Bitcoin’s rise will have ‘disastrous’ consequences for the planet

From The New Daily.

The Bitcoin frenzy currently gripping the world is taking an unexpected toll on the planet – in the form of a carbon footprint almost as big as New Zealand’s.

And with the cryptocurrency’s astronomical growth showing no sign of slowing, this carbon footprint is likely to grow – prompting some commentators to warn of an “environmental disaster” in the making.

The culprit is Bitcoin ‘mining’, the little-understood process that both secures the existing Bitcoin system, and creates new Bitcoins.

This process, according to Digiconomist, is incredibly energy intensive, and is fed largely by China’s highly polluting, carbon-intensive coal-fired power stations.

These revelations come as the Australian Securities Exchange revealed it would be using the same technology used by Bitcoin – Blockchain – to run its system, the first stock exchange in the world to do so.

Writing in The Conversation on Monday, Professor John Quiggin said the rise of Blockchain itself should not be prevented, as there were other ways to use it that were not as energy intensive.

But he said that Bitcoin itself should be abandoned, describing it as a “collective delusion” with “massively destructive environmental consequences”.

Bitcoin’s rise continues

On Monday, the value of a single Bitcoin reached $A22,343, more than 20 times its value a year ago.

The unprecedented surge – offering massive returns on small investments – has proved irresistible to everyday investors, pushing more and more to buy the currency, and forcing its value into what many warn is bubble territory.

But a more sophisticated, select group – Bitcoin miners – is also  seemingly increasing, likewise attracted by the rocketing value of a digital currency that many called the gold of the 21st century.

How Bitcoin mining works

Bitcoin mining involves using a computer to solve a mathematical problem posed to it by the Bitcoin system.

When the computer solves this problem, it validates previous Bitcoin transactions, increasing the security of the Bitcoin system. In return for performing this service, the miner – as likely as not some teenager working from his or her bedroom in Shanghai – is rewarded in Bitcoins.

The video below attempts to explain the whole thing in simple terms (with questionable success).

As the video explains, Bitcoin mining requires a truly phenomenal amount of electricity – currently 32 terawatts a year, according to Digiconomist.

To put that in context, Australia uses 224 terawatts of electricity a year, while New Zealand uses 40, according to figures published by the US Central Intelligence Agency.

If Bitcoin were a country, it would be the 60th-biggest consumer of electricity in the world, ahead of 160 other countries. In other words, Bitcoin is becoming a significant contributor to climate change.

And the likelihood is it will get worse, for two reasons.

First, there is only a finite number of Bitcoins that can ever be mined. Currently around 17,000 have been mined. The limit is 21,000.

The closer we get to the 21,000 figure, the harder it is to mine Bitcoins. As a result the computer power required to mine Bitcoins increases, with the electricity used going up as a result.

(All this, by the way, puts a huge strain on miners’ computers.)

And second, as the value and profile of Bitcoin increases, the number of aspiring miners will also likely increase, further pushing up electricity usage.

Supporters of Bitcoin would like to see it become a global currency to rival the US dollar. But Professor Quiggins warned against this.

“Shifting the whole global financial system to Bitcoin would require at least a 200-fold increase, which in turn would entail increasing the world’s electricity use by around 500 per cent,” he said.

“With the current threat of climate change looming large globally – this constitutes an unthinkably large amount of energy consumption.”

Turnbull government announces banking royal commission in major backflip

From The New Daily.

The Turnbull government has announced it will hold a royal commission into the banking sector, in a major policy backflip.

The decision came after the big banks wrote to the government saying an inquiry was necessary to end business and economic uncertainty.

Prime Minister Malcolm Turnbull announced the royal commission in a press conference in Canberra on Thursday morning.

“The chief executives and chairman of the big four banks have written to us, asking the government to step in, end the uncertainty and ensure an orderly process that addresses the concerns,” the PM said.

“Cabinet has met this morning and has determined that the only way we can give all Australians a greater degree of assurance about the financial system is through a royal commission into misconduct in the financial services industry.”

