Australian lenders secure European Union funding win

Australian lenders have secured a big win as they continue to tap global investors for funding.

Australia has been granted an exemption to the EU’s new securitisation ​package.

Australia has secured a key carve-out to the European Union’s securitisation reforms, which risked denting investor demand from those markets for domestic securitisation deals.

The exemption is considered a big win for Australia as non-bank lenders and other issuers continue to tap global investors for funding, typically with home loans that are packaged up as bonds. They are called residential mortgage-backed securities.

The EU’s potential reforms had sparked high-level representations — across the diplomatic and political spectrum — to make the case that Australia should not be caught by the proposed changes.

The European parliament has now passed the securitisation regulations, although the compromise deal allows investment in Australian deals to continue largely unencumbered.

The Australian Securitisation Forum informed its constituents of the win this week.

“Following extensive advocacy efforts by the ASF, Association for Financial Markets in Europe and the Australian government, the strict prohibition on investment in SSPEs in Annex II-listed countries has been removed,” the notification said.

“A significant amount of effort went into allaying EU concerns that Australia employs harmful tax practices and emphasising the importance of Australia’s long-established, high quality, legally robust and well-functioning securitisation market.”

The EU reforms were problematic because Australia was initially classified as being a jurisdiction which had not abolished what the jurisdiction considered a “harmful tax regime”. That centred on Australia’s offshore banking unit regime, which facilitates a concessional tax rate of 10 per cent rather than the typical prevailing rate of 30 per cent.

The federal government has committed to amend or abolish the OBU regime, but that is yet to occur.

The EU had also put a red flag on countries with strategic deficiencies in their anti-money laundering and counter-terrorist financing regimes. For Australia, the fact that real estate agents, conveyancers and lawyers are not caught by the financial crimes framework wasn’t viewed favourably.

The compromise arrangement between the EU and Australia is an important concession for local non-bank lenders, amid bumper demand for mortgages. ASX-listed Liberty Financial on Wednesday priced a $1bn securitisation deal for prime mortgages, lifting its issuance for March above $1.6bn.

Banks have had a leg up by tapping ultra-cheap funding via the Reserve Bank’s COVID-19 Term Funding Facility.

An Allen & Overy report on Wednesday highlighted the EU securitisation changes and a new notification obligation to relevant tax authorities for European investors in Australian securitisations.

The law firm’s report noted amending regulation was due to be published in early-to-mid April and come into force three days after that.

Under the new rules, a notification is required to tax authorities of the EU member state in which the investor is resident for tax purposes, allowing an assessment of any tax benefit.

Allen & Overy’s report also said the EU regulation “is silent” on the consequences of non-compliance by institutional investors, if they do not notify a tax authority of participation in an Australian securitisation deal.

“It is not clear what, if anything, the relevant tax authorities may choose to do, once notified.”