Month: May 2017

Why your bank will ask you to pick a ‘PayID’

From The New Daily.

From October this year, bank customers will be able to replace their clunky BSB and account number with an email address or mobile phone number, according to experts.

This ‘PayID’ will be a crucial part of Australia’s new payments system, which will allow almost instant bank transfers, 24 hours a day, 365 days a year.

The Reserve Bank, which operates the ageing system that clears payments between accounts, has been busily working for years with big players in the industry on the billion-dollar ‘New Payment Platform’ or ‘NPP’.

There’s plenty of complicated stuff happening behind the scenes, but one of the main things Australians should know is that, from October, they’ll be able to pick a PayID for each bank account they want to receive super-fast payments into.

NPP Australia CEO Adrian Lovney told The New Daily that the PayID concept will make account numbers easier to remember, and remove the risk of accidentally sending money to the wrong person.

“It makes payments more intuitive and simpler because users will be able to provide payers details which are easy to remember such as an email address or phone number,” Mr Lovney said.

“This offers greater peace of mind as people no longer have to rely on providing financial account information, such as a BSB and account number, to payers so they can receive payments.

“And services that use PayID may display a PayID name before you send a payment as an additional level of confirmation that you are sending money to the right person.”

So, if a family member wants to send you money or you’re splitting the bill at a restaurant with friends, you can simply tell them to type your PayID into their online banking and, in about 15 seconds, the money will be in your account.

The new system will be so fast and simple, it has been speculated that credit cards and cash will lose popularity.

It was built by the Society for Worldwide Interbank Financial Telecommunication (SWIFT), which also built Australia’s current payment system in 1998.

It will allow real-time processing for all ‘push’ payments (such as wages, welfare payments, bill payments or transfers to friends and family), but won’t speed up ‘pull’ payments made on debit and credit cards.

Payments expert Nathan Churchward, whose employer Cuscal is one of the 13 companies working on the new system, predicted that PayID could become as popular a brand name to Australians as Google and Uber.

He gave a real-world example: he recently bought $2500 worth of tickets for a group of friends and accidentally gave them all his wrong bank account number. Their payments bounced back and he was left wondering why no one was paying up.

“I work in banking. You’d think I’d be able to remember my account and BSB. But I can’t!” Mr Churchward told The New Daily.

“With PayID, if you get the mobile number wrong, it will ask you if you want to pay ‘Joe Bloggs’ and you’ll realise and won’t proceed.”

Businesses also won’t have to “splash” their bank details all over the internet, where fraudsters lurk, he said.

Cuscal’s hot tips on PayID

  • You can’t pick a random number. Banks will probably require a mobile phone number, email address, Australian Business Number (ABN) or Australian Company Number (ACN)
  • You can set multiple ‘PayIDs’ for the one bank account. For example, your mobile phone number and email could both be linked to the same transactions account
  • However, you can’t link the same PayID to multiple accounts
  • Every PayID will be changeable. So if you get a new phone number, you’ll be able to ask your bank to change your PayID to the new number
  • If you switch to a new bank, you’ll be to reuse an old PayID. But any direct debits you’ve set up won’t automatically transfer across
  • Some institutions may restrict PayIDs to specific account types. So you might be able to link to a debit card account, but not a mortgage offset or term deposit
  • Your institution may not offer PayID straight away in October

Harnessing machine learning in payments

Good article from McKinsey on the revolution catalysed by the combination of machine learning and new payment systems as part of big data. The outline some of the opportunities to expand the use of machine learning in payments range from using Web-sourced data to more accurately predict borrower delinquency to using virtual assistants to improve customer service.

Machine learning is one of many tools in the advanced analytics toolbox, one with a long history in the worlds of academia and supercomputing. Recent developments, however, are opening the doors to its broad-scale applicability. Companies, institutions, and governments now capture vast amounts of data as consumer interactions and transactions increasingly go digital. At the same time, high-performance computing is becoming more affordable and widely accessible. Together, these factors are having a powerful impact on workforce automation. McKinsey Global Institute estimates that by 2030 47 percent of the US workforce will be automated.

