NAB Launches Online SME Unsecured Lending Product

In a nod to the emerging Fintech SME lending sector, NAB today announced $100,000 unsecured lending for Australian small business owners to grow and expand, backing the strength of their business without the need for security requirements such as property or cash, with a decision is around 10 minutes.  As we discussed recently, getting funding for SME ex. security is tough.

The rates look highly competitive at 13.85% relative to many of the other Fintech alternatives.

Customers apply via a fast and simple digital application process, with conditional credit approval granted in minutes. Once application contracts are signed and returned, cash is delivered within 24 hours.

Executive General Manager Business Direct and Small Business Leigh O’Neill said NAB recognises that fast and easy access to funds is critical for small businesses as they grow.

“There is often a perception that access to credit is difficult without a property or other major asset to secure against. That’s why we’ve responded by placing more emphasis on the strength of the business rather than traditional physical bricks and mortar, and we’re doing this at a fair and competitive price,” Ms O’Neill said.

NAB is the only Australian bank to have developed in-house an unsecured online lending tool without a third party referral involved. QuickBiz first launched in June 2016, initially up to $50,000.

The new $100,000 QuickBiz loan is an extension to NAB’s existing unsecured, self-service digital financing facilities, which includes an overdraft and credit card, all unsecured and capped at $50,000 for eligible customers.

“Six months after a QuickBiz loan application, just under half of our customers grew their business turnover by greater than 10 percent. This confirms we have an important role to play by offering finance to businesses with good prospects- it’s the the kick-start they need.”

“Small businesses are the backbone of the Australian economy. We need all parts of the economy – big business, government and industry – to get behind them to move the country forward.”

NAB’s Unsecured Solutions Fast Facts:

  • Unsecured QuickBiz loan, up to $100,000 available for eligible Australian SMEs
  • Direct connectivity to Xero or MYOB data, or simple financial upload from any accounting package
  • Application and decision in under 10 minutes
  • Competitive and transparent annualised interest rate charges, 13.85 % – no hidden surprises

For more information on the entire QuickBiz product suite (loan, overdraft) and Low Rate NAB business cards),

FED Lifts Rate As Expected

The FED has lifted the federal funds rate to 1.5% after their two day meeting – the third hike this year. The move was expected and had been well signalled.  This despite inflation still running below target, though they expect it will move to 2% later.  More rate rises are expected  in 2018.  This will tend to propagate through to other markets later.

Information received since the Federal Open Market Committee met in November indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. Averaging through hurricane-related fluctuations, job gains have been solid, and the unemployment rate declined further. Household spending has been expanding at a moderate rate, and growth in business fixed investment has picked up in recent quarters. On a 12-month basis, both overall inflation and inflation for items other than food and energy have declined this year and are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Hurricane-related disruptions and rebuilding have affected economic activity, employment, and inflation in recent months but have not materially altered the outlook for the national economy. Consequently, the Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong. Inflation on a 12‑month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-1/4 to 1‑1/2 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

Voting for the FOMC monetary policy action were Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Patrick Harker; Robert S. Kaplan; Jerome H. Powell; and Randal K. Quarles. Voting against the action were Charles L. Evans and Neel Kashkari, who preferred at this meeting to maintain the existing target range for the federal funds rate.

Commonwealth Bank files response to AUSTRAC claims

Commonwealth Bank (CBA) today filed a response to the civil proceedings commenced by AUSTRAC on 3 August 2017.

CBA contests a number of allegations but admit others, including the allegations relating to the late submission of 53,506 threshold transaction reports (TTRs), which were all caused by the same single systems-related error.

The Defence focuses on key factual and legal matters in the claim. CBA confirms that in our Defence we:

  • agree that we were late in filing 53,506 TTRs, which all resulted from the same systems-related error, representing 2.3% of TTRs reported by CBA to AUSTRAC between 2012 and 2015;
  • agree that we did not adequately adhere to risk assessment requirements for Intelligent Deposit Machines (IDMs) – but do not accept that this amounted to eight separate contraventions – and agree we did not adhere to all our transaction monitoring requirements in relation to certain affected accounts;
  • admit 91 (in whole or in part) but deny a further 83 of the allegations concerning suspicious matter reports (SMRs);
  • admit 52 (in whole or in part) but deny a further 19 allegations concerning ongoing customer due diligence requirements.

Further detail can be found in CBA’s Concise Statement in Response.

We continue to fully cooperate with AUSTRAC in relation to our obligations under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (AML/CTF Act) and respect its role as a regulator.  The nature of the regime involves continuous liaison and collaboration with the regulator as risks are identified.  As such we are in an ongoing process of sharing information with the regulator.

