Behind the 500% increase in small businesses using marketplace lending

From SmartCompany.

The number of small business customers signing onto loans through marketplace lenders has increased more than 500% over the past year, but experts say scrutiny must be put on the alternative finance sector now to ensure smaller operators get the best deal.

The Australian Securities and Investments Commission (ASIC) released its 2017 survey of marketplace lending practices this week, crunching the numbers of 12 key lenders in Australia. Marketplace lending covers a range of models, including peer-to-peer systems and other structures where investors put up funds on which they get returns when consumers and businesses borrow.

In 2015-16, ASIC’s survey of the sector put the total value of loans through this kind of model at $156 million, but that figure has doubled over the past year to now sit at $300 million. Total borrowers for the year jumped from 7,448 last year to 18,746 this year.

The pool of small business borrowers through these schemes has historically been small, but over the past 12 months there was a 509% increase, from 33 SME borrowers in 2015-16 to 201 in 2016-17. Seventy-seven percent of these business loans carried interest rates of between 12% and 16%.

Business customers borrowed $47 million through marketplace lending platforms in 2017, compared with $26 million in the year prior, according to the report.

The numbers come as regulators and Australia’s Small Business Ombudsman continue to focus on the challenges SMEs are currently experiencing when applying for finance from the big banks. In an era where property is hard to secure in Australia, Kate Carnell has told SmartCompany young business owners face big challenges ahead when applying for a bank business loan.

While options like marketplace lending provide an alternative to small businesses, Carnell has raised concerns that these models don’t always make it clear what businesses are signing up for.

The small business and fintech communities have started discussions to address these concerns, with Carnell, Fintech Australia chief executive Danielle Szetho and independent banking consultant and founder of thabankdoctor.org, Neil Slonim, holding a roundtable on the issue of transparency in SME lending this week.

Slonim tells SmartCompany that while the pool of business borrowers using marketplace lending is still very small, conversations must be had about it and alternative finance models more broadly.

“The main thing businesses need to understand is that borrowing through one of these models is different from borrowing through a bank,” he says.

The larger lenders have less room to move on their loan terms and are often “more transparent” when it comes to fees than their newer fintech competitors, Slonim says, while alternative lenders can find it “difficult to convey the true cost” of a loan.

He says it’s important to find a balance when discussing these concerns with fintech companies, because areas like marketplace lending will be valuable for small businesses into the future.

“It’s a really important sector, it needs to be encouraged, but there does need to be more self regulation and the regulators. In particular, ASIC will come in if they’re not satisfied there’s progression [on regulation],” he says.

These discussions will be a long-term process, with the Small Business Ombudsman, Fintech Australia and thebankdoctor.org planning on releasing a report in February 2018 with recommendations for establishing guidelines for interest rates and fees from alternative lenders.

Westpac refunds $11 million to interest-only customers

ASIC says Westpac will provide 13,000 owner-occupiers who have interest-only home loans with an interest refund, an interest rate discount, or both. The refunds amount to $11 million for 9,400 of those customers.

The remediation follows an error in Westpac’s systems which meant that these interest-only home loans were not automatically switched to principal and interest repayments at the end of the contracted interest-only period.

As a result, affected customers did not start paying any principal on their loans at the time agreed with the bank, and now have less time to repay the principal amount of their loans. These customers would also have paid more in interest.

To remediate the affected customers, Westpac will now:

  • Refund the additional interest paid from when the loan was contracted to convert to principal and interest repayments
  • Discount the interest rate for the remaining term of the loan.

This remediation has been designed so that customers pay no more interest over the life of the loan than they would have if the system error had not occurred.

ASIC will monitor Westpac’s consumer remediation program to ensure it is meeting consumer requirements.

ASIC Acting Chair Peter Kell said banks must ensure proper systems processes and oversight, particularly when it affected important assets such as consumers’ homes:

‘Greater regulatory scrutiny of interest-only loans has led to improvements in how lenders are providing these loans, including in lenders identifying system errors.’