He said the royal commission would last for 12 months, and would report to government in February 2019. It would cover not just the banks, but also fund managers, superannuation funds and insurance companies.

The decision to hold a royal commission came within hours of a letter from the big banks addressed to Treasurer Scott Morrison, in which they called for the government to launch an inquiry.

“We are writing to you as the leader’s of Australia’s major banks,” the letter read.

“In light of the latest wave of speculation about a parliamentary commission of inquiry into the banking and finance sector, we believe it is now imperative for the Australian Government to act decisively to deliver certainty to Australia’s financial services sector, our customers and the community.”

It went on: “We now ask you and your government to act to ensure a properly constituted inquiry into the financial services sector is established to put an end to the uncertainty and restore trust, respect and confidence.

The government’s bombshell announcement followed a major threat from Nationals MPs to cross the floor and back a bill that would have established a banking ‘commission of inquiry’ behind the government’s back – a move that would have significantly undermined the PM’s authority.

In his speech, Mr Turnbull said the decision to call a royal commission was based on a desire to put an end to uncertainty that was coming from this threat.

“The banks … do not believe an inquiry is necessary, but they have raised – and you may have seen their letter to us – serious concerns that the ongoing uncertainty is undermining the financial system,” he said.

“Now the speculation about an inquiry cannot go on. It’s moving into dangerous territory, with some of the proposals being put put forward have the potential seriously to damage some of our most important institutions. We have got to stop the banks and our financial services sector being used as a political football.

“It may be politically advantageous to some people to do so, but it runs the risk of putting vital economic interests at stake, and runs the risk of putting them under threat.”

He said the decision was “a regrettable but necessary action”.

How the property boom has pulled the banks into housing market risk

From The New Daily.

Experts warn the increasing dependence of Australian banks on the property boom is putting both the banking system and the wider economy at risk.

Just how important playing the property game has become for the banks was highlighted when Westpac recently released its annual results. The bank’s chief Brian Hartzer, who earned $6.7 million for the year, said lending for mortgages accounted for 62.4 per cent of the bank’s outstanding loan book of $684.9 billion.

Martin North, analyst and principal of Digital Financial Analytics, said that figure would “be closer to 70 per cent” if you add in the lending to property developers and other businesses related to the industry.

Around 20 years ago the banks typically lent almost as much to business as they did to housing, he said.

Source: APRA

The above table details the move to housing lending. However it differs slightly from the figures Westpac quoted as it is gleaned from figures the banks report to APRA rather than the way they report in their shareholders.

Nonetheless, all figures on the chart are calculated in the same way so it tells a story about the shift to mortgage lending over the past 15 years.

What it demonstrates is that the four major banks are lending a greater proportion of their loan assets to the residential property market than they were in 2002 when both owner-occupied and investment lending are added together.

Two of the big four, Westpac and NAB, have reduced their proportional exposure to home loans slightly, but when all residential property lending is added together, all have increased their relative exposures.

The ANZ has seen its home loan exposure jump from 38.7 per cent to 43.4 per cent of its exposures.

As a result, the ANZ, traditionally a business-focused bank, has seen its proportion of corporate lending decline from 33 per cent of the loan book to 26.8 per cent.

This is potentially dangerous.

Mr Hartzer warned on Monday the residential construction cycle had “peaked” with no sign that business investment was growing fast enough to take up the slack.

“It’s hard to see what will take its place,” he said.

Independent economist Saul Eslake told The New Daily the move to property lending has been in train for some time.

“Business has been pretty conservative about borrowing for investment since the last recession in the 1990s,” Mr Eslake said.

“We had a big mining investment boom but most of it was funded by equity because of the degree of risk in those mining projects. And because 80 per cent of the mining industry is foreign-owned most of the money it did borrow came from foreign banks through existing relationships.

“The projects were so big the Australian banks mostly couldn’t have funded them.”

The banks would be more exposed than in the past to the effects of a major house price fall, Mr Eslake said, although he doubted such a disastrous outcome would eventuate.

“I don’t expect that to happen although some people have been talking about it.”