AUSTRAC has indicated that it proposes to file an amended statement of claim containing additional alleged contraventions.  If an amended claim is served on us, we expect the court would set a timetable for CBA to file an amended defence. We will provide market updates as appropriate.

We take our anti-money laundering and counter-terrorism financing (AML/CTF) obligations extremely seriously. We deeply regret any failure to comply with these obligations. CBA is accountable for those deficiencies.

We understand that as a bank we play a key role in law enforcement. AUSTRAC’s former CEO has publicly acknowledged our contribution in this regard. We have invested heavily in seeking to fulfil the crucial role we play. CBA has spent more than $400 million on AML/CTF compliance over the past eight years. We will continue to invest heavily in our systems relating to financial crimes thereby supporting law enforcement in detecting and disrupting financial crime.

During the period of the claim, CBA submitted more than 36,000 SMRs, including 140 in relation to the syndicates and individuals referred to in AUSTRAC’s claim.

In the same period we submitted more than 17 million reports in aggregate, including SMRs, TTRs and in respect of international funds transfer instructions. CBA will submit over 4 million reports to AUSTRAC in this year alone.

CBA also responds to large numbers of law enforcement requests for assistance each year, including approximately 20,000 requests this year. Some of the information provided directly resulted in disrupting money laundering and terrorism financing activity and prosecuting individuals.

Any penalty imposed by the Court as a result of the mistakes we have made will be determined in accordance with established penalty principles. For example, the Court may consider whether any contraventions arise out of the same course of conduct and will assess the appropriate penalty for that conduct accordingly, as it recently did in the Tabcorp decision.

CBA’s submissions at trial will also highlight steps that we have taken since 2015 as part of our Program of Action to strengthen and improve our financial crimes compliance.

 

Program of Action

CBA has made significant progress in strengthening our policies, processes and systems relating to its obligations under the AML/CTF Act through our Program of Action.  While this is a continuing process of improvement, progress achieved since the issues concerning TTRs associated with IDMs were first identified and rectified in late 2015, includes:

  • Boosting AML/CTF capability and reporting by hiring additional financial crime operations, compliance and risk professionals. As at 30 June 2017, before the claim was filed, CBA employed over 260 professionals dedicated to financial crimes operations, compliance and risk.
  • Strengthening our Know Your Customer processes with the establishment in 2016 of a specialist hub providing consistent and high-quality on-boarding of customers, at a cost of more than $85 million.
  • Launching an upgraded financial crime technology platform used to monitor accounts and transactions for suspicious activity.
  • Adding new controls such as using enhanced digital electronic customer verification processes to supplement face-to-face identification to reduce the risk of document fraud.

The Program of Action has also addressed issues that AUSTRAC alleges were ongoing contraventions in its claim. For example, CBA recently introduced daily limits for IDMs deposits for CBA cards associated with a personal account. We understand CBA is the first major Australian bank to implement a control of this type.

CBA is committed to continuing to strengthen our financial crimes compliance and to working closely with regulators across all jurisdictions in which we operate to fight financial crime.

The RBA On Least Cost Routing

The RBA’s Tony Richards, Head of Payments Policy spoke at the Australian Payment Summit 2017 and discussed the vexed issue of Least Cost Routing for EFTPOS transactions, especially when using Tap-and-Go. Until very recently, acquirers have indicated reluctance to provide least-cost routing to their merchant customers. This is partly due to the expected systems work, including to reprogram terminals.  But pressure is mounting, as for example, the recent House of Reps report.

He says indications are that all four of the major banks are moving to providing least-cost routing if requested by merchants, though in some cases they have indicated this could occur on a fairly extended timetable.

So, merchants, do yourself a favour, and ask! You may save on your transaction costs!

Given that payment costs are a significant item for merchants, it is not surprising that merchants pay attention to them. Just as merchants are keen to hold down other business costs, they are also keen to hold down their payment costs. Recently, they have drawn attention to a particular issue that is driving up their cost of payments.

The majority of debit cards issued in Australia are now dual-network cards, which means that authorisation of cardholders’ debit transactions can occur through different networks – the domestic eftpos network or the debit networks of the international MasterCard or Visa schemes. If you look at your debit or ATM card, there is a good chance it will have an international scheme logo on one side and the eftpos logo on the other.