‘All banks should be reviewing their systems to ensure that they minimise the chance of any such errors occurring, and that any risks to customers are identified early. If past errors are identified, remediation needs to be timely, transparent and effective.’

Westpac is contacting all affected customers, however customers with questions about their loan or the remediation can contact Westpac on 1300 132 925.

ASIC and Westpac are continuing to discuss an appropriate remediation program for investor customers with interest-only loans affected by the same system error.

This has been a long-standing error and has affected some interest-only home loans for owner occupiers who had an interest-only loan with Westpac between 1993 and August 2016.

More information about interest-only home loans 

Interest-only home loans have an initial agreed interest-only period, commonly up to five years. During the interest-only period consumers only pay the interest on the amount borrowed. At the end of the interest-only period the loan reverts to a principal and interest loan, to repay the loan over the remaining term. Repayments increase at the end of the interest-only period.

ASIC’s MoneySmart website has information for consumers about

interest-only mortgages as well as an interest-only mortgage calculator to help consumers work out their repayments before and after the interest-only period.

Additional background

ASIC is undertaking a targeted review of interest-only home loans and provided an update on this review in 17-341MR ASIC update on interest-only home loans.

ASIC is reviewing whether other major lenders have experienced a similar issue.

In 2015, ASIC reviewed interest-only loans provided by 11 lenders and issued REP 445 Review of interest-only home loans (refer: REP 445), which made a number of recommendations for lenders to comply with their responsible lending obligations (refer: 15-297MR).

In 2016, ASIC reviewed the practices of 11 large mortgage brokers and released REP 493 Review of interest-only home loans: Mortgage brokers’ inquiries into consumers’ requirements and objectives (refer: REP 493). REP 493 identified good practices as well as opportunities to improve brokers’ practices.

ASIC’s Fintech “Sandbox” To Remain Unchanged

ASIC has released a consultation paper  and a review of its regulatory sandbox, introduced in December 2016.

 

In the review ASIC proposes to retain class waivers known as the fintech licensing exemption, that allow eligible financial technology (fintech) businesses to test certain specified services without holding an Australian financial services or credit licence for up to 12 months. The exemption is subject to a number of conditions, such as client and exposure limits, consumer protection measures, adequate compensation arrangements, and dispute resolution systems.

The fintech licensing exemption is a world-first approach that allows eligible fintech businesses to test certain services for up to 12 months without an AFS or credit licence.

Outside of the fintech licensing exemption, many fintech businesses rely on exemptions provided under ASIC’s relief powers. They have provided a number of exemptions from the licensing requirement for offering certain types of products and services. This is because, depending on the nature, scale and complexity of the products and services offered, it is not always appropriate for a business to obtain a licence and meet all of the usual regulatory obligations. They have provided relief for ‘low value’ non-cash payment facilities, the provision of generic financial calculators, and some services for mortgage offset accounts.

ASIC had committed to reviewing its fintech licensing exemption following 12-18 months’ operation.

ASIC Commissioner John Price said, ‘by introducing ASIC’s fintech licensing exemption,we have given a range of fintech businesses the chance to test their ideas without needing a licence.’

‘Even in cases where interested fintechs have discovered that they were not able to make use of the fintech licensing exemption, we have found that its introduction has encouraged businesses to come forward and consider their other options that result from the flexibility in ASIC’s existing regime.’

ASIC’s current fintech licensing exemption allows eligible businesses to test specified services for up to 12 months with up to 100 retail clients, provided they also meet certain consumer protection conditions and notify ASIC before they commence the business.

To date, four fintech businesses have used the fintech licensing exemption. Relying on the exemption, one business tested its financial services (providing advice and dealing in listed Australian securities); two businesses are currently testing advisory and dealing services in deposit products; and one business is testing acting as an intermediary and providing credit assistance.

In addition, over a dozen fintech businesses have also contacted ASIC about using the fintech licensing exemption.The consultation period closes on 27 February 2018.

