October 2015 – Page 3 – Digital Finance Analytics (DFA) Blog

Digital Disruption and the Sharing Economy

The sharing economy has the potential to disrupt current business models, whether its taxis, banking, accommodation or a range of other areas. It also has the potential to be stopped dead in its tracks, if incumbents, or regulation get to dictate too much too soon. This note offers a few observations about the potential of sharing and highlights some of the open but important issues. It is especially relevant given Labor’s announcement on the sharing economy this past week.

First, a few basic points. In December 2014 the Institute of Public Affairs published an excellent report – “The Sharing Economy – How over-regulation could destroy an economic revolution“. It provides an excellent summary of the key issues which need to be considered.

The sharing economy describes a rise of new business models (‘platforms’) that uproot traditional markets, break down industry categories, and maximise the use of scarce resources. The best known services are the ridesharing system Uber and the accommodation service Airbnb. However, the sharing economy extends much further into finance, home tools, investment, and everyday tasks. The ‘sharing economy’ emerged from dramatically falling transaction costs that had prevented certain markets from developing. The sharing economy coordinates exchanges between individuals in much the same way as a traditional market, but does so in a flexible, self-governing, and potentially revolutionary way. These burgeoning benefits are profound: more sustainable use of idle and underutilised resources; flexible employment options for contractors; bottom-up self-regulating mechanisms; lower overheads leading to lower prices for consumers; and more closely tailored and customised products for users.

These sharing economy platforms are only in their embryonic stage of development. The benefits to the Australian economy as the market becomes more efficient are likely to expand. This expansion will only occur if Australia’s entrepreneurs are left to experiment and innovate. The real threat to the sharing economy is government regulation driven by the incumbent industries that are challenged. The danger of excessive legislation and regulation will absorb the gains yielded by technology improvements, preventing mutually beneficial trade and stifling economic growth. This paper recommends new approaches to regulatory design that would encourage the growth of the sharing economy:

regulators should encourage bottom-up, organic, self-regulating institutions prior to introducing top-down government control;

occupational licensing needs to be reduced to allow private certification schemes and reputation mechanisms to evolve;

industry specific regulatory frameworks need to be avoided;

regulations making it harder for start-ups to compete for labour need to be reduced; and

the status of individual contractors needs to remain separate from highly restrictive employment law.

Whilst it is hard to keep track of all the new businesses springing up, there is a useful web resource which lists at least sixty locally. From this list we immediately see the breadth of industries which may be impacted. Everyone knows about Uber, the lift sharing service, Airbnb, for accommodation, Open Shed for neighbourhood services and tools, Zopa for finance, Kickstarter for funding for new ideas, and Airtasker for services. It is important to understand how wide-ranging the potential impact may be. Bloomberg Finance recently suggested that finance was potentially the area of largest potential disruption, followed by accommodation and transport.

These businesses only exist because mobile devices, and the internet make real-time collaboration and data sharing possible. The core proposition is peer-to-peer, where a platform facilitates someone with an asset to share that with someone looking for just that thing. As a result, underutilised assets can be better used, and the platform providing both matching, and payments. Users can also rate the product or service, so providers can be scored, to assist future prospective purchasers.

Technology reduces the transaction costs, makes pricing potentially more dynamic, and creates win-wins for seller and purchaser, and it fosters market based transactions. But will the market be sufficient to ensure services are of expected quality and ensure potential consumers are not ripped off? Do some of these models create unacceptable disruptions to existing businesses. If consumers get better outcomes when they use these services will they flourish at the expense of existing operators?

The core question is how and if they should be regulated. Should the sharing economy be allowed to self-regulate? If traditional “top down” forms of regulation are imposed will they simply kill off the business?

Andrew Leigh, Shadow Assistant Treasurer and Member for Fraser has highlighted the regulatory conundrum which needs to be addressed in “Sharing the benefits of the sharing economy“.

Initially, many governments have simply attempted to shut these services down. But forward-thinking regulators are increasingly realising that the sharing economy can deliver big benefits for consumers, while also creating new economic opportunities for the people who provide services through it. So how do we strike a balance between protecting public safety and supporting innovation? How can we ensure providers pay their taxes but don’t end up wrapped in red tape? And how do we open industries up to new competition without inadvertently dismantling important worker and consumer protections? We are just at the beginning of this conversation in Australia, as services like Uber and AirBNB have only been operating here for a short time. Internationally, however, local and state governments have now been grappling with these issues for several years. Exploring how they have responded to the rise of the sharing economy provides a useful starting point in thinking about the kind of regulatory structures we might build here at home.

Uber – restriction or rapprochement?