Traditionally, cardholders have determined how their debit transactions are processed, by pressing either the CHQ or SAV buttons for eftpos or the CR button for the international network, before entering their PIN. However, with the shift to contactless or ‘tap-and-go’ transactions, the processing of debit transactions has been shifting to the international networks. This initially reflected the fact that contactless payments were only available for the international schemes. Most cards and terminals are now also activated for eftpos contactless functionality. However, when card-issuing banks send out dual-network debit cards they are programmed with the international scheme as the first-priority network for contactless use and the eftpos network as second priority.

Most cardholders are indifferent about which network processes their contactless transactions. Both networks can link to the same debit account and cardholders do not directly bear the costs of the transactions. Moreover, there are typically no rewards programs associated with debit transactions, and customers receive similar protections from fraud and disputed transactions, based on the ePayments Code and the chargeback policies of the three schemes.

However, many merchants have a preference for transactions to be processed via the eftpos network, because it is typically less expensive for them. Accordingly, many merchants have been calling for their acquirer banks to provide them with ‘least-cost routing’, i.e., terminal functionality that sends contactless debit transactions via the lower-cost network. Terminals might be programmed to always send dual-network card transactions via a particular network or they might use dynamic rules which identify the lower-cost network for each transaction.

The Bank has had discussions with consumer organisations and staff from the Australian Competition and Consumer Commission (ACCC) as to how least-cost routing might be implemented. We consider that it would be desirable for a merchant implementing least-cost routing to disclose this to customers. Depending on how terminals were actually programmed, this could be by a sign that the merchant will typically send tap-and-go debit card transactions via a certain network, but noting that customers wishing to send transactions via a different network could insert or dip their cards and push the button or keypad for their preferred network. A sign such as this would provide consumers with the opportunity to override the merchant’s preferred network if they wished. Such a framework would seem to be a reasonable balance between the rights of merchants and consumers, and it is likely that consumers would quickly become used to the idea that their transactions could be sent via different networks at different merchants.

The Reserve Bank has taken an interest in dual-network card issues because of the Payments System Board’s mandate to promote competition and efficiency. As the Bank and other observers of the payments system have frequently noted, the nature of competition in the payment card market is often such that it tends to drive up costs to merchants, as schemes increase their interchange fees to persuade issuers to issue their cards. Merchants have typically had little ability to offset these pressures (in the absence of regulatory intervention to cap interchange fees or remove schemes’ no-surcharge rules). However, dual-network cards can potentially offset the pressures for payment costs to rise, because the merchant may be able to steer the consumer to use the lower-cost of the two networks on a card. Accordingly, the Bank has indicated that it supports the issue of such cards in Australia, because they are convenient for cardholders and allow stronger competition between networks at the point of sale, facilitating both consumer and merchant choice.

Some disputes over dual-network debit cards emerged between the debit schemes in 2012-13. However, after a series of discussions with the Bank, in August 2013 the three debit schemes made voluntary undertakings to the Bank that addressed some policy concerns. These included commitments:

  • to work constructively to allow issuers to include applications from two networks on the same card and chip, where issuers wished to do this;
  • not to prevent merchants from exercising choice in the networks they accept, in both the contact and contactless environments; and
  • not to prevent merchants from exercising their own transaction routing priorities when there are two contactless debit applications on one card.

As noted above, most terminals and eftpos cards are now enabled for tap-and-go eftpos transactions. Given the Bank’s views about the potential competition and efficiency benefits of dual-network cards, as well as the earlier commitments by the three debit schemes, the Bank has been liaising with a range of stakeholders over recent months to encourage the provision of least-cost routing functionality to merchants.

However, until very recently, acquirers have indicated reluctance to provide least-cost routing to their merchant customers. This is partly due to the expected systems work, including to reprogram terminals.

In addition, some merchants have expressed concern to the Bank that the international schemes might resist the implementation of least-cost routing. To the extent that transactions via the international schemes are currently more expensive to merchants, a possible outcome of least-cost routing becoming available would be for the international schemes to reduce scheme or interchange fees so that merchants have little incentive to send transactions via another network. However, some merchants are concerned about other possible responses, including that the international schemes might respond to a merchant’s decision to implement least-cost routing of debit transactions by increasing the interchange rates that apply to the merchant’s credit transactions. They have also noted that the international schemes might try to preclude least-cost routing by attempting to persuade issuers to stop issuing dual-network cards. The ACCC is aware of these concerns, and is closely monitoring the situation. With the passage of the Harper reforms, which came into effect in November this year, the ACCC now has even stronger powers to investigate and take action in relation to conduct by the international schemes that might hinder competitive conduct by a lower-cost provider.