A number of factors have driven the housing boom including population and income growth for the past 25 years, a huge fall in interest rates and increases in the tax advantages to property investment through negative gearing and the halving of the capital gains tax level, he said.

Australia’s property market growth comes to a halt

From The New Daily.

Sydney’s deflating house prices have dragged the property market down across the entire country, in the most conclusive sign yet that the boom is over, figures from CoreLogic have revealed.

For the month of October – traditionally a bumper month for property sales – average house prices across Australia’s capital cities posted no growth at all.

Sydney house prices fell by 0.5 per cent, bringing quarterly losses to 0.6 per cent.

Prices in Canberra and Darwin also fell (by 0.1 per cent and 1.6 per cent respectively), while Adelaide and Perth each posted zero growth.

Of the capital cities, only Melbourne, Brisbane and Hobart saw property prices increase, at 0.5 per cent, 0.2 per cent and 0.9 per cent respectively.

Perth’s flat growth was also an improvement on a long period of falling prices.

The poor results will be a disappointment to sellers who assumed a spring sale would optimise the value of their property.

CoreLogic’s head of research Tim Lawless put the low growth down, primarily, to tighter restrictions on lending.

“Lenders have tightened their servicing tests and reduced their appetite for riskier loans, including those on higher loan-to-valuation ratios or higher loan-to-income multiples,” he said.

He added that more expensive rates on interest-only loans were acting as a disincentive for property investors, particularly those that offered low rental yield.

Commenting on the NSW capital’s poor results, Mr Lawless said: “Seeing Sydney listed alongside Perth and Darwin, where dwelling values have been falling since 2014, is a significant turn of events.”

However, despite the recent depreciation, house prices in Sydney are still 7.7 per cent higher than they were a year ago.

Turning to Melbourne, Mr Lawless put the city’s continued growth down to “record-breaking migration rate”, which he said was creating “unprecedented housing demand”.

Units v Houses

In most capital cities, houses continued to see higher capital growth than units, due to overdevelopment of the latter. A notable exception to this was Sydney.

Over the year, unit values in Sydney grew by 7.9 per cent, compared to 7.7 per cent for houses.

“While Sydney is seeing a large number of new units added to the market, it seems that high levels of investment activity and strained affordability is helping to drive a better performance across this sector,” Mr Lawless.

The report found that rental yields, while they had grown 2.8 per cent over the year, were still extremely low when compared to house prices – which have on average risen 6.6 per cent over the year.

Sydney and Darwin were exceptions to this.

“If the Sydney market continues to see values slip lower while rents gradually rise, yields will repair, however a recovery in rental returns is likely to be a slow process,” Mr Lawless said.

Chinese money dries up

While CoreLogic put the flat growth down to tougher mortgage lending restrictions, a report by Credit Suisse offered a different explanation.

According to the ABC, the report found Chinese capital flows into Australia had fallen in recent months, and this was having a pronounced effect on the domestic property market.

“Over the past few months, the Sydney housing market has not only cooled down, but has arguably turned cold,” ABC quoted Credit Suisse as saying.

“Over the past year, Chinese capital flows have fallen considerably, in part reflecting the impact of stricter capital controls.

“This fall foreshadows weakness in NSW housing demand in the year ahead.”

This, Credit Suisse argued, could see the Reserve Bank forced to cut interest rates even further. Currently the cash rate sits at a record low of 1.5 per cent.

An affordable housing own goal for Scott Morrison

From The New Daily.

There was considerable shock on Friday when Treasurer Scott Morrison announced legislation that could block billions of dollars of new housing supply – bizarrely enough, in the name of ‘affordable housing’.

Property developers are aghast at Mr Morrison’s draft legislation, because although they see it as giving a small leg-up to the community housing sector, they think it will block literally billions of dollars in investment in mainstream rental dwellings.

Both measures relate to an established way of bringing together large pools of money from institutions or wealthy individuals as ‘managed investment trusts’ (MITs).

Mr Morrison’s draft law is offering MITs a 60 per cent capital gains tax discount for investing in developments run by recognised ‘community housing providers’, rather than the normal 50 per cent discount.

But at the same time the legislation bans MITs from investing in all other residential developments.