ASIC also launched their Innovation Hub in 2015, and has worked with 233 fintech businesses that cover the spectrum of fintech.

 

Youi pays $164,000 for poor insurance sales practices

ASIC says Youi has refunded 102 consumers approximately $14,000 in total, and will pay $150,000 as a community benefit payment to the Financial Rights Legal Centre’s Insurance Law Service, after ASIC raised concerns about its home and car insurance sales practices.

Youi has also engaged an independent firm (EY) to conduct a review of sales practices in response to concerns that some sales staff were charging consumers for insurance policies without their consent to purchase. This included where consumers only made an inquiry to get an insurance quote.

ASIC was concerned that Youi’s remuneration and bonus structures incentivised sales staff to prioritise sales ahead of consumers’ interests.

Since the review, Youi has:

  • Changed its remuneration structure and reduced the incentives provided to sales staff based on sales volumes
  • Reviewed sales scripts and staff training
  • Introduced new controls and monitoring of sales staff
  • Made significant changes to its legal, risk and compliance capability.

EY will conduct a follow-up review to assess the implementation and test the effectiveness of the recommendations made in their initial assessment of Youi’s risk culture and review of sales practices. A final report will be provided to ASIC by 30 June 2018.

Acting ASIC Chair Peter Kell said positive consumer outcomes should be at the heart of sales structures: ‘It is completely unacceptable that customers were signed up for Youi insurance policies without their knowledge or permission.’

Consumers who believe they have a dispute with Youi should contact Youi directly on 07 3852 7895. The Financial Ombudsman Service can provide further assistance on 1800 367 287.

Background

The Financial Rights Legal Centre’s Insurance Law Service is a national service providing consumers free advice about insurance problems.

ASIC’s MoneySmart website has information for consumers about getting the best deal on insurance, including what to look for in insurance products so they can find the right policy for their needs.

ASIC accepts enforceable undertakings from ANZ and NAB to address conduct relating to BBSW

ASIC says Australia and New Zealand Banking Group (ANZ) and National Australia Bank (NAB) have today entered into enforceable undertakings (EUs) with ASIC in relation to each bank’s bank bill trading business and their participation in the setting of the Bank Bill Swap Rate (BBSW), a key Australian benchmark and reference interest rate.

On 10 November 2017, the Federal Court made declarations that each of ANZ and NAB had attempted to engage in unconscionable conduct in connection with the supply of financial services in attempting to seek to change where BBSW set on certain dates (in respect of ANZ, on 10 occasions in the period 9 March 2010 to 25 May 2012, and in respect of NAB, on 12 occasions in the period 8 June 2010 to 24 December 2012). The Court also declared that each bank failed to do all things necessary to ensure that they provided financial services honestly and fairly.

The Federal Court imposed pecuniary penalties of $10 million each on ANZ and NAB for the attempts to engage in unconscionable conduct in respect of the setting of BBSW. The Court also noted that each of ANZ and NAB will give EUs to ASIC which provides for them to take certain steps and to pay $20 million to be applied to the benefit of the community, and that each will pay $20 million towards ASIC’s investigation and other costs.

Background

ASIC commenced legal proceedings in the Federal Court against ANZ on 4 March 2016 (refer: 16-060MR) and against NAB on 7 June 2016 (refer: 16-183MR). The EUs form part of an agreed resolution to those proceedings.

On 16 November 2017 Jagot J of the Federal Court published her decision in both the ANZ and NAB proceedings ([2017] FCA 1338).

On 5 April 2016, ASIC commenced legal proceedings in the Federal Court against the Westpac Banking Corporation (Westpac) (refer: 16-110MR). These proceedings are ongoing.

ASIC has previously accepted enforceable undertakings relating to BBSW from UBS-AG, BNP Paribas and the Royal Bank of Scotland (refer: 13-366MR, 14-014MR, 14-169MR). The institutions also made voluntary contributions totaling $3.6 million to fund independent financial literacy projects in Australia.

