Power afforded the Australian Prudential Regulation Authority in draft covered bond legislation has been criticised as too broad by respondents to a consultation on the proposed Australian framework. The point was one of several criticisms made in responses to the draft legislation.

The Australian Banking Association called for the removal of a section that permits APRA to impose additional requirements.

“The power is too broad and is not limited to circumstances where the ADI is in breach of the law or regulations relating to covered bonds, is in financial difficulty or where the financial system is at risk,” said the ABA. “This power is broader than those currently granted to APRA in the Banking Act.

“It may also extend to the SPV [which is envisaged as holding the cover assets and guaranteeing issuance] because it is a subsidiary of the ADI,” added the association, “in which case APRA could prevent the SPV from making payments on the covered bond guarantee. This may adversely affect investor sentiment.”

Allen & Overy also noted that APRA had too powerful a role in the legislative proposal, to issue directions preventing the transfer of assets to the cover pool. The law firm said this section would be “viewed unfavourably by the international covered bond market as the circumstances in which the direction could be used are very broad ranging”.

The ABA said that while it would have preferred a cap of 8% on assets encumbered by covered bond issuance to be 10%-15%, it could accept the lower level as a starting point given that a revision of is allowed for by the legislation. However, the ABA said that it wanted clarification that additional capital requirements would not be imposed on an ADI for covered bond issuance beneath the 8% cap.

“Capital neutrality for covered bond transactions within the cap is essential, including the treatment of required and voluntary overcollateralisation,” it said.

The envisaged role of the cover pool monitor was another element market participants questioned, with Allen & Overy noting that it was too broad and the ABA calling for fewer duties to be afforded to the role.

“The cover pool monitor should not determine the value of the assets in the cover pool,” it said. “The ADI should do that that.”

A restrictive definition of the SPV was also pointed out by the association. The draft legislation definition reads: “The SPV’s sole purpose must be holding assets to cover the liabilities of the ADI to (a) covered bond holders of the ADI and (b) service providers of the SPV.”

It was criticised because, for example, this definition does not allow for the ability to buy and sell assets.

(This article was amended on 23 and 25 May after the Australian Treasury amended the submissions on its consultation website.)