Credit Card Rules Tightened – Finally!

Credit card providers will be forced to scrap unfair and predatory practices – after the legislation passed through the parliament on Thursday.  However, the implementation timetable is extended into 2019.  It also included a package of other measures.

The reforms include:

Requiring affordability assessments be based on a consumer’s ability to repay the credit limit within a reasonable period (from July 2018).  This tightens responsible lending obligations for credit card contracts.

Banning unsolicited offers of credit limit increases (from January 2019). At the moment, whilst the law forbids providers from making these sorts of offers in writing, offers can be made by phone and other mediums. This loophole has been exploited, but will now be closed.

Simplifying how credit card interest is calculated, especially, banning the practice of backdating interest rate charges. Currently, some providers were attracting new customers with promotional low rate, or no rate offers, say for the first month. But, if a customer failed to pay off in full a credit card bill after the first month, the credit card company was often retrospectively applying the new interest rate to previous purchases. This was allowed in the banks’ small print, but the government said the practice did “not align with consumers’ understanding and expectation about how interest is to be charged”. This will be banned, from next year.

Requiring credit card providers to have online options to cancel cards or to reduce credit limits (from January 2019). At the moment, some card providers force customers to come into a bank branch to reduce limits or terminate cards, and when they did come in were often persuaded not to do it. The asymmetry between fast credit card approvals online, and slow cancellation will end.

The Treasurer said:

This legislation will protect vulnerable Australians from predatory behaviour which seeks to make a quick buck from people’s misfortune, and compound their financial hardship. This is the first phase of reforms outlined in the Government’s response to the Senate Inquiry into the credit card market, which seeks to put more power in the hands of consumers.

The Bill will also materially boost competition in the banking sector by allowing small lenders to call themselves banks; a significant change that will entice new lenders and challenger banks to enter the market. This will provide greater choice for Australians and put downward pressure on the cost of banking products and loans.

In lifting the ban on the use of the word ‘bank’, any lender with an ADI licence will now be able to market themselves as a bank, whether they have bricks and mortar branches or operate exclusively online. Off the bat, this reform paves the way for more than 60 current Australian lenders and credit unions to call themselves banks.

The Bill – the Treasury Laws Amendment (Banking Measures No. 1) 2017 – also strengthens financial stability by providing the Australian Prudential Regulation Authority (APRA) a new reserve power over the lending activities of non-banks. It modernises APRA’s legislative framework by making clear APRA’s roles and responsibilities under the Banking Act 1959.

This Bill accompanies the Turnbull Government’s Banking Executive Accountability Regime, which brings greater accountability to our banks by introducing tough new rules for banks and their executives, and the Crisis Management Bill, which strengthens APRA’s crisis management powers.

We discussed the implications of the Bail-in clauses recently, especially relating to bank deposits


In A Banking Crisis, Are Bank Deposits Safe?

There were several well publicised Government bail-out’s of banks which got into problems after the GFC. For example, the UK’s Royal Bank of Scotland was nationalised. This costs tax payers dear, so there were measures put in place to try to manage a more orderly transition when a bank gets into difficulty.

In October 2011, the Financial Stability Board (FSB) issued its Key Attributes
of Effective Resolution Regimes for Financial Institutions (Key Attributes). These Key Attributes set out the ‘core elements that the FSB considers to be necessary for an effective resolution regime. There followed legislation in a number of jurisdictions.

For example, the EU introduced  the Bank recovery and resolution – Directive 2014/59/EU, the US The Dodd-Frank  Title II Overview: Orderly Liquidation Authority and in New Zealand the Open Bank Resolution (not to be confused with Open Banking, which we discussed last week). This is a summary from New Zealand.

But note the chilling words “the bank closes temporarily  and some money is frozen. Bank re-opens under statutory manager. Customers can access non-frozen portion of their money, which is now Government protected. Frozen money can be used to help resolve the bank’s issues. Resolution of issues completed. Un-used portion of frozen money is returned to customers”.

Or in other words, customers money, held as savings in the bank are able to be grabbed to assist in the resolution. This is of course what happened to people with bank deposits in Cyprus a few years back.