The Payments System Board has discussed issues involving dual-network cards in recent meetings. At its 17 November meeting, the Board strongly supported calls from a range of stakeholders for acquirers to provide merchants with least-cost routing functionality for contactless transactions using dual-network debit cards. It requested the Bank staff to continue to engage with the payments industry on this issue, noting that ‘a prompt industry solution was preferable to regulation’.

More recently, the Review of the Four Major Banks by the House of Representatives Standing Committee on Economics has made the following recommendation:

“The committee recommends that banks be required to give merchants the ability to send tap-and-go payments from dual-network debit cards through the channel of their choice.

Merchants should be able to choose whether to route these transactions through eftpos or another channel, noting that consumers may override this merchant preference if they choose to do so.

If the banks have not facilitated this recommendation by 1 April 2018, the Payments System Board should take regulatory action to require this to occur.”

Recent indications are that all four of the major banks are moving to providing least-cost routing if requested by merchants, though in some cases they have indicated this could occur on a fairly extended timetable. We expect that some of the smaller acquirers may be able to move more quickly.

Accordingly, the Bank expects that by early in 2018 there will be concrete indications that a critical mass of acquirers are moving to provide least-cost routing and that the international schemes are not attempting to prevent this. However, if this expectation is not met, I expect that the Payments System Board will consider consulting on a regulatory solution that deals with all the relevant considerations. While of course the measures that could be consulted on will be determined by the Board, I can imagine that this could involve considering whether some or all of the following measures might be in the public interest:

  • a requirement that acquirers must provide merchants with least-cost routing functionality for contactless dual-network debit card transactions
  • a requirement for enhanced transparency in contractual pricing of acquiring services to merchants
  • requirements that schemes publish explicit criteria for any preferred or strategic interchange fees and that any such criteria may not be related to acceptance decisions relating to other payment systems
  • anti-avoidance provisions that ensure adherence to the spirit, as well as the letter, of any standard.

Yes, Finance For Small Business IS a Problem

Christopher Kent, RBA Assistant Governor (Financial Markets), spoke at the 30th Australasian Finance and Banking Conference on The Availability of Business Funding, a subject which was featured in the recent RBA Bulletin.

While his speech covered the gamut of business finance, his comments on small business are important. He acknowledged the need for, and difficulty of getting funding in this sector. Something we have highlighted in our SME Report series, and which are still available. Whilst alternative lenders (Fintechs for example) have a role to play, (and there is massive opportunity in the SME sector in our view), most SME’s still go to the banks, where they have to pay more, for poor products and service. Indeed, if you are a business owner seeking to borrow, without a property to secure against, the options are limited. This is because the banks’ view is, correctly, unsecured risks are higher than secured, and in any case, they prefer to lend to mortgage holders more generally, as the capital required to do so is lower. Therefore many SME’s are at a structural disadvantage, and often end up having to pay very higher interest rates, if they can get finance at all.

There is much to do, in my view, to address the funding needs of SMEs, and this is a critical requirement if we are to seen sustained real economic growth. As Kent suggests, perhaps Open Banking will assist, eventually!

The challenge of obtaining finance has been a consistent theme of the Small Business Finance Advisory Panel. In this context, it is important to distinguish between two types of small businesses. First, there are the many established small businesses that are not expanding. Their needs for external finance are typically modest. Second, there are small businesses that are in the start-up or expansion phase. They are not generating much in the way of internal funding. Accordingly, those businesses have a strong demand for external finance. I’ll focus my comments on the issues relevant to this second group of small businesses.

I should emphasise again that access to finance for small businesses is important because they generate employment, drive innovation and boost competition in markets. Indeed, small businesses in Australia employ almost 5 million people, which is nearly half of employment in the (non-financial) business sector. They also account for about one-third of the output of the business sector.

Compared with larger, more established firms, smaller, newer businesses find it difficult to obtain external finance since they are riskier on average and there is less information available to lenders and investors about their prospects. Lenders typically manage these risks by charging higher interest rates than for large business loans, by rejecting a greater proportion of small business credit applications or by providing credit on a relatively restricted basis.

The reduction in the risk appetite of lenders following the global financial crisis appears to have had a more significant and persistent effect on the cost of finance for small business than large business. After the crisis, the average spread of business lending rates to the cash rate widened dramatically. The increase was much larger and more persistent, though, for small business loans (Graph 9). In part, this increase owed to the larger increase in non-performing loans for small businesses than for large business lending portfolios (Graph 10). It’s not clear, however, whether the increase in interest rates being charged on small business loans relative to those charged on large business loans (over the past decade or so) reflects changes in the relative riskiness of the two types of loans.[11]

Graph 9
Graph 9: Interest Rate Spreads on Business Debt
Graph 10
Graph 10: Business Lending Default Probabilities

Over recent years, there has been strong competition for large business lending, which has resulted in a decline in the interest rate spread on large business loans. Part of the competition from banks for large business loans has been driven by an expansion in activity by foreign banks. Large businesses also have access to a wider array of funding sources than small businesses, including corporate bond markets and syndicated lending.