The reason that has shocked property developers is that they have been anticipating for some time that MITs would play a major role in the emerging ‘build-to-rent’ housing market.

Two types of build-to-rent

There is some confusion around the term ‘build-to-rent’ at present, because it is being used to describe two quite different kinds of housing, both of which are booming in the UK and US.

The first is a straightforward commercial proposition. A developer might build a 100-dwelling development – be it townhouses, low-rise apartments, or high-rise flats – but instead of selling off each home to speculators or owner-occupiers, it retains ownership and rents them out directly.

The second variation is similar, but involves government subsidies and the input of community housing providers, to keep rents low.

That model, being championed by the likes of shadow housing minister Doug Cameron, would connect large investors such as local super funds or overseas pension funds, with long-term investments that provide secure, good-quality rental properties to lower-income Australians.

So when you read the term ‘build-to-let’, have a look at who is using it – it could mean fancy apartments with swimming pools, gyms or other communal facilities, or just decent housing that cash-strapped people can afford.

A fatal contradiction

What’s so surprising about Mr Morrison’s two new measures, is that they appear to work against each other.

One is trying to push rents down for low-income groups squeezed out of the mainstream market, but the other looks to crimp supply in the mainstream market and thereby push rents up.

That would be a big mistake, because both kinds of new dwellings are needed as our increasingly dysfunctional capital cities look for ways to ‘retro-fit’ sprawling suburbs with higher-density housing.

For many years now I have complained that the housing market didn’t have to get to this point – negative gearing and the capital gains tax breaks that have helped push home ownership out of reach of many Australians should have been reined in years ago.

But they were not, and the market, and the economy more generally, has become dangerously unbalanced by the housing credit bubble that those tax breaks created.

If that imbalance is successfully unwound – by wages catching up to house prices – it will be a small miracle, but it will also take a long time.

In the meantime, increasing housing supply in the right areas of our capital cities is a good way to keep a lid on prices, albeit rents rather then purchase prices – though an abundance of good rental properties can lower those, too.

That is what Mr Morrison’s draft legislation is jeopardising.

Labor, as you might expect, has slammed the ban on MIT investments, which shadow treasurer Chris Bowen says “has completely ambushed the property and construction sector”.

Much rarer, is for the Treasurer to be at odds with the Property Council – the lobby group he worked for between 1989 and 1995.

But it has also been scathing of the change.

It said on Friday: “The answer to Australia’s housing problem is more supply. Build to rent has the potential to harness new investment that could deliver tens of thousands of new homes and provide a greater diversity of choice for renters.

“… the unintended consequence of the draft legislation is to completely close down the capacity for Managed Investment Trusts (MITs) to invest in build to rental accommodation. This risks stalling build-to-rent before it starts.”

Given that kind of opposition, it’s hard to see the MIT investment ban becoming law – or if it did, the government that put such a ban in place ever living it down.

The Zombie Economy and Mortgage Rates

From The New Daily.

The Reserve Bank of Australia surprised nobody when it left official interest rates on hold on Tuesday at the record low of 1.5 per cent for the 13th consecutive month.

Governor Philip Lowe said he’d done that despite the fact that there is some light appearing on the economic horizon.

“Labour markets have tightened further and above-trend growth is expected in a number of advanced economies, although uncertainties remain,” he said.

The bank has an “expectation that growth in the Australian economy will gradually pick up over the coming year”, he said.

That positive note is challenged by some, with Stephen Anthony, chief economist with Industry Super Australia, telling The New Daily that there was not real evidence that things would improve soon.

“I’d say to the bank, ‘Stop pretending you do know and issuing statements based on faith’,” he said.

“Central banks are practicing faith-based economics and the quantitative easing and rate cut policies of recent years have created zombie economies.”

You can argue the toss about the RBA’s view but the ‘zombie’ economy is creating opportunities for those wanting to borrow to buy property.

Steve Mickenbecker, director with rate watch group Canstar, said there had been some declines in interest-only interest rates for property in recent times.

“I was a little surprised to see the decline in interest-only loans because they had been increasing as APRA had told the banks it wanted to see less investment and interest-only lending,” he said.