The thinking behind it is simple. Banks need an exit strategy in case of a problem, and Government bail-outs should not be an option. So a manager can be appointed to manage through the crisis. They can use bank capital, other instruments, like hybrid bonds and deposits to create a bail-in. This approach to rescuing a financial institution on the brink of failure makes its creditors and depositors take a loss on their holdings. This is the opposite of a bail-out, which involves the rescue of a financial institution by external parties, typically governments using taxpayers money.

So, given the New Zealand position (and the tight relationship between banking regulators in Australia and New Zealand), we should look at the position in Australia.  Are deposit funds in Australia likely to be “bailed-in”?

As it happens there has been a long running discussion on this in Australia, and on 16 November 2017, the Senate referred the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill 2017 [Provisions] to the Economics Legislation Committee for inquiry and report by 9 February 2018. They just reported back.

It all centered on the powers which were to be given to APRA to deal with a banking collapse.  “The bill seeks to strengthen the powers of the Australian Prudential Regulation Authority (APRA) to facilitate the orderly resolution of an authorised deposit-taking institution (ADI) or insurer so as to protect the interests of depositors and policyholders, and to protect the stability of the financial system in case of crisis”. The Treasurer had argued that by “affording APRA the power to work with ADIs and insurers in order to plan for economic stress events, the cost to the taxpayer will be significantly
reduced in the event of a financial crisis”.

The Senate review and consultation elicited a significant number of submissions,  and they made two main points in opposition to the bill: firstly, they believed that this bill gives APRA the power to ‘bail-in’ depositors’ savings to stabilise a failing financial institution; secondly, in place of the bill, the Australian Parliament should legislate a Glass-Steagall style separation of the banks.

Specifically, Dr Wilson Sy, a former analyst with APRA, considered that the bill was not clear enough on the topic of depositors’ savings. Dr Sy suggested that deposit protection is to be balanced against financial system stability, without the law clearly stating which has higher priority’. Dr Sy claimed that the bill is ‘designed to confiscate bank deposits to ‘bail-in’ insolvent banks to save the financial system.

It came down to the meaning of “any other instrument” in the draft bill. Treasury said, “the use of the word ‘instrument’ in paragraph (b) is intended to be wide enough to capture any type of security or debt instrument that could be included within the capital framework in the future. It is not the intention that a bank deposit would be an ‘instrument’ for these purposes”. Treasury confirmed that because deposits are not classified as capital instruments, and do not include terms that allow for their conversion or write-off, they cannot be ‘bailed-in’.

The committee concluded:

The committee believes that the protection of depositors’ interests is paramount and does not consider that the bill would allow the ‘bail-in’ of Australians’ savings and deposits. The stability of the financial system depends on its depositors having confidence in its financial institutions. By ensuring the security of depositors’ savings, the overall protection of the financial system can be ensured.

But there are a few questions to consider.

  • Why not expressly exclude deposits from the bill, the current vague wording appears to leave the door open for a deposit grab in case of financial instability? We may have some reassuring words from the regulators, but is it enough?
  • How does this fit with the NZ model, where deposits can be targeted, especially, as the regulators in the two countries are closely aligned, and in fact most banking in New Zealand is provided by Australian Bankers. In case of failure would customers of a bank operating in both countries be different?

And two wider questions.

  • The NZ model expressly says depositors should weight up the risks of placing money with specific lenders but can savers really do this?
  • The issue of hybrid bonds needs more careful consideration, in that in Australia (unlike some other countries) these bonds have been sold to retail investors, people looking to savings with good returns, and who probably do not understand the bail-in risks they may face. So even if deposits are excluded there is a risk that investors in hybrids will get a nasty shock.

Seems to me this is a messy area, and I for one cannot be 100% convinced savings will never be bailed-in. And that’s a worry!

I recall the Productivity Commission comment last week, that financial stability had taken prime place compared with competition (and so customer value) in financial services. The issue of bail-in of deposits appears to be shaping the same way.







Open Banking Report Paves The Way For Competitive, Customer Centric Services

Treasurer Morrison has release the report by King & Wood Mallesons partner Scott Farrell today in to open banking which aims to give consumers greater access to, and control over, their data. It mirrors recent UK developments, and is another nail in the competitive advantage the large players currently have.  Later the scheme could be widened to other industry sectors, such as energy or telecommunications.

This “open banking” regime mean that customers, including small businesses, can opt to instruct their bank to send data to a competitor, so it can be used to price or offer an alternative product or service.

