement for debenture issuers, clarification of the role of trustees and auditors, prospectus requirements and the prohibition of terms such as 'deposit' and 'at call account'. In 2007 ASIC identifed 34 unlisted debenture companies that were not listed on the stock market and were not rated by a ratings agency. A report in the Australian Financial Review revealed that, by the time Banksia collapsed, 16 of the 34 had gone belly-up, owing investors $1.5 billion. Of the 18 still operating, 12 didn’t have enough capital to meet ASIC’s suggested minimum capital ratio. Banksia had less than half the recommended amount. As things stand, debenture issuers are free to lend money provided they disclose their lack of capital in their prospectus. If there is a lesson to be learnt from the Banksia collapse, it is that disclosure is not enough to protect consumers. between regulated and unregulated deposit-taking institutions.” Status doubt Luke Lawler, Abacus senior manager, public affairs, says frequent use of the term 'non-bank' to describe the likes of Banksia can raise doubt about the status of non-bank ADIs such as credit unions, mutual banks and building societies. "A bright line needs to be drawn between regulated banking institutions and non-ADIs. A further step to avoid confusion would be to replace the term ADI in the Banking Act 1959 with Authorised Banking Institution, or ABI,” says Lawler. Even when consumers are made aware of the difference between companies like Banksia and ADIs, many are unmoved. Rene Deen, general manager at Goulbourn Murray Credit Union, says his organisation uses local media to advertise its government guarantee and the fact that it is APRA-regulated just like the big banks, but the message often falls on deaf ears. "At the end of the day, [Banksia's] rate on deposits was always higher than ours,” says Deen. He mentions one customer who had just sold her house and had to park the proceeds until she bought a new home. She deposited it with Banksia, based on its interest rates, despite being warned that it was not as safe as the credit union, and now her money is gone. The majority of Banksia's clients were retirees dependent on income from their investments. When interest rates began to fall, the temptation of Banksia's higher interest rates was too great. Some people even had Centrelink pay their pension into their Banksia ‘accounts’. "[Shadow banks] are taking deposits and offering rates better than ours because they don't have to provide the capital and liquidity that we do to operate," says Challis. “But this will change.” Unlike with APRA-regulated ADIs, there is no active supervision of debenture companies to check on the adequacy of their capital and liquidity. What's more, the cur rent regulatory framework doesn't require a new prospectus every time people invest funds, so they are lulled into believing it is safe. Lawler says Abacus doesn't want to ban debentures or the companies issuing them. Instead, it supports measures to reduce the likelihood of investors believing a debenture issuer is a regulated banking institution, rather than subjecting them to a watered-down version of pr udential regulation. Consumer education Now that the receivers have released some of Banksia's funds, much of it is walking through the doors of the local credit union. However, says Deen, consumer education works only after the event. The popularity of the shadow banking sector has endured despite the litany of failures and losses for individual consumers. Human nature is diffcult to change. The best solution for consumers lies in more effective regulation. Barbara Drury is a freelance writer. It is unfair and unrealistic to think consumers can tell the di erence between regulated and unregulated deposit- taking institutions. Peter Challis, chief executive of WAW Credit Union www.abacus.org.au 19