Payments providers are already familiar with machine learning, primarily as it pertains to credit card transaction monitoring, where learning algorithms play important roles in near real-time authorization of transactions. Given today’s rapid growth of data capture and affordable high-performance computing, McKinsey sees many near- and long-term opportunities to expand the use of machine learning in payments. These include everything from using Web-sourced data to more accurately predict borrower delinquency to using virtual assistants to improve customer service performance.

Machine learning: Major opportunities in payments

Rapid growth in the availability of big data and advanced analytics, including machine learning, will have a significant impact on virtually every part of the economy, including financial services (exhibit). Machine learning can be especially effective in cases involving large dynamic data sets, such as those that track consumer behavior. When behaviors change, it can detect subtle shifts in the underlying data, and then revise algorithms accordingly. Machine learning can even identify data anomalies and treat them as directed, thereby significantly improving predictability. These unique capabilities make it relevant for a broad range of payments applications.

What is machine learning?

Machine learning is the area of computer science that uses large-scale data analytics to create dynamic, predictive computer models. Powerful computers are programmed to analyze massive data sets in an attempt to identify certain patterns, and then use those patterns to create predictive algorithms (exhibit). Machine learning programs can also be designed to dynamically update predictive models whenever changes occur in the underlying data sources. Because machine learning can extract information from exceptionally large data sets, recognize both anomalies and patterns within them, and adjust to changes in the source data, its predictive power is superior to that of classical methods.

 

Machine learning has already established a strong foothold in credit cards, particularly in fraud management. PayPal’s Braintree Auth payments tool, for example, uses PayPal’s consumer transaction data in conjunction with software developer Kount’s fraud detection capabilities to authorize high volumes of transactions and verifications in near real-time. Each credit card transaction or verification is analyzed in milliseconds using hundreds of fraud detection tests.

There are several other areas in the payments value chain where machine learning is adding significant value:

  • Product sales: Machine learning can be a powerful tool for developing deeper insights about customers and sales prospects because it can draw upon a wider variety of internal and external data than marketers have traditionally used. It can more accurately cluster customers and prospects into segments according to their profiles and probable needs. This deeper insight can reveal new opportunities for cross-selling and up-selling among both customers and prospects. McKinsey finds that with machine learning payments providers can increase revenue from existing customers by 10 to 15 percent.
  • Customer retention: Companies typically monitor and forecast customer churn based on changes in account status; when churn rates rise they take steps to address the problem. Now, through machine learning, they can identify those customers they are at risk of losing and act quickly to retain valuable customers. For example, 47Lining, an Amazon Web Services partner, uses a combination of site behavior, demographics, and media-sentiment measures to predict customer churn with 71 percent accuracy. Companies using machine learning to address customer churn have achieved reductions of as much as 25 percent.
  • Collections: Collection practices and debt restructuring work best when closely aligned with borrowers’ changing circumstances and propensity to pay. Machine learning can help companies build robust dynamic models that are better able to segment delinquent borrowers, and even identify self-cure customers (that is, customers that proactively take action to improve their standing). This enables them to better tailor their collection strategies and improve their on-time payment rates. TrueAccord’s HeartBeat, for instance, is a machine learning tool that helps lenders customize personal interactions in real time, based on its ability to detect why a customer’s payments are late. Companies using machine learning have been able to reduce their bad debt provision by 35 to 40 percent.
  • Treasury pricing: In commercial payments, companies can capture 10 to 15 percent more revenue through optimized treasury pricing. In the near term, advanced analytics can identify quick-win opportunities to reduce price leakage (such as discounts exceeding authorized limits) and billing errors. Over the long term, clustering techniques built on machine learning can significantly improve customer segmentation and lead to more appropriate pricing models.
  • Customer care: Over time, McKinsey expects to see a gradual increase in the automation of many customer services. This is an area in which the cognitive intelligence capabilities of machine learning are particularly well suited. Among the benefits are: lower servicing costs, enhanced agent performance, more efficient capacity management, improved digital customer experience, reduced risk, and elimination of waiting times. A variety of relevant applications are already available, including virtual assistants that use natural language processing, deep insight tools like IBM’s Watson, and cognitive engines that can do things presently handled by humans, such as IPSoft’s Amelia, which can understand and interact with people (see sidebar, “Cognitive agents”).