Ride-sharing app Uber has been perhaps the most controversial of all the new sharing economy services. No small part of the kerfuffle can be sheeted home to the company’s somewhat aggressive business strategies and PR missteps. But it also stems from its success in opening previously locked-up taxi markets to real competition. The regulatory issues surrounding Uber are varied and complex. They include the need to ensure public safety both for those in the car and on surrounding public streets, and the lack of transparency about the company’s pricing model and relationship with its drivers. Then there’s the question of insurance for mixed private and commercial use of a car, and the challenge of ensuring that drivers pay tax on what they earn.

In 2014, Spain sidestepped all of these tough policy challenges by issuing a total injunction against Uber operating in that country. Unlike other attempts at banning the service however, the Spanish authorities went so far as to place associated restrictions on banks and internet firms supporting the Uber app. This detail may well be what lets the Spanish government succeed where others have failed in blocking Uber. That’s because the company might be happy to pay its drivers’ fines from local government authorities, but it simply can’t operate without the payment and communications infrastructure provided by those third parties. At the other end of the spectrum, several US states have now legalised Uber after working with them to come up with tailored regulations. In California for example, local legislators created new rules for ‘Transport Network Companies’, a category which covers Uber, Lyft, Sidecar and any other app offering pre-booked transport in return for a fare. Amongst other things, the rules require these companies to get an operating licence from the California Public Utilities Commission, carry out criminal background checks on their drivers, hold commercial liability insurance worth a minimum of US$1 million, and conduct a 19-point car inspection on every vehicle in their network. Other places, including Pennsylvania and Detroit, have classified these companies as ‘experimental’ service providers, in recognition of the fact that both their long-term impact and viability is unknown. These jurisdictions have given the companies temporary, two-year approval to operate while they decide on a more permanent response. The United States examples may not be exactly right for Australia, but they show that it is possible to regulate sharing economy services without squeezing the life out of them. As for the Spanish approach, it remains to be seen whether an injunction is enough to protect an existing monopoly indefinitely.

AirBNB – no place at home?

AirBNB’s accommodation service has attracted much less political heat than Uber, perhaps in part because it is not competing so directly with established players. The app lets people rent out a room or two – or their whole property – for short stays, with prices that are often well below hotel rates. Because of this, it has tended to attract intrepid adventurers and people on tight travel budgets, rather than the high-end business travellers who are the hotel industry’s bread and butter. As with Uber, AirBNB raises a host of questions about safety, insurance and tax, as well as public amenity for people who live in surrounding homes or apartments. The service has recently been the focus of major protests in New York, but other cities have reached an accord by acknowledging people’s right to do what they please with their own properties.

For example, Portland now allows its residents to rent out properties through AirBNB as long as they get a licence from the city and have a basic pest and safety inspection done. AirBNB has agreed to collect tax on behalf of the homeowners and pay this directly to the City of Portland. As an incentive for people to do the right thing, the city then channels this into a dedicated rental housing affordability fund. Questions have been raised about the transparency of this approach because AirBNB currently lodges a single tax return, rather than letting authorities know which renters earned what. But it’s a big step up from the unregulated way the company still operates in many other cities around the world. Amsterdam and Paris have similarly legalised AirBNB, but both cities only allow people to rent out their primary residences. This means landlords cannot switch their long-term rental properties to short-stay accommodation, as is often the concern of affordable-housing advocates. It also ensures that people living in apartment buildings don’t have to deal with a constant stream of strangers coming and going year-round. The Dutch have gone so far as the mandate that Amsterdammers may only rent out their homes for up to two months a year, with up to four guests allowed at a time. The Parisians, on the other hand, seem satisfied that the primary residence requirement acts as enough of a natural limit.

Rules like these seem to preserve what’s good about a new service such as AirBNB while limiting some of its negative externalities. That’s a balance Australian lawmakers should also be working towards as we move to clarify our local rules for the sharing economy. It’s unlikely that any government around the world will get sharing economy regulation right on the first go. These services are unprecedented in recent policymaking terms, and how they’ll develop in the long term is largely unknown. But if the benefits are real and the risks are manageable, then there’s a good argument for legalising these services now so that they have a real chance to grow.

If we can get the rules right, this new part of the economy may well bring benefits that everyone can share in.

So back to Labor’s sharing economy principles:

1. Primary property is yours to share The sharing economy has come about through people making better use of their spare rooms, the empty seats in their cars and their unused tools. So when Australians use this primary personal property to deliver services, rules and regulations specific to the sharing economy should be applied. These should involve light-touch regulation which protects consumers without creating undue regulatory burden. But when additional property is being used to deliver services, this does not fall within the scope of the sharing economy. Standard commercial regulations and requirements should apply when an apartment is being rented year-round or someone has a fleet of cars on the road. When applying sharing economy-specific rules and regulation, compliance responsibility should rest with sharing economy platform operators wherever possible. This recognises that these platforms are better-equipped to understand and meet regulatory requirements than the individual Australians providing services through them.