The report recommends that the open banking regime should apply to all banks, though with the major banks to join it first. For non-banks and fintechs, the report wants a “graduated, risk-based accreditation standard”. Superannuation funds and insurers are not included for now.

In fact, all authorised deposit-taking institutions (ADIs) will automatically be accredited to receive data.

There are exclusions. For example, value added data which is created by banks as a result of their analysis will not be included in the regime. Know your customer data though should be sharable. De-identified aggregate data would not be sharable.

Data provided under the regime will initially be “read only”, but the successful adoption of open banking “could also lead to ‘write access’ reforms” in the future. The following products are called out as in scope.

Transfer of data should be made free of charge, the report says.

Safeguards will be important, including under the Privacy Act, and a customer’s consent under Open Banking must be explicit, fully informed and able to be permitted or constrained according to the customer’s instructions. Joint accounts will need some special considerations in terms of authority, and advice.

An appropriate data standard will need to be agreed, and a clear and comprehensive framework for the allocation of liability between participants in Open Banking should be implemented. This framework should make it clear that participants in Open Banking are liable for their own conduct, but not the conduct of other participants. To the extent possible, the liability framework should be consistent with existing legal frameworks to ensure that there is no uncertainty about the rights of customers or liability of data holders.

In terms of implementation, data holders should be required to allow customers to share information with eligible parties via a dedicated application programming interface, not screen scraping.
The starting point for the Standards for the data transfer mechanism should be the UK Open Banking technical specification.

A period of approximately 12 months between the announcement of a final Government decision on Open Banking and the Commencement Date should be allowed for implementation. From theCommencement Date, the four major Australian banks should be obliged tocomply with a direction to share data under Open Banking. The remaining AuthorisedDeposit-taking Institutions should be obliged to share data from 12 months after the
Commencement Date, unless the ACCC determines that a later date is more appropriate.

The ACCC as lead regulator should coordinate the development and implementation of a timely consumer education programme for Open Banking. Participants, industry groups and consumer advocacy groups should lead and participate, as appropriate, in consumer awareness and education activities.

The ABA welcomed the report:

Banks are excited to enter the Open Banking age that will spark new innovations and deliver cutting edge products, with customers the big winner.

The Farrell Report into Open Banking released by the Treasurer today recognises both the opportunities and challenges that data sharing will bring. While the Australian Bankers’ Association has some concerns surrounding the implementation, the report lays out a broadly sensible path to Open Banking. Mr Farrell’s report should be commended for its focus on customers and its commitment to work with stakeholders to design a safe and secure data sharing framework.

Giving customers greater access to their own data will boost choice in banking and further simplify the application process for a financial product.

Australians have one of the most innovative and technologically advanced banking systems in the world. Examples of this is 24-hour banking, payWave and the soon to be launched PayID and New Payments Platform.

As the Productivity Commission affirmed this week, Australian banks are at the forefront of global innovation which has delivered a superior customer experience. Investments in how banks use data are already leading to new innovations that are improving the customer experience and this is set to continue under Open Banking.

A reform as large as Open Banking must be carefully considered and properly implemented.

Research shows that Australians trust their banks with personal information, more than online retailers, social media companies and even governments. It’s important that banks maintain this trust and ensure that the open data reforms don’t place personal information at risk.

Banks will continue to work with stakeholders like consumer groups, FinTech’s, regulators and government to get this right so it is a good model for all industries and customers are protected.

The ABA looks forward to carefully analysing Mr Farrell’s report and working with members and stakeholders to address any challenges to ensure its success. Banks would also like to thank Mr Farrell for his thorough and thoughtful inquiry

Mandatory Comprehensive Credit Reporting Draft Bill Released

The Treasury has released draft legislation to require the big four banks to participate fully in the credit reporting system by 1 July 2018.   They say this measure will give lenders access to a deeper, richer set of data enabling them to better assess a borrower’s true credit position and their ability to pay a loan.

We note that there is no explicit consumer protection in this bill, relating to potential inaccuracies of data going into a credit record. This is, in our view a significant gap, especially as the proposed bulk uploading will require large volumes of data to be transferred.

It does however smaller lenders to access information which up to now they could not, so creating a more level playing field.  Consumers may benefit, but they should also beware of the implications of the proposals.