Machine learning in the card collection environment

Cognitive agents

Cognitive agents like IPSoft’s Amelia combine natural language and deep insight technologies to complete tasks typically handled by humans. Using a three-step process, they help companies intelligently automate a variety of tasks:

  1. Understand: Cognitive agents can rapidly absorb and comprehend a diverse range of data sets, from complex manuals to call logs and flow charts.
  2. Learn: Cognitive agents absorb data from the customer language they process, and can refer the customer to a live agent language they process, and can refer the customer to a live agent when uncertain about how to react. They also learn from cases they refer to agents, further improving effectiveness as they continue to record interactions and data.
  3. Resolve: Finally, cognitive agents can directly resolve customer inquiries received through online chat, mobile, and voice channels. Alternatively, when connected to a backend system they can support live agents in resolving customer issues.

Service automation tools can help payments providers increase customer satisfaction, enhance financial performance, and improve compliance.

In card issuing, machine learning is already having a valuable impact. This is especially true in collections, where McKinsey has seen 10 to 15 percent improvements in recovery rates and 30 to 40 percent increases in collections efficiency. To minimize delinquencies, issuers can use individual-account pattern recognition technologies, and develop contact guidelines and strategies for accounts that are already delinquent. Following an account delinquency, issuers allow a brief time window (usually 90 days) before they write off the receivables and turn collection over to third-party providers. This brief period is an ideal time for issuers to apply collection strategies that draw heavily on the capabilities of machine learning.

 

Research shows the banks will pass the bank levy on to customers

From The Conversation.

Studies of European countries show that bank taxes similar to the 0.06% bank levy introduced by the government in the 2017 federal budget will be largely borne by customers, not shareholders.

The levy could also make the banking system more, rather than less risky. The fact that a bank is asked to pay the levy is a confirmation that it is “too big to fail”. This could in turn encourage riskier behaviour. The levy might also trigger a higher probability of default by reducing a bank’s after-tax profitability

But it is difficult to say whether banks will pass the levy on to customers by increasing their loan rates, fees or both.

In its response to the levy, NAB confirmed it will not just be borne by shareholders:

The levy is not just on banks, it is a tax on every Australian who benefits from, and is part of, the banking industry. This includes NAB’s 10 million customers, 570,000 direct NAB shareholders, those who own NAB shares through their superannuation, our 1,700 suppliers and NAB’s 34,000 employees. The levy cannot be absorbed; it will be borne by these people.

Aware of this problem, the government has asked the Australian Competition and Consumer Commission (ACCC) to undertake an inquiry into residential mortgage pricing. The ACCC can require banks to explain changes to mortgage pricing and fees.

When banks pass on these taxes

The bank levy is similar to taxes recently introduced by some G20 economies, including the UK. These had the dual purpose of raising revenues and stabilising the balance sheets of large banks in the aftermath of the global financial crisis.

An analysis of bank taxes in the UK and 13 other European Union countries shows that the extent to which taxes are passed on to customers depends on how concentrated the banking industry is.

The more the industry is dominated by a small number of banks, the greater the share of the tax that is passed on to customers and the less that is borne by shareholders. In more concentrated industries customers have relatively fewer alternative options and therefore tend to be less mobile across banks. This in turn gives the large banks greater market power to increase interest rates and fees without losing customers.

Australia’s banking industry is quite concentrated. In fact, we’re around the middle of the pack of OECD countries, much higher than the US, but lower than some European countries. From this we can surmise that at least some of the cost of the bank levy here will be passed on to borrowers through higher loan rates, fees or both.