2. New services must support good wages and working conditions Sharing economy services must not undercut the wages and conditions of Australian workers. Companies that facilitate labour hire should ensure their pricing and contracting arrangements allow Australians to achieve work outcomes at least equivalent to the prevailing industry standard. Australians delivering services through sharing economy apps are generally not employees. But it must be recognised that they are not entirely independent contractors either. This is because they do not have the bargaining power to meaningfully negotiate prices or conditions on individual jobs. The Federal Government should look at ways the Fair Work Act, Independent Contractors Act and Competition and Consumer Act could allow collective bargaining by sharing economy workers over issues like pricing, service charges and network access. Commonwealth and State governments should also investigate options for bringing sharing economy workers into insurance and workers’ compensation schemes – as is currently the case for certain independent contractors in states such as New South Wales – and explore reforms to support compulsory superannuation saving through the tax system.

3. Everyone must pay their fair share of tax Everyone doing business in the sharing economy must pay a fair share of tax. Sharing economy companies must pay company tax at the standard corporate rate on all revenue generated in Australia. Australians delivering services in the sharing economy must pay income tax at the standard marginal tax rate relevant to their annual income. They are also required to collect GST when their annual activity exceeds the current GST-exemption threshold. Since all its transactions take place online, the sharing economy has the potential to improve tax collection and simplify taxpaying. To facilitate the payment of tax, sharing economy companies should collect Tax File Numbers or Australian Business Numbers from the Australians operating on their networks and report annual earnings data to the ATO for pre-filling in tax returns.

4. Proper protection for public safety Sharing economy companies and those delivering services through them must have appropriate insurance policies to cover customer and third party risk. Sharing economy companies should work with the insurance sector to develop products which accommodate mixed personal and sharing economy use of property such as cars and homes. These companies should also act as an ‘insurer of last resort’, where doing so does not create unreasonable barriers to entry for new competitors. Compliance responsibility for meeting insurance requirements should rest with the sharing economy companies. They should cite and hold on file relevant insurance documentation for the Australians delivering services through their platforms. Sharing economy services should be subject to the provisions of Australian Consumer Law. This means that Australians are entitled to all standard protections relating to consumer rights, honest conduct and product safety when using these services. State and local governments should develop licensing and inspection codes specific to sharing economy services. For example, in some international jurisdictions governments have opted to take a light-touch approach based on minimum standards and streamlined vetting. These codes should recognise the lower level of risk posed by these services relative to commercial operations, rather than seeking to directly replicate existing regulatory structures. In determining whether sharing economy-specific or standard commercial regulations should apply to a particular activity, the personal property rule should be applied.

5. Access for all Sharing economy services should be required to meet agreed accessibility standards. Not every service will be fully accessible for people with disabilities, but sharing economy companies should negotiate appropriate service levels through binding accessibility agreements with disability advocates. The Australian Human Rights Commission should have jurisdiction under the Disability Discrimination Act to intervene where agreement cannot be reached or negotiated standards are not observed. Sharing economy services should be encouraged to offer platforms that cater specifically to people with disabilities. For example, Uber Assist offers disability-accessible cars and vans.

6. Playing by the rules In a context where tailored, light-touch rules exist for the sharing economy, there should be zero tolerance for companies that continue to flout Australian laws. Sharing economy companies should be subject to heavy penalties if they are found be operating in contravention of laws applying this flexible and responsive framework. Where platform operators repeatedly violate Australian laws, governments should take action to disable their operations.

To me, these seem on one level quite sensible, although it puts the acid on the platform providers to track, trace and report transactions. Such an obligation should be tailored to the size of the business, because if the full obligations are placed on nascent businesses too soon it will kill them, and it will potentially create a concentration of a small number of large scale players, whereas we should be encouraging a thousand flowers to bloom.

I suggest we should bias the regulatory framework to encourage new businesses to develop. Tender plants need carefully husbandry. Legislators must take the time to get the rules right, but with a bias towards facilitating disruption, not stopping it. In Australia, our track record on this is frankly poor, and incumbents often have such strong influence (at a market, and political level) that as a result new sharing economy businesses are likely to get crushed.

UK Bank Ring-Fence Unlikely to Cause Material Rating Gaps

The Prudential Regulation Authority’s (PRA) ring-fencing policy proposals limit, but do not prevent, ring-fenced banks (RFB) to lend to non-ring-fenced sister banks (NRFB) and impose no added restrictions on dividend payments. This will allow some fungibility of funding and capital within group companies. Standalone Viability Ratings (VR) assigned to RFBs and NRFBs will therefore remain interdependent, reducing rating gaps between them, says Fitch Ratings.