In July 2015, ASIC published Report 440, which addresses the potential manipulation of financial benchmarks and related conduct issues.

The Government has recently introduced legislation to implement financial benchmark regulatory reform and ASIC has consulted on proposed financial benchmark rules.

Citibank refunds $3.3 million to credit card customers and $1m on transactions

ASIC says Citibank has refunded Citibank has refunded around 4,000 current and former customers more than $1 million after misstating the bank’s obligations around unauthorised transactions on customers’ accounts. Separately, Citibank will refund more than $3.3 million to around 39,500 current and former customers for failing to refund customers when credit card accounts were closed with an outstanding credit balance.

Citibank will refund more than $3.3 million to around 39,500 current and former customers for failing to refund customers when credit card accounts were closed with an outstanding credit balance.

Citibank will provide refunds for Citibank, Virgin Money, Bank of Queensland, Suncorp and Card Services branded credit cards and for Citibank Ready Credit loan customers. Citibank is the credit provider for all of these products.

This error occurred on accounts as far back as 1994 but did not happen every time an account was closed.

Citibank is writing to eligible customers to advise that they will receive a refund of the credit balance with interest. Former customers will receive a bank cheque and current customers with an open account will receive a direct credit into their account.

The closed credit card and loan accounts with more than $500 in credit balances, which were not transacted on for seven years (or three years as applicable) have been transferred to ASIC as required under unclaimed money legislation.

Citibank has strengthened its systems so that cheques for credit balances are issued to customers automatically when they close their accounts.

“Customers should be confident that when they close an account, they are refunded any outstanding balance,” ASIC Deputy Chair Peter Kell said.

Mr Kell also said customers may be entitled to claim their balance through ASIC’s MoneySmart website which holds unclaimed money from accounts which have been inactive for a certain period:

“If you think you might be impacted, your money may be with ASIC as unclaimed money. I strongly encourage you to search your name on ASIC’s MoneySmart unclaimed money search.”

Citibank reported the issue to ASIC, and has cooperated with ASIC in resolving the matter.

Background

Citibank (Citigroup Pty Ltd) has commenced writing to all affected customers, and affected customers will be contacted before 30 November 2017.

 

Citibank has refunded around 4,000 current and former customers more than $1 million after misstating the bank’s obligations around unauthorised transactions on customers’ accounts.

Citibank had refused customers’ requests to investigate unauthorised transactions because it claimed the requests were made outside the time period permitted under the Visa and MasterCard scheme chargeback protections.

Affected customers had made reports to Citibank about ‘card not present’ unauthorised transactions (such as internet transactions), where a payment was made using the credit or debit card number details, rather than the physical card itself.

In letters sent to customers in response to their requests, Citibank incorrectly stated that because the request was made outside the timeframe specified by Visa and MasterCard, it was not required to assess the claim, and that the customer’s only options were to approach the merchant or a fair trading agency.

The letter would likely have misled customers about their protections under the ePayments Code. The ePayments Code provides protections to consumers for unauthorised transactions – these protections are separate to, and not the same as, the protections provided by Visa and MasterCard.

As a result, customers did not have their claims properly considered in accordance with Citibank’s contractual obligations with those customers under the ePayments Code.

To remediate affected consumers:

  • Current customers will have their accounts refunded
  • Former customers who are owed more than $20 will be sent a bank cheque
  • Former customers whose individual amounts were more than $500 and cannot be located will have their funds treated in accordance with unclaimed money requirements
  • For former customers owed less than $20, and those who cannot be located with amounts less than $500, an equivalent amount will be donated to charity

If a donation is made and the customer comes forward, Citibank will honour individual refunds.

Citibank has also reviewed its processes to ensure there are no further miscommunications about its obligations under the ePayments Code.