“Most of the fall has been triggered by moves by St George/Bank of Melbourne who may have responded to seeing their lending volumes fall.”

The average interest-only investment rate has fallen 0.71 per cent to 4.93 per cent with the best deal in the market sitting at 4.14 per cent.

This is welcome news for interest-only borrowers “who have stuck it out with investor interest-only loans and, on average, copped a 40-basis point rise over the last 12 months, adding $116 per month to the cost of a $350,000 mortgage”, said Sally Tindall, Money Editor at rate watch site RateCity.

Deals for those wanting principle and interest investment loans have dropped marginally to 4.73 per cent with the best deals at around 4.09 per cent, according to Canstar.

For home buyers there has been some downward movement with average rates down 0.17 per cent to 4.73 per cent while the best deals are at a low 3.65 per cent.

Mr Mickenbecker said: “I’ve had anecdotal evidence that there are some better deals for owner-occupiers being offered for new customers but not for existing customers.”

Ms Tindall said traditional home owners have good opportunities in the current environment if they’re prepared to really shop around.

Australians opting to live in their properties and pay down their debt can nab a rate as low as 3.44 per cent.”

There are even rock bottom investment deals available.

“While there are 510 owner-occupier loans under 4 per cent, investors have just 49 to choose from,” she said.  

The RBA’s decision came ahead of Wednesday’s GDP data, which is expected to show the economy is growing marginally slower than the RBA’s most recent annualised forecast of 1.75 per cent.

Dr Anthony said the economy has effectively been “set adrift” by the “economics of faith”.

“The question is when you ride a bike more and more slowly, at what point do you fall off?”

CBA’s Potential Exposure To Foreign Jurisdictions

From The New Daily.

The Commonwealth Bank could face big penalties on top of estimates of $300-$500 million fines in Australia if international regulators are forced to act over its breaches of rules around money laundering and terrorism financing, experts say.

Foreign regulators have been far harder on banks than their Australian counterparts, levying billions of dollars in penalties in recent years.

The bank is to be investigated by regulator APRA in an unprecedented and wide-ranging review of its governance, culture and accountability structures as a result of its latest scandal.

But if the tentacles of its misdeed spread into foreign jurisdictions, then international regulators could get involved, leaving the bank open to potentially huge penalties.

“The US Federal Reserve and potentially the Securities and Exchange Commission could get involved if any transactions involved US dollars,” said independent economist Saul Eslake.

“Jurisdictions like Singapore, the UK, the EU could be involved or even China if it felt it was a sovereignty issue,” said Pat McConnell, honorary Fellow in Applied Finance at Macquarie University.

In recent years, major international finance scandals around the rigging of benchmark interests rates in UK, European, US and Japanese markets have led to massive fines totalling over $9 billion for some of the biggest names in international banking.

On these scandals “banking regulators have led the charge but they have also involved the US Department of Justice”, Mr McConnell said.

If the CBA scandal were to spill out into foreign markets the effects could be wide-ranging. As well as fines, “if the transactions involved US dollars, regulators could suspend or impose conditions on the use of CBA securities in the US market”, Mr Eslake said.

“That could make it hard to issue shares in the US or for investors to trade in Commonwealth Bank bonds.”

Brian Johnson, a banking analyst with CLSA, pointed to the danger of international repercussions for CBA in a note to investors issued this week.

“The problem is that many of these transactions identified by AUSTRAC saw funds remitted outside of Australia which could leave CBA vulnerable to fines in those domiciles where penalties for bank misbehaviour have been much bigger than in Australia,” he said.“Furthermore, bank counter parties will likely be looking at CBA exposures in the light of these alleged AML [money laundering regulation] breaches.”

That, in lay persons terms, means that other banks may cut exposures to CBA because they think it has become a business risk or charge more to do business with it. That, in turn, would affect CBA’s profits.

“With CBA having facilitated the transfer of AML breached funds to Malaysia and Hong Kong, those country’s regulators will be reviewing CBA for potential AML fines,” Mr Johnson said.