The PRA has sought to eliminate the use of intra-group concessions across the ring-fence and now expects banks to apply third-party credit discipline to such exposures. This will improve analytical transparency which we view positively.

We envisage that UK banks subject to ring-fencing will adopt one of two models depending on the relative size of their non-ring-fenced activities, prior to the January 2019 deadline. Banks have to submit their plans by January 2016, according to the PRA’s consultation paper published on 15 October.

VRs assigned to RFBs are likely to be constrained by limited geographical and product diversification and, provided these remain largely focused on UK retail and SME lending, we do not expect to see much ratings differentiation between them. We already indicated in our September 2014 comment, accessed by clicking on the link below, that VRs for RFBs narrowly focused on domestic retail and SME business are likely to be capped in the ‘a’ range.

The UK ring-fencing rules apply to banks with more than GBP25bn of core deposits from SMEs and individuals. Most banks affected by ring-fencing have very limited (if any) wholesale and investment banking activities and therefore these groups will adopt models dominated by RFBs. This will be the case for Lloyds and RBS.

In these instances, the ability of the larger RFB to lend up to 25% of its regulatory capital to the smaller NRFB should be a significant positive ratings factor for the NRFB’s VR. This is because the NRFB will be able to benefit from ordinary support flowing from the larger RFB.

For groups whose non-retail, corporate and investment banking business is significant, as is the case for Barclays and HSBC, the importance of the NRFB within the restructured group is likely to be significant, or even dominant. The RFB’s ability to fund its NRFB sister will likely be less material simply because of the banks’ relative sizes. Under this model, we believe that management will seek to structure RFB and NRFB subsidiaries to ensure these remain robust on a standalone basis, maintaining strong and balanced funding and liquidity and meeting adequate capitalisation levels.

A clearer picture about the likely ratings outcome for RFBs and NRFBs will emerge once further details of group restructuring are available. Much will depend on exactly what activities are kept in or out of the fence. Resolution strategies (‘single point of entry’ or ‘multiple point of entry’), depending in particular on the volumes, form and source of ‘loss absorbing’ debt, will also be relevant for ratings and will add a separate layer of uncertainty to ratings within a UK banking group until more clarity emerges.

But, as far as regulations are concerned, our opinion is that the PRA proposals will not create a particularly ‘high’ fence, reducing intra-group rating differentials. By preserving the ability to share capital and funding across RFBs and NRFBs, the PRA is demonstrating that it is keen for RFBs to continue to enjoy the benefits of remaining part of broader banking groups.

Government’s FSI Support Will Strengthen Aussie Banks

The Australian government’s acceptance of almost all of the recommendations of the Financial System Inquiry (FSI) will lead to a strengthening of the banking system with improved resiliency to shocks, says Fitch Ratings. The decision to back the recommendations reinforces Fitch’s view that bank capital requirements will rise in line with regulatory changes over the medium term.

The Australian government released its response to the FSI on 20 October, agreeing with all of the inquiry’s recommendations pertaining to banking system resilience and regulation. The government stated that the Australian Prudential Regulation Authority (APRA) would implement key recommendations related to banking system stability.

This reinforces earlier policy announcements and bank capital issuance trends since the original announcement of the FSI recommendations in December 2014. Since then, APRA announced an increase in minimum mortgage risk-weights for internal ratings-based (IRB) banks in July, while each of the “Big 4” Australian banks have undertaken multi-billion dollar capital raises totaling an aggregate AUD17bn this year.

The government has also committed to APRA ensuring banks have an “appropriate” total loss-absorbing capacity (TLAC) in place at some point beyond 2016. A TLAC framework has been proposed by the Financial Stability Board for global systemically important banks, but this does not apply directly to Australia. Australia’s commitment to implementing a TLAC requirement would be credit positive for bank Viability Ratings, and is likely to reinforce the trends towards higher capital levels.

Implementation of the FSI recommendations will include reducing implicit government guarantees and implementing a bank resolution regime in line with evolving international practice. Fitch maintains that developing a stronger resolution framework would be likely to result in the removal of the sovereign Support Rating Floor for the banking system. Support Ratings for the largest Australian banks are at ‘1’, indicating a high level of government support. But, as a resolution regime is implemented, Fitch would expect Support Ratings and Support Rating Floors to migrate to ‘5’ and ‘No Floor’, respectively.

It is important to note that this should not have an effect on Australian banks’ Issuer Default Ratings (IDRs), as none of the banks’ ratings are at their Support Rating Floors.

America’s rental affordability crisis is about to go from bad to worse

From The Conversation.