In contrast, competition has been less vigorous for small business lending. Indeed, some providers of small business finance were acquired by other banks or exited the market following the onset of the crisis. Also, the interest rates on small business loans have remained relatively high. This difference in competitive pressures is evident in the share of lending provided to small business by the major banks, which is relatively high at over 80 per cent. This compares with a share of around two-thirds in the case of large businesses. Small businesses continue to use loans from banks for most of their debt funding because it is often difficult and costly for them to raise funds directly from capital markets.

The RBA’s liaison has highlighted that if small business borrowers are able to provide housing as collateral, it significantly reduces the cost and increases the availability of debt finance. Lenders have indicated that at least three-quarters of their small business lending is collateralised and they only have a limited appetite for unsecured lending. However, there are a number of reasons why entrepreneurs find it difficult to provide sufficient collateral for business borrowing via home equity:

  • they may actually not own a home, or have much equity in their home if they are relatively young;
  • similarly, they may not have sufficient spare home equity if they’ve already borrowed against their home to establish a business and now want to expand their business;
  • and even if they have plenty of spare home equity, using their homes as collateral concentrates the risk they face in the event of the failure of the business.

Many entrepreneurs have limited options for providing alternative collateral, since banks are far more likely to accept physical assets (such as buildings or equipment), rather than ‘soft’ assets, such as software and intellectual property.

Given the higher risk associated with small businesses, particularly start-ups, equity financing would appear to be a viable alternative to traditional bank finance. However, small businesses often find it difficult to access equity financing beyond what is issued to the business by the founders. Small businesses have little access to listed equity markets, and while private equity financing is sometimes available, its supply to small businesses is limited in Australia, particularly when compared with the experience of other countries (Graph 11). Small businesses also report that the cost of equity financing is high, and they are often reluctant to sell equity to professional investors, since this usually involves relinquishing significant control over their business.

Graph 11
Graph 11: Venture Capital Funding

Innovations Improving Access to Business Finance

There are several innovations that could help to improve access to finance by: providing lenders with more information about the capacity of borrowers to service their debts, and connecting risk-seeking investors with start-up businesses that could offer high returns.

Comprehensive credit reporting

Comprehensive credit reporting will provide more information to lenders about the credit history of potential borrowers. The current standard only makes negative credit information publicly available. When information about credit that has been repaid without problems also becomes available publicly, the cost of assessing credit risks will be reduced and lenders will be able to price risk more accurately; this may enhance competition as the current lender to any particular business will no longer have an informational advantage over other lenders. It may also reduce the need for lenders to seek additional collateral and personal guarantees for small business lending, particularly for established businesses. Indeed, the use of personal guarantees is more widespread in Australia than in countries that have well-established comprehensive credit reporting regimes, such as the United Kingdom and the United States.

For several years, the finance industry has attempted to establish a voluntary comprehensive credit reporting regime in Australia. Participation has so far been limited.[13] However, several of the major banks have committed to contribute their credit data in coming months. The Australian Government has announced that it will legislate for a mandatory regime to come into effect mid next year.

Open banking

The introduction of an open banking regime should make it easier for entrepreneurs to share their banking data (including on transactions accounts) securely with third-party service providers, such as potential lenders. When assessing credit risks, lenders place considerable weight on evidence of the capacity of small business borrowers to service their debts based on their cash flows. For this reason, making this data available via open banking would reduce the cost of assessing credit risk. A review is currently being conducted with a view to introducing legislation to support an open banking regime.

Large technology companies

Technology firms can use the transactional data from their platforms to identify creditworthy borrowers, and provide loans and trade credit to these businesses from their own balance sheets. This could supply small innovative businesses that are active on these online platforms with a new source of finance. Amazon and Paypal are providing finance to some businesses that use their platforms. For example, Amazon identifies businesses with good sales histories and offers them finance on an invitation-only basis. Loans are reported to range from US$1 000 to US$750 000 for terms of up to a year at interest rates between 6 and 14 per cent. Repayments are automatically deducted from the proceeds of the borrower’s sales.

Alternative finance platforms

Alternative finance platforms, including marketplace lending and crowdfunding platforms, use new technologies to connect fundraisers directly with funding sources. The aim is to avoid the costs and delays involved in traditional intermediated finance.