An IMF study of G20 countries suggests that a levy of 20 basis points (i.e. 0.2%, approximately three times higher than the Australian government’s bank levy), could lead to an increase in loan rates of between 5 and 10 basis points. This means that the monthly repayment on a loan (assuming an initial rate of 5.5%) would increase by approximately A$6 for every A$100,000 borrowed.

The IMF also found that the bank levy doesn’t just hit customers. A 0.2% levy would reduce banks’ asset growth rate by approximately 0.05% and permanently lower real GDP by 0.3%.

The impact on customers

If the banks pass on the levy to customers then it becomes just another indirect tax, similar to the GST. The question then is whether this is regressive – does it have a greater impact on those on lower incomes than higher incomes.

Lower income earners are likely to borrow less than higher income earners. However, lower income earners are also less able to bear an interest rate increase. They are also more likely to be excluded from borrowing when the cost of borrowing increases.

In this sense, then, if the bank levy is passed on to customers it could become a barrier to home ownership for some lower income borrowers.

More generally, if the value of bank transactions is a higher proportion of low incomes than of high incomes, then the bank levy would operate as a regressive tax and contribute to sharpening (rather than smoothing) inequalities.

Both of these would be unintended, but undesirable, consequences of the levy.

Authors: Fabrizio Carmignani, Professor, Griffith Business School, Griffith University; Ross Guest, Professor of Economics and National Senior Teaching Fellow, Griffith University

UK Home Price Growth Eases

According to the UK’s Office for National Statistics, average house prices in the UK have increased by 4.1% in the year to March 2017 (down from 5.6% in the year to February 2017). This continues the general slowdown in the annual growth rate seen since mid-2016.

The average UK house price was £216,000 in March 2017. This is £9,000 higher than in March 2016 and £1,000 lower than last month.

On a regional basis, London continues to be the region with the highest average house price at £472,000, followed by the South East and the East of England, which stand at £312,000 and £277,000 respectively. The lowest average price continues to be in the North East at £122,000.

 The East of England and the East Midlands both showed the highest annual growth, with prices increasing by 6.7% in the year to March 2017. This was followed by the West Midlands at 6.5%. The lowest annual growth was in the North East, where prices decreased by 0.4% over the year, followed by London at 1.5%.

The UK HPI is a joint production by HM Land Registry, Land and Property Services Northern Ireland, Office for National Statistics and Registers of Scotland.

The UK House Price Index, introduced in June 2016, includes all residential properties purchased for market value in the UK. However, as sales only appear in the UK HPI once the purchases have been registered, there can be a delay before transactions feed into the index. As such, caution is advised when interpreting prices changes in the most recent periods as they are liable to be revised.

Treasury response to the Australian Bankers’ Association

The Secretary to the Treasury, John Fraser, today responded to a letter from the Chief Executive Officer of the Australian Bankers’ Association to the Treasurer regarding the major bank levy.

Dear Ms Bligh

Major bank levy

I refer to your letter to the Treasurer of 12 May 2017 concerning the major bank levy announced in the 2017-18 Budget. The Treasurer has asked me to respond on his behalf.

I understand the interest of the industry to obtain modelling information on the levy. As is usual practice we will be providing further relevant information including a regulatory impact statement canvassing the broader economic impacts, compliance issues and revenue estimates as part of the explanatory material accompanying the draft legislation when it is introduced into Parliament.

The levy’s inclusion in the Budget followed development as part of normal budget processes. Through those processes, careful consideration was given to the design of the levy, the costings and to its effect on the economy as well as the financial sector. This consideration drew on Australia’s experience with and development of financial sector levies over a number of years and international experience.

As is the case for other revenue and expenditure decisions, Budget Paper No. 2 this year shows the fiscal balance impact of the measure over the forward estimates period and Budget Statement No. 3 also shows the underlying cash balance impacts over the forward estimates.