We just learned America’s rental affordability crisis is as bad as it’s ever been. Unfortunately, it’s about to get a whole lot worse.

The American Community Survey for 2014, released a few weeks ago, found that the number of renters paying 30% or more of their income on housing – the standard benchmark for what’s considered affordable – reached a new record high of 20.7 million households, up nearly a half-million from the year before. Despite the improving economy, the increase was nearly five times bigger than last year’s gain.

That means about half of all renters live in housing considered unaffordable. And the latest increase comes on top of substantial growth since 2000 that has seen this number climb by roughly six million households over the period, an increase of about 41%.

Worse still are the more than 11 million households with severe cost burdens, paying more than half their income for housing, up from seven million at the start of the century.

Having so many families and individuals struggling to pay their monthly rent is a clear cause for concern. Renters in this situation are forced to make difficult trade-offs to make ends meet, including opting for housing in distressed neighborhoods or in poor condition. In fact, in an analysis of consumer expenditure data we undertook at the Harvard Joint Center for Housing Studies, we found that renters in this situation largely accommodate their high housing costs by spending substantially less on such basic needs as food and health care.

This growing problem needs to be addressed because having a stable, decent home has been found to produce a wide variety of benefits, from better health outcomes to improved school performance among children. There is also growing evidence that providing permanent affordable housing for homeless individuals and families is much more cost effective than paying for temporary housing.

With the housing crash receding from the headlines and prices on the rise again, it is all too easy to believe that as the economy heals, the housing affordability crisis will naturally ebb without the need for greater efforts by our public leaders.

Unfortunately, this is wishful thinking.

Prospects for improvement

The rising tide of cost-burdened renters has its roots both in the real (inflation-adjusted) growth in the cost of rental housing and in falling renter incomes.

Since 2001, the median monthly rental price in the US has climbed significantly faster than inflation, while the typical renter’s pretax income has fallen by 11%. These trends were evident even before the recession and housing bust, but have certainly been exacerbated by the economic travails since.

Now that the economy is nearing full employment and holding out the prospect of a rebound in incomes and construction of new apartments is reaching levels not seen since the 1980s, there would seem to be some hope that the extent of rental cost burdens would start to abate. But at the same time, there are also demographic forces at work that are likely to make matters worse.

The two fastest-growing segments of the population in coming years will be those over age 65 and Hispanics, both of which are more likely to experience cost burdens.

In collaboration with researchers at the affordable housing nonprofit Enterprise Community Partners, the Joint Center for Housing Studies set out to simulate future trends for cost-burdened renters based on our household projections for the next decade under different scenarios in which rents continue to outpace incomes, or, alternatively, where we see a turnaround in current conditions and incomes grow faster than rents.

As we document in our recent report, we found that demographic forces alone will push up the number of renters with severe rent burdens by 11% to more than 13 million by 2025, with a large share of the growth among the elderly and Latinos. That’s assuming incomes and rents both grow in line with overall inflation.

If we do get lucky enough to see gains in income outpace the rise in rents by 1% annually over the next decade, we would see a modest decline of some 200,000 renters with severe burdens. That’s some improvement but not nearly enough to appreciably change the current challenge. And this modest net improvement would mask a still-significant growth in rent burdens among Hispanics of 12%.

But alternatively, if rents continue to grow faster than incomes at a pace similar to what we see today, we could see the number of renters spending more than half their income on housing reach 14.8 million, an increase of 25% over today’s record levels. That would mean 31% of US renters – and most likely at least a few of your family and friends – would be desperately struggling to get by.

What can we do about it?

So what do we need to do to address this situation?

Since falling incomes are a key part of the problem, efforts to raise take-home pay will have to be part of the solution. Increases in the minimum wages will help to some extent. Improvements in education and job training that prepare people for decent paying jobs are also needed.

On the housing front, there is also a strong case for an expansion of assistance for the nation’s lowest-income households. About 28% of renters earn less than US$20,000 a year. At that income, monthly housing costs have to be $500 or less to be affordable.

The private market simply can’t supply housing at such low rents. Public assistance is needed to close the gap. However, at present only about one out of four households who would qualify for this federal housing assistance based on their income is able to secure one of these units. Unlike other programs in the social safety net, housing assistance is not an entitlement. And we simply don’t come anywhere close to fully funding housing assistance to help all those eligible.

The vast majority of those who are left out face so-called worst-case housing needs, paying more than half their income for housing or living in severely inadequate housing.

Solving the housing problem

There are two main ways in which we have extended housing assistance in recent decades: 1) by providing housing choice vouchers that subsidize monthly costs for homes the tenant finds in the private market or 2) by subsidizing the cost of new housing or the rehabilitation of existing housing with support of the Low Income Housing Tax Credit.