While alternative financing platforms are growing rapidly, they are still a very minor source of funding for businesses, including in Australia. The largest alternative finance markets are in China, followed by the United States and the United Kingdom. But even these markets remain small relative to the size of their economies (Graph 12).

Graph 12
Graph 12: Alternative Financing for Businesses

Marketplace lending platforms provide debt funding by matching individuals or groups of lenders with borrowers. These platforms typically target personal and small business borrowers with low credit risk by attempting to offer lower cost lending products and more flexible lending conditions than traditional lenders. Data collected by the Australian Securities and Investments Commission indicate that most marketplace lending in Australia is for relatively small loans to consumers at interest rates comparable to personal loans offered by banks (Graph 13).

Graph 13
Graph 13: Marketplace Lending in Australia

It is unclear whether marketplace lending platforms are significantly reducing financial constraints for small businesses. Unlike innovations such as comprehensive credit reporting, which have the potential to improve the credit risk assessment process, marketplace lenders do not have an information advantage over traditional lenders. As a result, they need to manage risks with prices and terms in line with traditional lenders. Nevertheless, these platforms could provide some competition to traditional lenders, particularly as a source of unsecured short-term finance, since they process applications quickly and offer rates below those on credit cards.

Crowdfunding platforms have the potential to make financing more accessible for start-up businesses, although their use has been limited to date. Crowdsourced equity funding platforms typically involve a large number of investors taking a small equity stake in a business. As a result, entrepreneurs can receive finance without having to give up as much control as expected by venture capitalists. Several legislative changes have been made to facilitate growth in these markets, including by allowing small unlisted public companies to raise crowdsourced equity.

CHOICE ‘Welcomes’ Broker Commission Changes But…

Consumer group CHOICE says the proposed CIF mortgage broker reforms are positive, but do not address their key concerns of ensuring brokers act in the best interests of their customers (currently they are not obliged too), and potential conflicts about poorly disclosed trail commissions.

This from Mortgage Professional Australia.

Consumer advocate CHOICE and other consumer groups have welcomed changes to broker commissions proposed by the Combined Industry Forum.

“This announcement from the mortgage brokers, aggregators and lenders is a positive first step towards ensuring that mortgage brokers act in customer interests,” said CHOICE’s director of campaigns and communications, Erin Turner.

CHOICE, which was harshly critical of brokers in their submission to ASIC earlier this year, said CIF’s proposals “shows that all parties in the home lending industry have taken ASIC’s report into mortgage broker remuneration seriously.”

It adds that the changes could increase transparency by informing consumers about the number of lenders brokers used.

CHOICE became part of the CIF after complaining to the Treasury in July that “reform must be focused on what’s best for consumers, not what works for brokers, aggregators or lenders.”

Broker heads hopeful

Both following ASIC’s review, an ongoing Productivity Commission review and in an earlier ‘shadow-shopping’ report, CHOICE have been critical of brokers in the past two years.

However, broking industry associations are hopeful that CHOICE’s involvement in and endorsement of the Combined Industry Forum’s recommendations could lead to a more cooperative relationship.

“I would hope so,” FBAA executive director Peter White told MPA. “it has turned out to be a good result, they have been involved. It’s no ‘roll over, we’ll do this because I say so’; there’s been debate and meaningful discussion about things.”

MFAA CEO Mike Felton said he looked forward to working with consumer advocates going forward: “we the MFAA and the Combined Industry Forum recognise that the consumer is a key stakeholder and that it was critical that the consumer be represented throughout this process. I think that gives credibility to the reforms that have produced.”

Still concerned about trail commissions

Consumer advocates did not entirely welcome the recommendations of the Combined Industry Forum, however.

CHOICE noted that “we are disappointed that brokers aren’t required to act in the best interests of consumers and that there are few changes to overall commission structures. In particular, there is little clarity about the consumer benefit of trail commissions.”

“Consumer groups will continue to discuss these reforms with industry and look forward to their implementation.”

CHOICE has complained about trail commissions to an ongoing review by the Productivity Commission into competition in the financial system. The review, which reports in July 2018, could lead to changes by the Government, depending on its recommendations.

UK Property Investors Head For The Exit

The UK Property Investment Market could be a leading indicator of what is ahead for our market. But in the UK just 15% of all mortgages are for investment purposes (Buy-to-let), compared with ~35% in Australia.  Yet, in a down turn, the Bank of England says investment property owners are four times more likely to default than owner occupied owners when prices slide and they are more likely to hold interest only loans. Sounds familiar?