“If an unauthorised payment has been made on their account, customers should be confident that their bank will appropriately investigate the payment. Customers should never be misled about their rights under the Code.” ASIC Deputy Chair Peter Kell said.

“Banks should ensure in all their communications that they are clear and accurate with customers about their consumer rights.”

Citibank’s remediation program covered consumers who may have received the letter between 1 January 2009 to 22 July 2016, and did not have their claim appropriately assessed.

Financial advice firm to pay $1 million penalty for breach of best interests duty – ASIC

ASIC says the first civil penalty has been imposed on a financial services licensee for breaches of the best interests duty under the Future of Financial Advice (FOFA) reforms. The focus on the matter was on the “best interest” provisions and the remuneration model. This is a significant development.

The Federal Court has imposed a civil penalty of $1 million against Melbourne-based financial advice firm NSG Services Pty Ltd (currently named Golden Financial Group Pty Ltd) (NSG) for breaches of the best interests duty introduced under the Future of Financial Advice (FOFA) reforms.

The penalty relates to financial advice provided to retail clients by NSG advisers on eight occasions between July 2013 and August 2015. The clients were commonly sold insurance and advised to roll over superannuation accounts that committed them to costly, unsuitable and unnecessary financial arrangements.

The Court found that the failures by NSG to ensure compliance by its representatives were systemic in nature and in his reasons, Justice Moshinsky said, “I regard the contraventions as very serious ones”.

In March 2017 NSG consented to the making of declarations against it and after a hearing on 30 March 2017 the Court was satisfied that declarations ought to be made.

The Court found that NSG’s representatives breached:

  • s961B of the Act by failing to take reasonable steps to ensure that they provided advice that complied with the best interests obligations; and
  • s961G of the Act by failing to take reasonable steps to ensure that they provided advice that was appropriate to its clients.

Those breaches formed the basis of 20 contraventions in total by NSG of s961K(2) or s961L of the Act, which provides that a financial services licensee must take reasonable steps to ensure its representatives comply with the above sections of the Act.

The Court made the declarations based on a number of deficiencies in NSG’s processes and procedures, including the following:

  • NSG’s training on legal and regulatory obligations was insufficient to ensure clients received advice which was in their best interests;
  • NSG did not conduct regular or substantive performance reviews of its representatives;
  • NSG’s compliance policies were inadequate, and did not address its representatives’ legal or regulatory duties, and in any event, were not followed or enforced by NSG;
  • There was an absence of regular internal audits, and the external audits conducted identified issues which were not adequately addressed nor recommended changes implemented; and
  • NSG had a “commission only” remuneration model, which meant that representatives would be paid by way of commission for sales of personal risk insurance products and superannuation rollovers.

ASIC Deputy Chairman Peter Kell said, “This outcome makes clear to the industry the serious consequences of financial services licensees failing to comply with their FOFA obligations.  ASIC will continue to pursue licensees who fail to do so.”

NSG, who agreed with ASIC on the amount of the penalty immediately prior to the hearing on penalty, and made joint submissions as to the orders, was also ordered to pay $50,000 in costs to ASIC, and will also pay $50,000 towards ASIC’s costs of its investigation into NSG under s91 of the ASIC Act.

MP grills CBA on brokers, offsets and big mortgages

From The Adviser.

NSW MP Kevin Hogan said that mortgage brokers have told him that it is in their best interest to get clients to borrow as much as they can.

Mr Hogan was on the parliamentary committee that questioned CBA chief executive Ian Narev in Canberra on Friday (20 October), where he was eager to find out from the CEO how brokers were behaving.

“You have one of the most extensive broker networks in the country,” Mr Hogan said, addressing Mr Narev.

“Brokers, as well as customers, tell me it’s obviously in the broker’s interest to get the customer to borrow the maximum amount of money they can get them to borrow — they get remunerated that way — even though they might not need that much money. And then they open an offset account and put the money they don’t need in that account, but they have drawn down the maximum amount of money they can borrow.”