Both programs have their place. In markets where modestly priced housing in a range of neighborhoods is not in short supply, vouchers make sense as a means of taking advantage of housing that already exists. Vouchers also have the potential for giving greater choice about where residents want to live in a metro area.

The housing credit program also plays an important role in helping to preserve existing subsidized housing that needs new investment, in helping to turn around neighborhoods where new housing can have a positive impact and in adding affordable housing in neighborhoods where it would not otherwise be provided.

Still, both programs could benefit from reforms to ensure that funds are used efficiently and that the housing opportunities provided are not concentrated in distressed neighborhoods.

For example, the Department of Housing and Urban Development recently started a pilot program that factors the variability of market rental prices across neighborhoods into the maximum rent its vouchers cover. Currently, the limit it is set at is the same for an entire metropolitan area. The new approach would allow that limit to vary across neighborhoods, giving beneficiaries more choice in where to live and also keep HUD from overpaying in distressed areas.

There are also proposals for reforming the housing tax credit program to allow it to serve a broader range of income levels and make it easier for people to get aid in high-cost markets like New York, San Francisco and Boston, where rental burdens are increasingly a problem among moderate-income households and not just the poor.

The grass roots

Beyond these federal efforts, state and local governments also have an important role to play in fostering a greater supply of affordable housing.

In addition to providing public funds for this purpose, these levels of government set land use regulations and policies that have the potential to spur affordable housing production. But all too often, they deter affordable housing production through complex and costly approval processes as well as limits on the types of housing that can be built.

With both demographic and economic trends likely to keep the number of cost-burdened renters at record levels for years to come, the issue is not going to go away. But we still lack the political urgency to take the steps needed to do something about the problem; housing affordability hasn’t even come up in any of the presidential debates.

It may be because it has historically been borne by the nation’s most disadvantaged families and individuals. But with the number of cost-burdened renters reaching highs each year, the challenge of paying the rent each month is becoming a significant concern for a broader swath of the country with each passing year.

It’s time our political leaders take notice and take action.

Author: Chris Herbert, Managing Director of the Joint Center for Housing Studies, Harvard University, Andrew Jakabovics, senior director for policy development and research at affordable-housing nonprofit Enterprise Community Partners.

How Sheffield City Council is supporting payday loan alternatives

From MoneySavingExpert. Sheffield City Council has recently supported the setup of Sheffield Money, a not-for-profit organisation tackling unfair access to finance. Sally Preece, a support and advice worker for Sheffield Money, explains what’s happening and why.

An emerging trend in the UK today is that an increasing number of people need help with their finances, particularly when faced with unexpected financial challenges.

People are increasingly ignored by mainstream lenders when they need help the most, and as a result are turning to high cost alternatives.

Last year, the debt charity StepChange was contacted by nearly 600,000 people with problem debt. Debt owed on catalogues and home credit is rising, with the second highest level of demand for debt advice coming from Yorkshire.

Sheffield City Council has also identified a need for affordable finance in the city – it found that the following is happening in Sheffield each year:

Around 34,000 people take, on average, two payday loans of £250 for 30 days.
Around 20,000 people borrow, on average, £650 on their doorsteps.
Around 3,000 people borrow, on average, £600 for two years through a weekly payment store.

An innovative alternative to high cost credit

To combat this growing issue, in August this year Sheffield City Council supported the setup of Sheffield Money, a not-for-profit organisation which specifically tackles unfair access to finance.

Sheffield Money offers residents of the city access to competitive loans, Financial Services Compensation Scheme-protected savings accounts, current accounts, lower cost white goods and appliances, as well as money and debt advice.

The organisation doesn’t sell products directly, but instead operates as a broker for existing suppliers with shared objectives such as credit unions, community development finance institutions, and Citizens Advice. These have a similar fair, ethical and flexible approach to finance as well as crucially offering the best rates and incentives for residents of the Sheffield City Region.

There is also a free, specialist money adviser in branch once a week to help people with all things finance, such as budgeting, savings, benefit eligibility, and improving credit scores to ease access to credit in future.

By offering alternatives, Sheffield Money hopes to improve and reduce debt crisis cycles, as well as help customers to start regularly saving in order to create a financial buffer for the future. It also won’t ever recommend a loan to someone who can’t afford it.

Since August, the service has received a great deal of positive attention from local organisations hailing this much-needed alternative to high cost lenders. It has had over 4,000 hits on its website, and almost 600 applications for loans.

…And ANZ Makes A Rate Hike Quorum

The last of the big four, ANZ has confirmed it will lift variable rates on owner occupied and investment home loans, effective 20 November.

The standard variable rate for owner-occupier home loans will increase by 0.18% to 5.56% whilst the standard variable rate for residential investment property loans will also increase by 0.18% to 5.83%.