The Government is seeking views on the exposure draft legislation and accompanying explanatory materials, which implements this measure. Closing date for submissions: 23 February 2018

The Bill amends the Credit Act to mandate a comprehensive credit reporting regime such that from 1 July 2018 large ADIs and their subsidiaries must provide comprehensive credit information on open and active consumer credit accounts to certain credit reporting bodies. It also expands ASIC’s powers so it can monitor compliance with the mandatory regime. The Bill also imposes requirements on the location where a credit reporting body must store data.

Since March 2014, the Privacy Act has allowed credit providers and credit reporting bodies to use and disclose ‘positive credit information’ or ‘comprehensive credit information’ about a consumer.

This includes information about the number of credit accounts a person holds, the maximum amount of credit available to a person and repayment history information.

Prior to March 2014, the information that could be shared was limited to ‘negative information’. This includes details of a person’s overdue payments, defaults, bankruptcy or court judgments against that person.

However, the Privacy Act does not mandate the disclosure of comprehensive credit information by credit providers to credit reporting bodies.

The 2014 Murray Inquiry and the Productivity Commission Inquiry into Data Availability and Use recommended that the Government mandate comprehensive credit reporting in the absence of voluntary participation. Comprehensive credit reporting is expected to enable credit providers to better establish a consumer’s credit worthiness and lead to a more competitive and efficient credit market.

In the 2017-18 Budget, the Government committed to mandating a comprehensive credit reporting regime if credit providers did not meet a threshold of 40 per cent of data reporting by the end of 2017.

On 2 November 2017 the Treasurer announced that he would introduce legislation for a mandatory regime as it was clear the 40 per cent target would not be met.

The Bill amends the Credit Act to establish a mandatory comprehensive credit reporting regime which will apply from 1 July 2018. The amendments do not require or allow disclosure, use or collection of credit information beyond what is already permitted under the Privacy Act and Privacy Code.

Currently, Australia’s credit reporting system is characterised by an information asymmetry. A consumer has more information about his or her credit risk than the credit provider. This can result in mis-pricing and mis-allocation of credit.

The Bill seeks to correct this information asymmetry. It lets credit providers obtain a comprehensive view of a consumer’s financial situation, enabling a provider to better meet its responsible lending obligations and price credit according to a consumer’s credit history.

The Government expects that the mandatory regime will also benefit consumers. Consumers will have better access to consumer credit, with reliable individuals able to seek more competitive rates when purchasing credit. Consumers that are looking to enter the housing market will be better able to demonstrate their credit worthiness. Consumers that possess a poor credit rating will also be able demonstrate their credit worthiness through future consistency and reliability.

The mandatory regime applies to ‘eligible licensees’ which initially will be large ADIs and their subsidiaries that hold an Australian credit licence. An ADI is considered large where its total resident assets are greater than $100 billion. Other credit providers will be subject to the regime if they are prescribed in regulations.

Eligible licensees are required to supply credit information on 50 per cent of their active and open credit accounts by 28 September 2018. The information on the remaining open and active credit accounts, including those that open after 1 July 2018, will need to be supplied by 28 September 2019.

The bulk supply of information must be given to all credit reporting bodies the eligible licensee had a contract with on 2 November 2017. In this way the credit provider has an established relationship with the credit reporting body and will have an agreement in place on the handling of data to ensure it remains confidential and secure.

Following the bulk supply of information, large ADIs and their affected subsidiaries must, on a monthly basis, keep the information supplied accurate and up-to-date, including by supplying information on accounts that have subsequently opened. This information must be supplied to credit reporting bodies the credit provider continues to have a contract with.

Credit providers that are not subject to the mandatory regime will be able to access credit information supplied under the regime by voluntarily supplying comprehensive credit information to a credit reporting body or becoming a signatory to the PRDE.

The security and privacy of a consumer’s credit information will be preserved and protected. The Bill relies on the existing protections established by the Privacy Act and Privacy Code and the oversight of the Australian Information Commissioner. The Bill also places a new obligation on credit reporting bodies on where data is stored. In addition, the Bill places an obligation on credit providers to be satisfied with the security arrangements of the CRBs prior to supplying information.

ASIC will be responsible for monitoring compliance with the mandatory regime. It has new powers to collect information and require audits to confirm the supply requirements are being met. ASIC will also have the ability to expand the content to be supplied under the mandatory regime and prescribe the technical standards for the format of the information.