According to a report in The Economist,  “one in every 30 adults—and one in four MPs—is a landlord; rent from buy-to-let properties is estimated at up to £65bn ($87bn) a year. But yields on rental properties are falling and government policy has made life tougher for landlords. The age of the amateur landlord may be”.

Investing in the housing market has seemed like a one-way bet, with prices trending upwards in real terms for four decades, mainly because government after government has failed to loosen planning restrictions on building new houses. Now, however, there are signs that regulatory changes have begun to send the buy-to-let boom into reverse.

Yields on rental properties have fallen. House prices have risen faster than rents, in part because buy-to-letters have reduced the supply of housing available to prospective owner-occupiers while simultaneously increasing the supply of places to rent. Britain’s ratio of house prices to rents is now 50% above its long-run average. All this makes buy-to-let investment less lucrative. Data from the Bank of England suggest that yields in September were below 5%, their joint-lowest rate since records began in 2001, when they were above 7.5%.

One consequence of this could be a more stable financial system. Roughly 15% of mortgage debt is on buy-to-let properties. The Bank of England has warned that there are risks associated with this. One problem is that property investors buy when house prices are rising but sell when they are falling, making house prices more volatile. Buy-to-let landlords are also more likely to default than owner-occupiers. One reason is that doing so does not force them out of their home. Another is that buy-to-let mortgages are more likely to be interest-only (ie, where the principal is not repaid). That can be tax-efficient but it means that monthly repayments can jump sharply if interest rates rise. The Bank of England’s stress tests last month showed that the rate at which landlords’ loans turn sour could be four times greater than the rate for owner-occupiers’ loans. All things considered, the shrinking of the buy-to-let sector may come as a relief to regulators.

The future for buy-to-letters will not get much brighter. In January a tweak to the rules on capital-gains tax will increase the liabilities of landlords who register as businesses. Large institutional investors are moving on to buy-to-letters’ turf, hoping to benefit from their economies of scale to offer better-quality housing to tenants. It was good while it lasted, but the golden age for the amateur landlord may be over.

Business Finance Still Skewed Towards Property

The final piece of the October 2017 lending finance data came from the ABS today. It is not pretty.  As usual we will focus on the trend series which irons out some of the statistical bumps.

Owner occupied housing lending excluding alterations and additions fell 0.1% in trend terms. Personal finance commitments rose 1.3%. Fixed lending commitments rose 2.2%, while revolving credit commitments fell 0.1%.

Total commercial finance commitments fell 1.1%. Fixed lending commitments fell 2.5% (which includes mortgage lending for investment purposes), while revolving credit commitments rose 3.7%.

The trend series for the value of total lease finance commitments fell 0.7%.

Here is the summary with the relative percentage for owner occupied housing and personal finance rising (so putting more pressure on household debt ratios in a flat income, rising cost market). Overall lending to business, relative to all lending fell again.

Personal credit is rising, now, as households find their cash flow is under pressure, many are now seeking fixed loans to help bridge the gap left by falling savings.  In prior years there was a fall at this time of year, before the Christmas binge, but that is different this year. This does not bode well for Christmas spending, and we see signs of the New Year sales already underway!

Then finally, if we look at the fixed business lending, and split it into lending for property investment and other business lending, the horrible truth is that even with all the investment lending tightening, relatively the proportion for this purpose grew, while fixed business lending as a proportion of all lending fell.

These a clear signs of a sick economy (in the sense of unwell!), with business investment still sluggish, still too much lending on property investment, and as we showed above, too much additional debt pressure on households.

I will repeat. Lending growth for housing which is running at three times income and cpi is simply not sustainable. Households will continue to drift deeper into debt, at these ultra low interest rates. This makes the RBA’s job of normalising rates even harder.

The mid-year economic forecast, later in the week will likely simply underscore the fact the economic settings are not appropriate. And, by the way, tax cuts, even if they could be paid for, will not help.

Mortgage arrears to increase in 2018: Moody’s

According to Moody’s “RMBS, ABS and covered bonds – Australia, 2018 outlook – Delinquencies will increase moderately from low levels, report”, delinquencies underlying Australian residential mortgage-backed securities (RMBS) are expected to “moderately” increase in 2018 from their current low levels.

The housing market is expected to ease, and household finances remain under pressure.

Of note is the rise in the relative share of non-bank lending (who are not under the same regulatory control as the banks) and the continued impact from the mining downturn, especially in WA.

We expect mortgage delinquencies in outstanding RMBS deals  to increase moderately from their low levels because of the continued after-effects of weaker conditions in states reliant on the mining industry and less favourable housing market and income dynamics.