Its the same story, ANZ also refers to rising regulatory capital requirements causing the rise.

“This decision reflects the significant additional cost of capital banks are now required to hold against home lending,” ANZ CEO Australia Mark Whelan said.

ANZ says the 18 basis point increase will add $36 per month to the average home loan of $242,000 and currently 42% of ANZ home loan customers are already at least one month ahead on their repayments.

Now, the fun begins – will the regionals tag along?

NAB Joins The Mortgage Rate Uplift Parade

Following WBC and CBA, NAB has announced a rate hike today. Effective 12 November, rates on mortgages will rise 17 basis points, so NAB’s standard variable rate will be 5.60%.

Today’s announcement responds to market conditions, as well as regulatory changes that require NAB to increase the amount of capital applied to residential mortgages.

NAB Group Executive for Personal Banking Gavin Slater said the NAB had carefully considered the decision to raise interest rates.

“There are a range of factors that come into consideration in interest rate decisions. The home loan market is dynamic, with multiple changes being seen across the industry,” Mr Slater said.

“Regulatory changes on capital requirements also increase the costs associated with providing home loans. In May this year, NAB took early steps to strengthen our capital position by raising $5.5 billion to begin to address expected changes in capital requirements.

“Today’s decision has not been easy, but we believe this is right decision for the long term. We know we have to balance the interests of our customers with the needs of our more than 550,000 shareholders.

“Interest rates are at historically low levels and NAB remains committed to providing a competitive proposition for our customers.

“We appreciate that price is important, but we also know that customers want us to provide the right help and advice, the right products, and deliver innovative digital capability.”

Same rationale, capital requirements. Fixed rate home loans and business rates remain unchanged.

Who’s next?

ACCC Chairman discusses competition law and economics

Australian Competition and Consumer Commission Chairman Rod Sims today delivered the opening address at the 13th Annual Competition Law and Economics Workshop in Adelaide.

This year the ACCC and the University of South Australia are co-hosting the two-day event for the first time. The workshop will bring together local and international experts to discuss the practical application of competition law and economics.

Introducing the workshop theme, Mr Sims discussed issues confronting the ACCC when applying Australia’s competition law, the importance of the Harper Review and the reality of increasing globalisation.

“There is a criticism that competition agencies, are either overly legalistic in the way they interpret the law, or overly theoretical in the way they apply the law,” Mr Sims said.

“An example arises with the emergence of many peer-to-peer business models, which the ACCC strongly welcomes. The ACCC is keen to ensure incumbent firms, with substantial market power, do not attempt to thwart new business models, and indeed, the potential for creative destruction.”

“Some have said we are adopting a theoretical approach, out of touch with the real world; we should simply stand back and observe.”

Citing the recent ihail draft decision, Mr Sims dismissed such claims. He said the ACCC is acutely aware of the profit maximising incentives and strategies of commercial firms, and that this approach is inherent in the ACCC’s competition assessments.

Mr Sims also spoke about the importance and challenges of making evidence based decisions, often in the face of speculative predictions of parties with vested interests.

In the second part of the speech, Mr Sims said the ACCC is very supportive of the vast majority of the Competition Review Panel’s findings, both as they relate to the Competition and Consumer Act and policy settings more broadly.

“The Harper Review’s recommendations on competition law showed a desire to both take a real world view, and a desire to bring our law into line with that applying overseas,” Mr Sims said.

“Harper’s recommendations on mergers and concerted practices illustrate this, as does the Panel’s recommendation on the misuse of market power.”

Mr Sims said other Harper recommendations do not get the focus they deserve.

“I believe Harper’s recommendations on collective bargaining, which could more readily allow collective boycott, can improve the bargaining power of small businesses and farmers in particular circumstances.”

“Another important recommendation, that does not get enough attention, is to ensure the CCA’s treatment of commercial activities by governments is consistent with those of private sector players.”

In the final part of his speech, Mr Sims discussed the reality of increasing globalisation and the response from competition agencies.

“Economic globalisation has resulted in an increasing number of reviews of mergers and investigations into cartels and unilateral conduct that transcend jurisdictional boundaries. This reality requires competition agencies, including the ACCC, to act cooperatively and collaborate,” Mr Sims said.

“Our engagement with other competition agencies has also helped us understand the significance of competition advocacy and impressed on us the value of market studies as a tool for analysing complex competition and consumer problems.”

“We are now more actively using the market studies tool with studies currently focussing on the Eastern Australian gas market as well as petrol markets in particular regional cities.”

Why Lifting Capital Ratios Is Not Enough

Regulators here and overseas are forcing banks to hold more capital in order to make the banking system “more secure”. In Australia, because of the lack of true competition, this will in practice mean the banks passing additional costs through to borrowers, thus maintaining the high (on an international basis) shareholder returns. Higher capital means higher priced bank products.