The Treasurer will also receive statements from large ADIs, their affected subsidiaries and credit reporting bodies to demonstrate that the initial bulk supply requirements, as well as the ongoing supply requirements, have been met.

The mandatory comprehensive credit regime, implemented by this Bill, recognises that industry stakeholders have already taken a number of steps to support sharing comprehensive credit information. This includes the PRDE and supporting ARCA Technical Standards.

The mandatory regime includes the ‘principles of reciprocity’ and the ‘consistency principle’ that have been developed by industry. To the extent possible, the mandatory comprehensive credit reporting regime operates within the established industry framework but also provides scope for future technological developments.

An independent review of the mandatory regime must be completed by 1 January 2022. The review will table its report in Parliament.



Treasury memo misses the real impact of Labor’s negative gearing policy

From The Conversation.

Labor MPs might be rubbing their hands together with glee at a Treasury memo that shows the federal opposition’s negative gearing policy will have a “small” impact on the property market. But insights from behavioural public policy, as highlighted by the 2017 Economics Nobel laureate – Richard Thaler and his colleague Cass Sunstein, tell us that how people respond to this policy will be more about how the government frames it.

The Treasury memo showed the Labor policy of limiting negative gearing to existing homeowners will have a limited impact as the changes are unlikely to encourage investors to sell quickly. Also, owner-occupiers dominate the housing market and the costs of selling are high.

However, this assumes that people are forward-looking, well-informed, good with numbers and perfectly responsive to new information. Behavioural economics shows us that people do not always think so deeply and logically about their choices.

How any changes to negative gearing are sold to us – as a loss or gain, as a one-off or ongoing, in terms of short versus long term costs and benefits – will impact how Australians react.

Most of us aren’t whizzes with mathematics. As Nobel prize winner Herbert Simon has shown, in place of complex mathematical algorithms we use heuristics. These are simple rules of thumb that draw on our intuitions, experience and gut feel.

Heuristics and biases

One common example of a heuristic is the availability heuristic. This is when we make decisions based on easily available information such as recent events and highly emotive experiences. Our brains work better with narratives and stories than with facts and figures.

Nobel economics laureates George Akerlof and Robert Shiller have applied a similar insight to analyse people’s perceptions of housing market fluctuations. They noted that we hear lots of stories about how house prices are on an upward trend. Via the availability heuristic, we easily remember these emotionally engaging stories, much better than we can remember the dry facts about the history of house price instability and housing market crashes.

This leads us to overestimate the chances of continuing house price rises, and to underestimate the chances of a fall, driving unsustainable house price increases – as witnessed, for example, in the American sub-prime property markets before the global financial crisis.

While heuristics can help us to decide quickly, they sometimes lead us into systematic mistakes – “behavioural biases”. This does not mean that we’re all hopelessly irrational. But for negative gearing it matters how a potential change is framed, and how that fits into our heuristics and biases.

Most economists (including those at Treasury) assume that one dollar is a perfect substitute for any other dollar. Whether we save A$100 via a tax break, win A$100 from a scratch card or earn A$100 from working overtime, it makes no difference.

Contrary to this view, behavioural economics has shown that the way we treat money is different depending on the contexts in which we earn and spend it. We have different “mental accounts” for consumption, wealth, regular income and windfalls. We are more likely to splurge money we’ve won from a scratch card than money we’ve earnt doing overtime.

This is another reason why framing is important. How the government frames a negative gearing change will determine the mental account to which we assign it, and therefore how we respond.

If negative gearing changes are considered a one-off hit – the opposite of a scratch card windfall – then property owners won’t worry so much. On the other hand, if the change to negative gearing is seen as an ongoing drain on our incomes, then they will worry a lot.

Another factor that will come into play is loss aversion – people are much more likely to worry about losses than gains. Evidence from behavioural experiments shows that home-owners over-estimate the value of their properties. This makes them reluctant to sell at reduced prices in a falling market.

It also means that Australians will resist negative gearing changes if these are framed as a loss, creating political pressures for a policy u-turn. It is difficult to predict how people might respond, but behavioural economics shows that any ructions might be avoided if the negative gearing change is framed as a gain.