Given the deadlines required to allow for introduction and passage of the relevant legislation before the announced commencement date for the levy, officers in my department are working with the Office of Parliamentary Counsel to prepare draft legislation as swiftly as possible to provide to the major banks for their comment.

We appreciate the written submissions that the major banks have now made to us following the meeting on 11 May 2017 and the many constructive comments therein

Latest RBA Minutes Warn On Household Balance Sheets

The RBA minutes really tell us little more about the economy, but the did talk about household balance sheets.

“Growth in housing credit had continued to outpace growth in household incomes, which suggested that the risks associated with household balance sheets had been rising” .

See my highlights below.

Domestic Economic Conditions

Members commenced their discussion of domestic economic conditions by noting that inflation outcomes for the March quarter had been in line with forecasts presented in the February Statement on Monetary Policy. As such, the March quarter inflation data had generally increased confidence in the forecast that underlying inflation would pick up to around 2 per cent by early 2018. Both headline and underlying measures of inflation had been ½ per cent in the March quarter. In year-ended terms, headline inflation had been a little above 2 per cent and underlying inflation had increased to around 1¾ per cent. Higher petrol prices and the increase in tobacco excise had both made sizeable contributions to headline inflation; increases in tobacco excise were expected to continue adding to headline inflation over the forecast period. Members noted that the ABS would issue revised expenditure weights for the Consumer Price Index (CPI) in the December quarter 2017 CPI release, which would reflect changes in consumption behaviour over the preceding six years in response to factors including large changes in relative prices.

Prices of tradable items (excluding volatile items) had been little changed in the March quarter but fell over the prior year. Strong competitive pressures in the retail sector had helped keep retail inflation low and there were signs that these pressures were affecting a broader range of consumer goods, such as furniture and household appliances. The appreciation of the exchange rate over the prior year is likely to have weighed on consumer prices.

Non-tradables inflation (excluding tobacco) had stabilised over preceding quarters. There had been signs of stronger price pressures in a few components, including an increase in new dwelling construction costs, which largely reflected a rise in the cost of materials. Utilities prices had also increased strongly in some cities in the March quarter, reflecting the pass-through to consumers of higher wholesale costs for gas and electricity. Members noted that utilities prices in other cities were likely to increase in the next few quarters and that there could be second-round effects on the CPI through upward pressure on business costs.

Working in the other direction, low wage growth and strong competition in the retail sector had contributed to domestic cost pressures remaining subdued. Rent inflation had remained persistently low and was around its lowest level in over 20 years, partly because rents had fallen significantly in Perth. Inflation in a range of administered prices, such as those for education, child care and pharmaceuticals, had been lower than usual, largely reflecting changes in government policy and the benchmarking of some administered prices to the CPI.

GDP growth over 2016 had been around 2½ per cent. Data that had become available over April suggested that the domestic economy had continued to expand at a moderate pace in the March quarter. Members noted that growth in domestic output was still expected to pick up to be a little above 3 per cent by the first half of 2018, as the drag from declining mining investment waned and as resource exports continued to pick up.

The impact of Cyclone Debbie had been most apparent in the spot price of coking coal, which had increased sharply after damage to key infrastructure affected coking coal exports from the Bowen Basin. Coking coal export volumes were expected to be significantly lower in the June quarter before returning to their previous levels over the remainder of 2017 as the damaged infrastructure is restored. Iron ore and liquefied natural gas exports were expected to make significant contributions to growth over the forecast period. Iron ore prices had fallen over the prior month, as had been expected for some time, and oil prices had been lower.

Although Australia’s terms of trade were expected to be higher in the near term than had been forecast at the time of the February Statement, much of the increase in the terms of trade since mid 2016 was expected to unwind over the next few years. As such, the recent rise in the terms of trade was not expected to result in materially more mining investment. However, members noted that the recent boost to mining profits could have other spillover effects, such as higher dividend payments, wage outcomes or government revenues, which represented an upside risk to the forecasts.