However, continuing to lift capital ratios will not alone make banks more secure. There are other strategies which we need to consider if we are truly to have undoubtedly strong banks. We need, in effect, to broaden the debate.

First, one of the main drivers of higher capital is to ensure that banks, should they get into trouble, would not be bailed out by tax payers via government intervention. In 2007, the UK the government became the major shareholder in a number of banks, which were on the brink. This led in turn to significant public debt, which has yet to be repaid. The FSI estimated that the economic cost of a severe financial sector crisis is around 158 per cent of annual GDP. For Australia, this is around $2.4 trillion. And this is just the annual cost. The question becomes how to handle banks that are too big to fail and get into difficulty. It should be essential for banks to think the unthinkable, and have in the bottom draw a secure exit plan should they get into difficulty, and this resolution plan has to be approved by the banking regulator. It should not simply be “raise more capital”, because as the APRA stress tests highlighted recently, individual banks assumed they could top up their reserves in a crisis, but did not consider the fact that everyone might be trying to do this at the same time (because of a broader crisis) as so might not be successful.

Second, and connected to the work-out plans, we think there is a case to ring-fence the retail bank operations of these large financial conglomerates, from their other operations. Risks in the treasury, wealth management, insurance, and international trade areas are potentially higher than in core retail banking. At the moment, it is all scrambled. The UK for example, to working towards adequate risk separation of core banking operations and the other elements within financial conglomerates. Whilst implementation needs to take account of the structure of individual entities, we think this is important.

Third, the obligations of the top managers in the banks with regards to complying with regulation should be clearly stated and enforced. We have seen some banks essentially flex lending standards to maintain market share. APRA and ASIC have both highlighted these shortcomings and the RBA have admitted risks were higher than initially thought because of loose lending criteria. The obligations on top managers should have legal force, and in severe cases of non-compliance, regulators should be more overtly holding them to account personally. More broadly, this speaks to the cultural norms within the banks, and the incentives in place. It also balances the obligations of regulators and those managing the banks – at the moment, it appears the onus is too much on the regulators to try and “catch” bad behaviour, rather than having the right behaviours championed by the banks themselves. This balance needs to be recast.

Fourth, we need stronger, real competition in the banking sector, not the faux competition where everyone marches to the same tune, and follows each other with rate rises and falls. We have some of the most profitable banks in the world, thanks to weak competition, not brilliant management, or super efficiency. Regulators are more concerned with financial stability than competition, though moving the dial on IRB banks from 15-17 to 25 is a starting point, tweaking capital is not sufficient. With so many regulatory authorities involved, from ACCC, APRA, ASIC and RBA, the onus of driving real competition falls through the cracks, at the expense of Australia Inc. The FSI recommended ASIC be given a specific competition mandate.

We should not become myopic about more capital being the total solution to fixing the banking system. Structure, culture, competition and governance must all be on the table.

CBA Lifts Mortgage Rates

As predicted, another major has announced hikes in its mortgage rates. Commonwealth Bank will increase in its variable home loan rates by 15 basis points for both owner occupied and investment variable rate mortgages, partially offsetting costs associated with recent changes to capital requirements.

As a result, for owner occupiers, the standard variable home loan rate will increase to 5.60% per annum. For investment home loan standard variable rate customers, interest rates will rise to 5.87% per annum. The new rates will be effective from 20 November 2015.

The bank cites the higher capital requirements as the driver, and says it has carefully tried to balance the interests of its customers and shareholders in pitching the quantum of the increase.

Matt Comyn, Group Executive for Retail Banking Services said: “The Commonwealth Bank is supportive of an Australian financial system that is strong, stable and competitive. We recently raised $5.1 billion to strengthen our capital position in line with new regulatory requirements implemented in response to the Financial System Inquiry. We have now reviewed our home loan pricing in light of these changes.

“As Australia’s largest home lender, we are committed to delivering competitive products and services to our customers, while maintaining an unquestionably strong capital position.

“Any decision to change interest rates is carefully considered. The cost of the new capital required to make the Australian banking system more secure needs to balance the interests of our customers, as well as the nearly 800,000 households who are direct shareholders and the millions more who are invested through their superannuation funds.”

Fixed rates and business rates remain the same, with the current Owner Occupier Wealth Package 2-year fixed rate remaining at 4.29% per annum.

Expect other lenders to follow, using the capital and financial stability alibis to protect margins.

In addition, some will argue the RBA should now cut rates in November, to adjust for recent home lending rate rises, but given the high growth rates in lending, as APRA highlighted today, we think this would be inappropriate.