EXTRACT: Shadow Banking is now a 52 TRILLION Industry and Posing Risks:
‘In the years since the crisis, global shadow banks have seen their assets grow to $52 trillion, a 75% jump from the level in 2010, the year after the crisis ended. The asset level is through 2017, according to bond ratings agency DBRS, citing data from the Financial Stability Board.
The U.S. still makes up the biggest part of the sector with 29% or $15 trillion in assets, though its share of the global pie has fallen. CHINA has seen particularly strong growth, with its $8 trillion in assets good for 16% of the total share.
Within shadow banking, the biggest growth area has been “collective investment vehicles,” a term that encompasses many bond funds, hedge funds, money markets and mixed funds. The group has seen its assets explode by 130% to $36.7 trillion. It poses particular danger because of its volatility and susceptibility to “runs” and is part of the “significant risks” DBRS sees from the industry.’
The ‘Wild West’ of shadow banking
Updated Fri 29 Nov 2019
Expires: Friday 25 October
A new wave of non-bank lenders is showering small businesses with high-risk loans at interest rates that be as high as 150 per cent.
What many borrowers don’t know is that normal consumer protection rules don’t apply to these so-called shadow banks, and that can lead to disaster for people who borrow against their family home.
KIRSTY GARRASH: Yes, please. Are you right? Watch out, bub.
PAT MCGRATH, REPORTER: Kirsty Garrash has just one day left to move everything out of her family’s home.
KIRSTY GARRASH: Supposed to just slide off.
PAT MCGRATH: She’s trying to keep up a brave face for her children.
KIRSTY GARRASH: Being his age, maybe it’s just we’re trying to make it a little exciting for him.
It is like a new adventure kind of thing, rather than what’s actually going on but we lost it. Got to find somewhere else to go.
PAT MCGRATH: Things were very different four years ago when Kirsty and her partner, Francis Murphy, bought the house.
KIRSTY GARRASH: We were just so happy to have a home. The kids were stoked. There was a swimming pool, you know, they could have friends over for pool parties.
PAT MCGRATH: They used the equity in their home to get a loan to expand their excavation business.
FRANCIS MURPHY: Especially anything in the building industry, they pretty much give us a call and we were there to do whatever, retaining walls, swimming pools, whatever has got to be done.
PAT MCGRATH: They couldn’t get a loan from a bank because their business had no financial track record.
So Kirsty and Francis went online in search of a lender that would give them money.
The company they found was a small business lender called Mango Credit which offers short-term high-interest loans. It offered Kirsty and Francis $300,000.
KIRSTY GARRASH: We just didn’t have enough of the paperwork to try and go a different way. It was always only going to be short-term.
FRANCIS MURPHY: In hindsight, we should have probably went another way.
PAT MCGRATH: The details of the loan show the massive financial risk Kirsty and Francis were taking on.
They put their family home up as security. The annual interest rate was 21 per cent but if they missed a repayment, that jumped to 150 per cent.
They’d be on the hook for monthly repayments of more than $37,000.
KIRSTY GARRASH: We never were going to default. It was never, it was not an option. That’s why we paid it for the 12 months without fail.
It was never a path we wanted to go. It was only a short-term thing.
PAT MCGRATH: But in January this year, Kirsty and Francis were sent down that path after they told Mango Credit they wanted to refinance the loan.
KIRSTY GARRASH: It will have to go in this back row or in the middle.
PAT MCGRATH: Kirsty said she made a verbal agreement with Mango’s owner to hold off on the next repayment in the meantime.
KIRSTY GARRASH: He said do not make the January repayment as it can be rolled over in your refinance because it was supposed to all be refinanced in January.
PAT MCGRATH: Kirsty later made a sworn statement that this happened.
Mango denied this when asked by the ABC.
What’s not in dispute is it put the loan into default and started charging the higher rate – 150 per cent.
FRANCIS MURPHY: Things just gone crazy and we were trying to do the right thing.
We had good people on board to help us get another loan and what not and it just went crazy.
PAT MCGRATH: Kirsty and Francis tried complaining to the Government’s new Australian Financial Complaints Authority, or AFCA, but they were told that Mango Credit operates outside of its jurisdiction because purely business lenders are not obliged to be part of AFCA.
Even though Mango Credit tells borrowers its mortgage arm is licensed, Mango Credit itself doesn’t have a credit license.
GERARD BRODY, CONSUMER ACTION LAW CENTRE: Many of the providers out there aren’t required to be licensed.
If you borrow from an unlicensed lender and have a dispute, it means you can’t take your complaint to the Australian Financial Complaints Authority and you are forced to go to court.
KIRSTY GARRASH: You have got no leg on. You literally have nowhere to turn and no-one to help and there’s no-one that can hold them accountable for this.
PAT MCGRATH: By April, Kirsty and Francis’s debt had blown out and in September they lost a legal battle with Mango over the repossession of their home.
SHERIFF: So have you got keys?
KIRSTY GARRASH: Yeah, they’re just on the veranda. Is that all I’ve just got to do, just give you guys the keys?
PAT MCGRATH: Two weeks ago the sheriff arrived to confiscate the keys to the house.
KIRSTY GARRASH: And they said it was fine that there was stuff left in the house. That’s completely fine and that they’re sorry to have to do it.
PAT MCGRATH: Mango Credit is clearly a successful business.