For instance, Treasury predicts that the additional revenue raised from restricting negative gearing could be up to A$3.9 billion. Therefore, the negative gearing changes could cover more than 80% of federal government expenditure on veterans and their families.

In the long and short term

Treasury’s modelling notes there might be downward pressure on house prices in the short term from changing negative gearing, but that this will be small overall.

But a range of models and experiments have shown that people are disproportionately focused on tangible, short-term outcomes. For example, most of us find it hard to persuade ourselves to go the gym: the short-term costs are inconvenience and discomfort and the benefits seem intangible and distant. This is called “present bias”.

Recent work in behavioural economics confirms that framing (alongside a range of other socio-psychological influences) has a strong impact on our choices. Framing will determine how we perceive the policy, which mental account we will use to process it and how the various heuristics and biases identified by economics and psychologists will play out.

In the debates around negative gearing policy changes, these behavioural insights have not been highlighted. So perhaps Treasury could have added some psychology, alongside the economics, in arguing that house price falls are likely to be limited.

Author: Research Professor at the Institute for Choice, University of South Australia

The Fall Out From The Negative Gearing Expose

The FOI release, which the ABC covered yesterday, highlighted “the Coalition’s phoney defence of negative gearing and capital gains tax discounts before the last election”.

A number of economists at the time disputed the claims that winding back those two tax write-offs would “take a sledgehammer” to property prices because “a third of demand” would disappear from the market.

But as the excellent Rob Burgess has highlighted in the New Daily today, there are two consequential questions which need answering:

The two questions that need answering, is why were Mr Turnbull and Mr Morrison making such obviously false claims, and why were those claims not torn apart by the Canberra press gallery?

The answer to the first question is straightforward. They were either responding to an ideological commitment from the right-wing of their own party room that tax is somehow optional for asset-rich Australians, or they were following the advice of party strategists who could not see them re-winning government if wealthier Australians did not hear them loudly condemning Labor’s plans.

Historians will not doubt tell us which of those it was in years to come.

The answer to the second question is more complicated.

Journalists were not brazenly siding with the banks who had profited so much from the negatively-geared property investment mania, and they were not simply playing partisan politics in favour of a Liberal-led government.

Rather, the get-rich-quick culture of the then 16-year-old property boom, and the gradually normalised claim that tax avoidance is somehow a basic human right, has infected Canberra policy makers and fourth-estate critics alike.

That’s why in 2016 it was so refreshing to hear NSW planning minister Rob Stokes lay out the moral case against these tax write-offs.

He said at the time: “We should not be content to live in a society where it’s easy for one person to reduce their taxable contribution to schools, hospitals and other critical government services – through generous federal tax exemptions and the ownership of multiple properties – while a generation of working Australians find it increasingly difficult to buy one property to call home.”

While he told the truth, his federal colleagues were telling lies.

They lied on behalf of the 10 per cent of Australians who profit from the tax write-offs, and against the interests of the other 90 per cent.

Perhaps now that the nation’s best-equipped economic modellers have highlighted the benefits of these reforms – around $6 billion a year returned to the budget bottom line – the news media will finally call these laws out for what they are.

They are grossly unfair. They have helped pump up the Australian housing bubble. And they have redistributed tens of billions of dollars from poorer to wealthier Australians.

As interest rates start to rise around the world, and the interest-payment write-offs of property investors start to bite even harder into the federal budget, these laws need urgent reform.

A news media that vigorously holds the defenders of these laws to account would be a good start.

Proposed Negative Gearing Changes Only Minor Impact

The ABC is reporting that a Treasury  FOI request has shown that Federal Labor’s negative gearing overhaul would likely have a “small” impact on home values, official documents reveal, contradicting Government claims the policy would “smash” Australia’s housing market.

The previously confidential advice to Treasurer Scott Morrison from his own department said the Opposition’s plan might cause “some downward pressure” and could have “a relatively modest downward impact” on prices.



Enhanced Financial Services Product Design Obligations Announced

The Treasury has released draft legislation for review  which focusses on the design and distribution obligations in relation to certain financial products. We think is is potentially a big deal, and will put more compliance pressure on Financial Services providers. It is a response to the FSI recommendations. Consultation is open until 9 February 2018. It includes investment products and well as credit products such as consumer leases, mortgages, and guarantees.