“New Zealand regulators are believed to be reviewing CBA’s intelligent deposit machines.”

Way beyond a  ‘simple coding error’

Mr Johnson said that CBA’s misdeeds go “way beyond a ‘simple coding error’” as the bank had claimed.

“The narrative in the AUSTRAC full claim (against CBA) is far more salacious, with tales of laundering drug monies, transferring funds for terrorism, ignoring recurring concerns of branch staff regarding implausible cash deposits and ignoring directives from the Australian Federal Police,” Mr Johnson said.

“While CBA is likely to go through the motions of preparing a defence to AUSTRAC’s claims it’s likely CBA would seek an out of court settlement to avoid the prolonged adverse detailed reporting that would inevitably follow court proceedings.”

Mr Johnson said he believed CBA could face Australian penalties or settlements of $300 million to $500 million, plus the risk of offshore fines.

CBA credit card scandal ‘just the tip of the iceberg’

From The New Daily.

The Commonwealth Bank credit card insurance scandal is the “tip of a very large iceberg”, legal experts have warned.

Philippa Heir, a senior solicitor at the Consumer Action Law Centre, welcomed the bank’s promise to repay $10 million to 65,000 students and unemployed people sold dodgy credit card insurance.

“Unfortunately it’s very widespread,” she told The New Daily.

“We’ve seen misselling of this sort of insurance on a large scale.”

On Monday, corporate regulator ASIC revealed that CBA – already mired in a money-laundering scandal – had agreed to refund about $154 to each of the 65,000 affected customers, who were sold ‘CreditCard Plus’ insurance between 2011 and 2015 despite being unable to claim for payouts.

CBA told the market it “self-reported the issue” to ASIC in 2015, and that the insurance was “not intentionally sold to customers who were not eligible”.

 

It was an example of what Consumer Action calls ‘junk insurance’, which is where inappropriate insurance policies are slipped covertly into the paperwork for car loans, credit cards and other financial products, or where the salesperson pressures the customer to buy unsuitable coverage.

Ms Heir said the CBA example was by no means an isolated case, and that many victims were poor.

“People who’ve spoken to us say they were told they had to [pay for insurance] or they would not qualify for finance for the car they needed to support their family. So this is affecting people on lower incomes significantly.”

Last year, ASIC published the results of a three-year investigation of add-on insurance sold by used car dealers. Its sample group paid $1.6 billion in premiums for only $144 million in payouts.

This amounted to an average payout of nine cents per dollar of premiums, compared to 85 cents for comprehensive car insurance, ASIC reported.

Consumer Action has set up a website to help Australians claim refunds from insurers. More than $700,000 has been claimed so far.

Here are the potential warning signs that a policy may be unsuitable.

Be wary of pressure selling

Consumer Action’s Ms Heir said high-pressure sales tactics were a danger sign.

“The key is, if you’re being put under pressure to buy insurance, that might ring alarm bells that you should shop around.”

An independent review of the banking sector, released in January, contained shocking revelations from bank staff who reported being forced to oversell financial products, including unnecessary insurance.

One anonymous bank teller said: “If I do not meet my daily sales target I have to explain how I will catch up at morning meetings of the team. I am behind in sales of wealth and insurance products and need to catch up to keep my job.”

Be wary of add-on insurance

ASIC’s recent investigation related specifically to add-on general insurance policies sold by used car dealers. It found “serious problems in the market”.

These add-on policies cover risks relating either to the car itself, or to the car loan. Examples include ‘consumer credit insurance’ and ‘tyre and rim insurance’.

Consumer Action agreed it was a high-risk area.

“One person we spoke to spent $20,000 for add-on insurance on a $60,000 car loan, so it took that loan from $60,000 to $80,000, which is hard to even comprehend,” Ms Heir said.

Be wary of insurance for small losses

An expert on investor behaviour, Dr Michael Finke of Texas Tech University, warned in a recent financial literacy series that fear of losing money temps consumers to buy unnecessary insurance.

Buying a policy is “rational” only when the probability of losing money is low and the size of the potential loss is high, Dr Finke said.