Its owner, Yanis Derums, owns a number of properties, including a three-storey harbourside home in Sydney.
When 7.30 contacted him, he insisted we talk to his lawyer.
Mr Derums, Pat McGrath from the ABC. How are you going? Have you got a moment to speak to us?
When we approached him directly he didn’t want to answer questions about his company’s business practices.
Mr Derums? Excuse me, Mr Derums. Did you tell Kirsty Garrash that she didn’t have to pay the mortgage while she refinanced?
But through his lawyers he denied he told Kirsty and Francis to hold off on making the repayment.
In a statement, he says he was, in fact, entitled to put them in default earlier because they had been late in making some repayments last year but decided not to.
He says he verbally offered to accept a lower amount to pay out the loan but Kirsty and Francis never came back with an offer in writing.
And he insists the loan was fair and his customers got their own legal advice.
Mango Credit is among dozens, possibly hundreds, of unlicensed lenders often known as shadow banks targeting Australian small business.
GERARD BRODY: It is the wild west. People can go online and get access to an unregulated loan too easily.
KATE CARNELL, SMALL BUSINESS OMBUDSMAN: It was really important for lenders that were lending to small business particularly to…
PAT MCGRATH: Australia’s Small Business Ombudsman sees a simple fix – make small business lenders subject to the same complaints regime as banks and other lenders.
In fact, some small business lenders have already signed up to do so.
KATE CARNELL: I think we broaden access to mediation and other forms of justice outside the court system so that small businesses have somewhere to go if a fin-tech or non-bank lender does the wrong thing.
PAT MCGRATH: There’s a darker side still to Australia’s shadow banking industry.
We’ve uncovered evidence that some lenders are giving out loans dressed up as small business finance but they’re actually for family homes and investment properties.
Because they’re giving the loans to companies rather than individuals, they don’t have to comply with consumer protection rules.
Carrol James found herself in the hands of an unlicensed lender when she needed quick money for a home she was building in 2015.
CARROL JAMES: I came across Prime Capital Securities. I spoke to a guy, explained the reasons why I needed the finance and he said they could help me but I needed to have a company name in order for them to lend me the money.
PAT MCGRATH: Like Mango Credit, Prime Capital is not licensed and not registered with AFCA.
The loan it gave Carrol didn’t name her as the borrower, it used a company name, her self-managed super fund.
And this part of the contract says that the loan is to be used for business purposes only and for no other purpose?
CARROL JAMES: Yes, that’s correct.
PAT MCGRATH: Was that what it was for? Was it for a business purpose?
CARROL JAMES: No, it wasn’t. It was for me personally.
PAT MCGRATH: And did Prime Capital know that?
CARROL JAMES: They did know that, yup. I actually explained all of that to them on the phone before they gave me a letter of offer for the loan.
And I do realise it when I signed this that was in there but they were aware the money was for me, not for the company or a company loan.
PAT MCGRATH: But did they ever offer you the money personally?
CARROL JAMES: No.
PAT MCGRATH: Prime Capital denies Carrol ever told the company that the money was for personal use.
It insists she said it was for a property development and she signed several documents stating the money was for business purposes.
GERARD BRODY: If you do borrow from an unlicensed lender for the purpose of purchasing property, or for any other personal or domestic purposes, then it should be actually covered by consumer credit laws.
CARROL JAMES: There was another fee of six and a half to Prime Capital.
PAT MCGRATH: The annual interest rate on Carrol’s $360,000 mortgage was 24 per cent.
CARROL JAMES: $9,000 a month I was paying but that was including admin fees as well per month in that $9,000.
PAT MCGRATH: But $9,000 is a lot of money to be paying every month.
CARROL JAMES: Absolutely is. It is an awful lot of money.
PAT MCGRATH: But soon after Carrol paid the money from the loan to the builder, he went bust.
Suddenly the timeline for her high interest loan blew out and Carrol wanted to refinance with another lender.
For that she needed her loan paperwork.
CARROL JAMES: I reached out to Prime Capital and asked, I think in the May of 2016, to see if I could get a statement.
I was waiting I think almost five months for the statement and look, I had actually got a lender that was willing to give me my finance.
PAT MCGRATH: The repayments were piling up while she waited for the statements and she sought help from authorities.
CARROL JAMES: I reached out to Consumer Affairs, the Financial Ombudsman and also to ASIC and I was told from every one of them there was nothing they could do to help me.
PAT MCGRATH: She eventually got the statement, refinanced and finished the town house.
But the $360,000 loan from Prime ended up costing her $130,000 in fees and interest.
Prime Capital declined to do an interview but in a statement to us it said it was sorry for the delay in getting the documents to her however it insists Carrol was well aware of the conditions of her loan – something she doesn’t dispute.
Do you take responsibility, do you think, for what happened?
CARROL JAMES: Of course I take responsibility. I’m the only one that signed the agreement, the loan contract.
But I think Prime Capital need to take responsibility as well for the hardship they’ve caused me and probably a lot of other people.
GERARD BRODY: Irresponsible lending to small businesses means that people can lose their homes, they’ll lose jobs, they’ll lose their wellbeing and I think that has severe consequences.
PAT MCGRATH: Francis and Kirsty are keeping their business above water for now but they have no idea how they’ll get back what they’ve lost.
KIRSTY GARRASH: If we had have been able to find someone else to get us a different sort of loan to start with, we wouldn’t be in this situation.