It sets out:

  • the new obligations;
  • the products in relation to which the obligations apply;
  • ASIC’s powers to enforce the obligations; and
  • the consequences of failing to comply with the obligations.

Here is a brief summary of the 57 page document.

The new design and distribution regime generally applies to a financial product if it requires disclosure in the form of a PDS. However, some financial products requiring a PDS are not subject to the new design and distribution regime: MySuper products and margin lending facilities. These products are currently subject to product-specific regulations that negate the need to apply the new regime.

The new design and distribution regime also applies to financial products that require disclosure to investors under Part 6D.2 of the Corporations Act. The section defines ‘securities’ for the purposes of Chapter 6D of the Corporations Act as meaning: a share in a body; a debenture of a body (except a simple corporate bond depository interest issued under a two-part simple corporate bonds prospectus); or a legal or equitable right or interest in such a share or debenture. Again, there are some exceptions.

The obligations require issuers of such products to:

  • determine what the appropriate target market for their product is
  • take reasonable steps to ensure that products are only marketed and distributed to people in the target market, and that appropriate records are kept to demonstrate this
  • and gives ASIC powers to “intervene” if a financial or credit product has resulted in or will, or is likely to, result in significant detriment to retail clients or consumers. There are two main limitations on the types of financial products that can be subject to the intervention power under the Corporations Act. First, the power generally only applies in an ‘issue situation’. Second, the power only applies where a product may be made available to ‘retail clients’.


As part of the Government’s response to the Financial System Inquiry (FSI), Improving Australia’s Financial System 2015, the Government accepted the FSI’s recommendations to introduce:

  • design and distribution obligations for financial products to ensure that products are targeted at the right people (FSI recommendation 21); and
  • a temporary product intervention power for the Australian Securities and Investments Commission when there is a risk of significant consumer detriment (FSI recommendation 22).

This consultation seeks stakeholder views on the exposure draft of the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018 which implements these measures.



Seven charts on the 2017 budget update

From The Conversation.

Here’s how the budget is looking at the mid-year mark, in seven charts.

The A$5.8 billion drop in the 2017-18 underlying cash deficit compared with the original May budget is due more to higher revenue than lower spending. Receipts are higher by A$3.6 billion and payments are lower by A$2.1 billion.

The higher receipts reflect the stronger economy, which implies higher company tax (up A$3.2 billion) and superannuation fund taxes (up A$2.1 billion).

Receipts would have been even higher if not for stubbornly weak wages growth which, despite stronger employment growth, has tended to dampen individuals’ income tax receipts. These are in fact down by A$0.5 billion.

The estimates of GST and other taxes on goods and services remain unchanged since the budget.

The lower payments of A$2.1 billion are driven by several changes having opposite effects. Some of these are:

  • A$1.2 billion (over four years) lower welfare payments to new migrants due to longer waiting times;
  • A$1 billion (over four years) lower payments to family daycare services due to more stringent compliance checking; and
  • A$1.5 billion (over four years) lower disability support payments due to lower than expected recipient numbers.

There is not much change in the net debt projections relative to those in the 2017-18 budget. Net debt is A$11.2 billion lower at A$343.8 billion in 2017-18 (around 19% of GDP). Debt stabilises in 2018-19 and starts to steadily decline thereafter to about 8% of GDP in the next ten years.

The lower deficits as a share of GDP are obviously reducing debt, but one factor tending to increase debt is student higher education loans. These are projected to increase by 32% from A$44.4 billion to A$58.8 billion over just the next four years.

The economic outlook continues to be a puzzle. National output of goods and services, real GDP, is expected to grow slightly slower in 2017-18 than the budget forecast – 2.5% compared with 2.75%.

However this is an improvement on the 2% achieved in 2016-17. And it is expected to increase further to 3% in 2018-19.

The economy is being driven by strong global growth and strong domestic business investment. Australia’s major trading partners are forecast to grow (meaning real GDP growth) at a weighted average of 4.25% in each of the next three years.

Wages and household consumption are the puzzle – they are not growing as fast as expected from the stronger than expected employment growth (up 0.25% on the budget to 1.75%) and lower than expected unemployment rate (down 0.25% on the budget to 5.5%).

Household consumption growth is down 0.5% on the 2017-18 Budget forecast to 2.25%. This has in fact become a global phenomenon due to higher costs and job insecurity from the forces of globalisation and automation.