“It’s a good strategy to make sure that you let the small ones go so you can focus on insuring bigger losses.”

He recommended setting a “risk retention limit” – a dollar figure below which you don’t insurance yourself.

“This limit should be based on your wealth and your ability to cover a loss if it happens,” he said. “This may mean keeping a little bit more money in a liquid savings accounts just in case.”

Bank compensation bills for scandals hit $355 million

From The New Daily.

The bill for the big banks in recompensing clients over financial scandals is continuing to rise, with the ANZ last week ordered by regulator ASIC to boost by $6 million to $10.5 million its compensation to mistreated OnePath superannuation customers.

That news “is a shock but not a surprise” said Erin Turner, campaigns director with consumer group Choice, although “it shows another disappointing outcome”.

While the extra cash will be welcomed by wronged ANZ customers, it’s small beer compared to what the banks have had to pay all up. In recent years a series of scandals have seen the big banks hit with compensation bills of at least $355.4 million.

Most of that money came as a result of mistreatment by bank financial advisory arms which, among other things, involved forging client signatures to switch investment choices without permission. Banks also charged clients advisory fees without giving any financial advice.

The figures are staggering with ASIC demanding the banks pay back a total of $204.9 million and of that only $60.4 million has been paid to date. The banks still owe $144.2 million, plus an interest component which has not been detailed.

A spokesman for ASIC said the shortfall in payments is not the result of a time payment regime drawn up by the regulator.

It is the result of the fact that the banks are having to trawl through their records to find details of the customers concerned and how much money they are owed, which apparently takes time. Just how much time presumably depends on the banks.

The list provided does not include all the high-profile scandals of recent years. The cost to the CBA of the money laundering scandal involving 53,700 transactions breaching reporting laws is yet to be determined and there are other issues under investigation or legal challenge.

There are also bank-related issues like the $500 million collapse of Timbercorp and the $3 billion Storm Financial collapse where incentives and lax lending saw the life savings of thousands go up in smoke, often at the latter stages of life when recovery was impossible.

Where recompense is made it doesn’t necessarily fully compensate for losses. For example the CBA repaid Storm Financial investors around $140 million when estimates of losses by those who borrowed through CBA were far higher than that.

Naomi Halpern, an activist who suffered personal losses in the Timbercorp collapse, says often compensation arrangements are inadequate. ANZ was a significant lender to Timbercorp investors.

“They’re not even giving back all of what has been lost. There is no recompense for the trauma and suffering people go through, you only get a percentage of the loss,” she said.

Ms Halpern is working with the review of banking dispute resolution led by Professor Ian Ramsay. She said while the committee is consulting widely the banks to date have only agreed to a prospective scheme that will compensate for future wrongs.

“They’re not interested in a retrospective scheme,” she said.

To date CBA has been hit with the biggest bills for compensation following the banking scandals. Payments will total $245.8 million when its compensation over financial planning misbehaviour are completed.

The bank reported a record profit of $9.88 billion last week and its theoretical liability over the money laundering issue totals almost $1 trillion.

Any settlement is likely to be far lower than that but with ASIC now pledging to look at the actions of CBA directors over the issue, there looks like being considerable personal and financial angst experienced at the bank before the issue is laid to rest.

Term deposits ‘copping it’

From The New Daily.

Australian banks are borrowing money at record-low rates from their term-deposit customers, despite needing their cash more than ever.

Dozens of institutions have cut the interest rates they pay on locked-away savings, even though the Reserve Bank hasn’t touched the official cash rate since August last year.

The RBA reported in recent days that rates on three-month and six-month term deposits have fallen to record lows.

Martin North, finance expert at Digital Finance Analytics, said savers are “trapped” and “copping it”.

“The banks have quietly been eroding the returns on deposits at the same time as they’ve been lifting the interest rates on their mortgages,” he told The New Daily.

“It frustrates me that everybody is fixated on mortgage rates, but we’ve got this other segment of the population that is intrinsically trapped by these lower interest rates.”

term deposit ratesAverage rates on three-month term deposits peaked at 6.55 per cent in 2008, just after the global financial crisis, and have plunged ever since. In July, the latest figures available, the average rate fell below 2 per cent for the first time since records began in 1982.

