The Australian Securities and Investments Commission (ASIC) has warned that the financial system could struggle to cope when the government winds back its COVID-19 economic stimulus measures.
James Shipton, ASIC’s Chairman has said that Australia may not have enough administrators and liquidators to deal with a series of business collapses if the government removes its subsidy packages. The problem will be compounded by the removal of a holiday period on loans issued by Australia’s largest lenders.
Mr Shipton warned of an economic “cliff” that businesses are approaching, stating that in late September – when the government has said its packages are slated to end – ASIC expects a number of residential and business borrowers will not survive.
Banks have implemented a six-month ‘holiday’ period for large business and personal loans, with the financial regulator warning of a possible collapse when banks end their repayment holidays.
ASIC says that in many cases, banks will have no choice but to foreclose on some business and residential loans if the borrower is unable to repay. ASIC is projecting the potential roll-on effects of this will have grave consequences for the Australian economy.
ASIC has also been forecasting a number of economic models which anticipate how businesses will cope when the government removes its support, and they’re forced to make significant changes.
“We are working with financial institutions right now to work through these issues to be prepared for any eventuality when the reality of September and October hits,” Mr Shipton told The ABC.
“Many Australians are going to be caught on the wrong side of this,” he warned. “Economic recessions do have consequences. This is a sad and tragic reality. That’s the point to avoid so that the hardship and the consequences are minimised.”
“What I am saying, is that the harsh reality needs to be recognised,” he said.
“We will need to prepare to have liquidators and administrators in place to navigate some companies getting on the wrong side of the crisis,” Shipton said, adding that “that unfortunately is going to be inevitable.”
ASIC says that one of these priorities is to protect consumers at a time of particularly “heightened vulnerability,” implementing protections for consumers against scams, illegitimate financial advice and misleading advertising campaigns.
He said the move from banks to eat into their capital reserves, rather than pressure business owners for loan payments has also reduced the pressure on those with loans.
Mr Shipton also confirmed that ASIC had modelled the risk of a global financial collapse like that of the 2008 GFC.
“Look, there is always a risk,” he said. “What we’re doing nonetheless is taking these scenarios and playing them out, so that we can be prepared to determine the type of issues that came up in the financial crisis so we can learn our lessons and be prepared or that.”
The ABC is reporting that “as part of pandemic measures, Treasurer Josh Frydenberg recently put a six-month freeze on legislation arising from the financial services Royal Commission after revelations of serious misconduct in the sector.”
Mr Shipton denied that ASIC has had its hands tied behind its back in terms of enforcement actions against misconduct from banks and loaners, stating that “I wouldn’t say that it’s a foot off any pedal.”
“We remain very committed to getting back on that important work,” he said, adding that “where there’s been faults and failings, we’ll act accordingly.”