Commodity prices are notoriously volatile and hard to predict, yet they are critical to the budget forecasts because they impact the revenue of resource companies which feeds into company taxes and other taxes.

Iron ore prices are assumed to remain flat at US$55 per tonne over the forecast period, as in the budget. This forecast is almost certain to be wrong because iron ore prices never stay flat for long – the problem is that we can’t say in which direction it will be wrong.

The same applies to thermal coal prices which are assumed to be flat at US$85 per tonne which is again consistent with the budget forecast.

Australian taxpayers continue to bear most of the burden of budget repair. The government can claim with some justification that their efforts to reduce payments further have been thwarted by the Senate.

Excluding the effect of Senate decisions, new spending has been more than offset by reductions in other spending. The gap between the revenue and payment is reducing at the rate of about 0.6 percent per year.

As a share of GDP payments are expected to be 25.2% in 2017-18, falling to 24.9% of GDP by 2020-21 which is slightly above the 30-year historical average of 24.8% of GDP.

Wage growth has been revised down from an already low 2.5% in the budget to 2.25% in MYEFO. With the Consumer Price Index forecast to grow at 2%, wages are barely keeping pace with inflation – growing in real purchasing power by only 0.25%.

This provides a meagre compensation for labour productivity growth which is implied to be about 1% in MYEFO. Wage growth is expected to pick up by 0.5% next year to 2.75%.

This is important because it underpins government revenue growth, yet it’s brave to expect the deep forces that are keeping wages down in Australia and around the world to turn around and exactly match the 0.5% growth in real GDP expected to occur next year.

New measures since the budget have increased the deficit on both the revenue and expenditure sides of the budget. On the revenue side, for example, higher education changes reduced revenue by A$76 million and the GST by A$70 million.

On the expenses side, needs-based funding for schools has cost an additional A$118 million and improving access to the Pharmaceutical Benefits Scheme costs A$330 million. The roll-out of the NDIS in Western Australia adds another cost at A$109 million, and Disability Care Australia at A$362 million.

Author: Ross Guest , Professor of Economics and National Senior Teaching Fellow, Griffith University

MYEFO – There’s a Consumer-Shaped Hole in Our Budget

On first blush, the revised federal budget has improved according to the MYEFO (Mid-Year Economic and Fiscal Outlook) released by the Treasurer  today.  But consumers are the weak link, and wage growth and consumption a problem – no wonder there is now talk of tax cuts for consumers! In addition, more savings are forecast, including an extension of the waiting period for newly arrived migrants to access welfare benefits and a freeze on higher education funding.

The budget is, they say, on track to return to balance in 2020-21, and overall debt as share of GDP is set to fall further. The latest projected surplus of $10.2 billion in 2020-21 is an improvement of $2.7 billion compared to May’s Budget estimate.

At the 2017-18 Budget, gross debt was projected to be $725 billion in 2027-28. Gross debt is now projected to reach around $684 billion by 2027-28 — a fall of around $40 billion. But absolute debt is still rising!

The improvement is driven by a rise in company profits, and company tax take. Commodity prices helped also, although they remain a key uncertainty to the outlook for the terms of trade and nominal GDP, especially in relation to the Chinese economy.

They say the fall off in mining investment is easing, while non-mining business investment is predicted to rise (a little), but we think overall business investment remains an issue.

Real GDP is forecast to grow by 2.5% in 2017-18, lower than at budget time (2.75%). Beyond that, real GDP is forecast to grow at 3% in 2018 19, per the original budget.

The 2017-18 forecast is lower driven by anemic outcomes for wage growth and domestic prices.  More than 360,000 jobs at a rate of 1,000 jobs a day having been created in 2017.  Yet, wages are now forecast to remain lower for longer, with index growth of 2.25% in June 2018, 0.25% lower than at budget time, and 2.75% to June 2019. They admit wages growth is lower than expected, but they still hope lifting economic momentum will lift wages, eventually – despite the very high levels of underemployment, and structural changes in working patterns. This lower forecast for wages is expected to weigh on personal income tax receipts and slow household consumption.

Finally, the assumed Treasury yields are set quite low, for modeling purposes.  Rising rates in the USA and elsewhere may lift rates faster.