Back in 2008, a saver with $10,000 could have earned $163 for locking away their cash for three months. Now, with the average rate at just 1.95 per cent, they’d be lucky to get $48 for their trouble.

Since the RBA cut rates last year, 59 institutions have slashed their three-month term rates (compared to four increases); 47 have cut one-year rates (with only 17 increases); and 24 have cut five-year rates (compared to just six increases), according to comparison website Canstar.

“My suspicion is we’re not going to see term deposit rates go up until we see the Reserve Bank go up,” said Steve Mickenbecker, chief financial spokesperson at Canstar.

“The banks have not felt any need to compete harder.”

More galling for borrowers is the fact, revealed by the RBA, that banks need term depositors more than ever.

RBA assistant governor Christopher Kent told an event in Sydney on Wednesday that banks are increasingly borrowing from everyday Australians the money they use to fuel their profits, rather than from expensive overseas bond markets like New York.

Deposits now account for 60 per cent of bank funding, Mr Kent said, up from lows of 35 per cent before the financial crisis – a shift he described as “quite stark”.

This is because the market and regulators have pressured the banks to rely more on term deposits, as this source of funding is considered more resilient to economic shocks.

Here’s how to make the banks pay more for the money they need.

Term is better than nothing

Finance analyst Martin North said many Australians have their money in online savings accounts, without realising they could be getting a better deal from a term deposit.

“There are many people holding their money at call, rather than in term. They will probably not be aware how much their interest rates have dropped in recent times because a lot of people set and forget,” he said.

In July, online savings accounts were paying a miserable 1.65 per cent on average – compared to 1.95 per cent for three and six-month terms, 2.25pc for a year, and 2.5pc for three years.

“If you can afford to tie your money up for a bit longer, it’s probably worth it because you’ll get better rates.”

Never break a contract

Mr North said it is “almost always” a bad idea to pull money out of a term deposit before it reaches maturity in order to take up a better offer elsewhere, as you will often be charged a hefty penalty.

“If you’ve got money in a term deposit, you’ll be locked into a specific term. It’ll be a contract,” he said.

“So be very careful about breaking contract to chase higher rates, as you’ll be charged an arm and a leg to do that.”

Look beyond the big banks

Term deposits are not just offered by the big four banks. They are available at smaller banks, community banks, credit unions and building societies across Australia, so it could be a good idea to compare widely before choosing an account.

“Don’t just automatically assume that the bank you’re with gives you the best rate, because they may not. There’s no guarantee they are,” Mr North said.

“So shop around.”

Never auto-renew

Steve Mickenbecker at Canstar said one of the biggest mistakes made by term depositors was rolling over at the same institution, without comparison shopping.

“If you go into term deposits, be prepared to be a little bit active. Maybe that means going for your six or 12-month term, but be prepared to shift when you get to the end of that term,” he said.

“Never do an auto renew. Look at the rates on offer every time you approach maturity.”

Be wary of super-long terms

Banks may be keen for long-term customers, but the market expects the RBA to lift rates relatively soon.

Mr North said locking away your money for too long could mean you miss out when rates eventually rise.

“Bear in mind that the likelihood in the medium term is that rates will go higher still, so you probably don’t want to go out too far because effectively you might be sitting on a rate that in two years time looks rather cheap.”

Consider an annuity

An alternative to the term deposits sold by banks are short-term annuities offered by life insurance companies, with terms of one year or more.

Justin McMillan, financial planner at Perth-based Smart Wealth, said annuities have better rates because providers are “aggressively” chasing new customers.

“Annuities are basically like extended term deposits, but the rate, because it’s from a life insurance company rather than from a bank, is normally better,” Mr McMillan said.

“They are a growing product, so it’s really a market share play.”

Anyone is eligible, and two of the biggest providers are Challenger and CommInsure. But remember: unlike term deposits, they are not guaranteed by the government.

Editors note. DFA changed the wording in the fourth paragraph as the original article as written confused borrowers with savers!