With Western Australia and other states reliant on mining pushing up delinquencies this year, this will continue in 2018,

The balance of risks in new RMBS deals will also change, as bank-sponsored RMBS issued in 2018 will include a lower proportion of interest-only, high loan-to-value ratio (LVR) and housing investment loans, following regulatory measures to curb the origination of riskier mortgages.

RMBS issued by the non-banks will include a greater percentage of interest-only and investment loans than has been recorded in the past as these lenders have fallen outside of APRA’s regulatory remit thus far.

ANZ completes simplification of Wealth Australia

ANZ today announced it has completed the simplification of its Wealth Australia division with the sale of its life insurance business to Zurich Financial Services Australia. The sale is comprised of two transactions with total proceeds of $2.85 billion, inclusive of $1 billion of upfront reinsurance commission from Zurich.

This follows the sale of its OnePath pensions and investments (OnePath P&I) and aligned dealer groups (ADG) business to IOOF Holdings Limited (IOOF) in October for $975 million. Total proceeds from the simplification of Wealth Australia is $3.83 billion.

Following completion, Zurich will be Australia’s largest retail life insurer as measured by in-force premiums with more than 1.5 million customers, while IOOF will have a top-five superannuation platform with the second largest aligned financial advice network.

Here is an interview with CEO Shayne Elliott and Andrew Cornell.

Life Insurance Transaction Scope:

  • 100% of One Path Life Australia Holdings Pty Limited (OPL)
  • As at 30 September 2017, total life in-force premiums were $1.7bn
  • Transaction does not include New Zealand and ANZ will retain Lenders Mortgage Insurance, General Insurance distribution and Financial Planning

Life Insurance Transaction Summary:

  • Total proceeds of $2.85 billion include $1 billion of upfront reinsurance commission from Zurich to ANZ and $1.85 billion for 100% of the life business
  • Annual profit of business is $189 million on a 2017 pro forma cash NPAT basis
  • Equates to a 2017 Price/Embedded Value of 1.0×3, 15.1x 2017 Price/Earnings on a pro forma cash NPAT basis
  • Carrying value of $3.38 billion. Estimated accounting loss on sale of ~$520 million post separation and transaction costs of ~$75 million post-tax and release of available for sale reserve
  • Expected to increase ANZ’s consolidated CET1 capital ratio by a total of ~$2.5 billion or ~65 basis points4 (~25 basis points upon completion of the reinsurance arrangement and a further ~40 basis points on completion)
  • The transaction would be broadly EPS and ROE neutral if capital released is returned to shareholders

Combined Transaction Summary:

  • Total proceeds of $3.83 billion for combined sales
  • Equates to 16.8x Price/Earnings on a pro forma cash NPAT basis
  • Combined sales to increase ANZ’s consolidated CET1 capital ratio by ~80 basis points

Capital released following reinsurance and completion of the life insurance sale is expected to increase ANZ’s consolidated CET1 capital ratio by ~65 basis points and largely be surplus to ANZ’s unquestionably strong requirements.

The sale is another step in ANZ’s strategy to create a simpler, better balanced bank focussed on retail and business banking in Australia and New Zealand, and Institutional Banking supporting client trade and capital flows across the region.

As part of the agreement, ANZ and Zurich will enter into a 20–year strategic alliance to offer life insurance solutions through ANZ’s distribution channels.

With a long history in Australia and a presence in more than 210 countries and territories, Zurich is a highly regarded insurance company with global capability in providing life insurance solutions to more than 60 million customers in partnership with 70 banks in 17 countries, including Santander, Citibank, HSBC, and ING.

ANZ Group Executive Wealth Australia Alexis George said: “From the outset we’ve been focussed on partnering with a high-quality organisation culturally aligned to ANZ and we’re pleased we will be able to provide our customers with access to wealth products from one of the world’s leading and most respected global insurers.”

“Zurich’s experience in working with banks around the world to provide insurance solutions, combined with its commitment to innovation and strong presence in Australia is a good outcome for our customers, shareholders and distribution partners.

“Partnering with Zurich is the best outcome for ANZ customers given it will become Australia’s leading life insurer with the scale to invest in product and digital innovation.

“This transaction will complete the simplification of ANZ’s Australian wealth business, however we will continue to work hard to minimise any disruption to our customers during the transition,” said Ms George said.

There are no changes to any current insurance policies as a result of today’s announcement, including general insurance products provided via QBE.

ANZ expects completion to occur in late 2018 together with the recently announced sale to IOOF of the Group’s Pensions & Investments and Aligned Dealer Group businesses. The transaction, including the reinsurance, remains subject to regulatory approval.