The MP then asked Mr Narev if he has noticed “a big difference” in the number of customers who open an offset account, with money put in it straightaway, between the broker network and their branch network.

The CBA boss took the question on notice, but provided his thoughts on debt levels and the financial wellbeing of customers.

Mr Narev said: “You are raising a different and very valid point, which is: how much should people borrow? In the context of the broader regulation on general advice versus specific advice, we have a lot of discussion about that at the bank, and it is a very live discussion both through our own channels and through proprietary channels.”

Mr Narev noted that, historically, there has generally been a view that “whatever the bank will lend me, I should borrow”.

While he stressed that CBA lends responsibly for what people can service, Mr Narev said that the question of what level of debt somebody is comfortable with is “very personal”.

“The whole industry — and we are certainly doing it, including through behavioural economics in conjunction with academics from Harvard University — is working through how, within the constraints of the law on advice, we can have richer discussions with people to go down exactly the distinction you’ve drawn.”

Mr Hogan restated his belief that brokers get incentive to put customers in larger loans, saying: “It is obviously in the broker’s interest to get that person to borrow as much money as they can possibly get them to do — which might not necessarily be in the best interest of the customer — and you have an extensive network.”

Outgoing ASIC chairman Greg Medcraft also believes that brokers encourage customers to borrow more. In fact, he even admitted that he would do it himself if he was a mortgage broker.

Speaking at a Reuters Newsmaker event on 12 September, Mr Medcraft touched on a recent report from investment bank UBS, which suggested that around $500 billion of mortgages could be based on inaccurate information.

Mr Medcraft said: “The mortgage commission is based on [the fact that] the larger their loans, the more you get. So, logically, what would you do?

“It’s human behaviour. I’d do it.”

Banking Regulators Asleep at the Wheel?

Well, finally, we got an admission from APRA that mortgage lending standards have decayed over the last decade, and that they needed to take action to reverse the trend. And now they are looking at debt-to-income.

Poor lending standards, they say are systemic, driven by completion, and poor bank practices. They recently intervened (a little). And late to the piece (now) debt-to-income is important. Did you hear the door slamming after the horse has bolted?

This is after ASIC called out poor lending practices, and the RBA have been raising concerns about the high household debt, and the downstream risks to growth this represents.

A completed change of tune from the declarations of 2015 when everything was said to be just dandy!

Those following this blog over the past few years will know we have been flagging these concerns, especially as the cash rate was brought to its all time low.  We said DTI was critical, that standards should be tightened, and the growth of debt to income was unsustainable.

These three parties, plus the Treasury form the “Council of Financial Regulators” which is chaired by the RBA are all culpable.  This body, which works behind the scenes, is referred to when hard decisions need to be take. If you look back at recent APRA and RBA statements, the Council gets a Guernsey!

The problem is there has been group-think for year, driven by the need to use households as a growth proxy for the failing mining and resource sector. And no clear accountability.

But too little has been done, too late.  And it is poor old households who, one way or the other will pick up the pieces – not the banks who have enjoyed massive profit and balance sheet growth.

Even now, lending for housing is growing three time faster than incomes or cpi.

Regulators are now lining up to call out the problems. Managing the risk going forwards is a real challenge. Time to review the regulatory structure.

Worth remembering that the Financial System Inquiry recommended the creation of a new Financial Regulator Assessment Board to assess the performance of the regulatory framework, but this was rejected by the Government!

 

ANZ and ASIC Agree to Settle the BBSW case

In a short release, ANZ says it has reached a confidential in-principle agreement with the Australian Securities and Investments Commission (ASIC) to settle court action relating to the Australian interbank BBSW market.

As a result, this morning ASIC has asked the Court to stand down the trial for 48 hours, which ANZ will consent to, so as to progress the in-principle agreement following which ANZ will make a more detailed statement.

Based on the in-principle agreement, the financial impact to ANZ will be reflected in the 2017 Financial Year results and is largely covered by the provisioning held as at 31 March 2017.