Recent data on retail sales growth and households’ perceptions of their personal finances suggested that consumption growth had moderated somewhat in early 2017. Further out, consumption was still forecast to expand at a bit above its average rate of recent years, consistent with the forecasts made at the time of the February Statement. Members noted that if the upside risks to household income growth from the higher terms of trade were realised, consumption growth could be stronger. On the other hand, if households were becoming more focused on paying down debt, this would imply some downside risks to the outlook for household consumption growth. A fall in housing prices could also weigh on consumption growth.

The large amount of residential construction still in progress was expected to support dwelling investment in the near term. Building approvals had been lower over prior months, particularly for higher-density dwellings, suggesting that this pipeline of construction work would continue to be worked off in coming quarters. Members noted that changes in the rate of home-building lag changes in population growth and that this had affected housing prices in some markets in the preceding few years. Growth in housing prices had remained brisk in Sydney and Melbourne, where population growth had been relatively strong, but had been weak in Perth, where population growth had fallen significantly following the end of the mining investment boom. At the same time, there had been some indications that the large increase in supply in the inner-city Melbourne and Brisbane apartment markets had weighed on prices, particularly in the case of Brisbane.

Members noted that surveys of business conditions had continued to improve and that some survey measures of investment intentions had picked up. However, other measures of investment intentions, including those recorded in the ABS capital expenditure survey, suggested that it could be some time before a stronger and more broadly based pick-up in non-mining business investment growth occurs. Other recent indicators of non-mining business investment, including non-residential building approvals and the pipeline of non-residential construction work, were still quite soft. The pipeline of outstanding public infrastructure work, however, had increased further.

Members observed that the unemployment rate had edged slightly higher in recent months to 5.9 per cent, but was expected to decline gradually over the forecast period. Members noted that this suggested spare capacity would remain in the labour market, although there was significant uncertainty about how to measure the degree of spare capacity, particularly given the higher levels of underemployment in recent years. An increase in labour demand could, in the first instance, be met partly by increasing hours worked by part-time employees, which would reduce measures of underemployment but represent an upside risk to the unemployment rate forecasts. The participation rate was slightly higher than had been forecast three months earlier and was assumed to remain around current levels throughout the forecast period.

Employment growth over the March quarter had increased and full-time employment had continued to rise. Members noted that this was in contrast to 2016, when all of the growth had been in part-time employment. Forward-looking indicators of labour demand, including data on vacancies and surveyed employment intentions, indicated that employment growth would pick up a little. Wage growth was expected to increase gradually as labour market conditions improved and the adjustment to the lower mining investment and terms of trade drew to an end.

Members had an in-depth discussion about changes in the composition of employment in recent decades. They discussed the implications of the secular upward trend in the share of part-time employment for labour market spare capacity. The share of part-time employment in Australia, which had increased from around 10 per cent in the early 1970s to over one-third at present, was relatively high by international standards, especially for younger workers; one driver is that students in Australia are more likely to combine their studies with part-time jobs. Data from the Household, Income and Labour Dynamics in Australia Survey suggested that the majority of part-time workers worked part-time as a matter of choice given their personal circumstances, which vary across their lifecycle. People aged between 15 and 24 years are more likely to work part-time at the same time as studying, while a significant share of women between the ages of 25 and 44 years cite child-caring responsibilities as their main reason for working part-time. Furthermore, some older workers indicate a preference for working part-time, possibly as part of their transition to retirement. The survey also indicated that some part-time workers cite a lack of full-time opportunities or that their work requires part-time hours as the main reason for working part-time.

Members observed that growth in part-time employment had become more cyclical over time because businesses had been more able to respond to changes in demand by adjusting the hours worked by employees rather than the number of employees. This increase in labour market flexibility had been enabled by a range of factors including labour market deregulation, technological change and the shift towards a more service-based economy. As a result, the distinction between full-time and part-time work had become less important in assessing labour market conditions. In addition, understanding the degree of spare capacity in the economy required an assessment of the additional hours part-time workers were willing and able to contribute as well as the number of unemployed people.

International Economic Conditions

Members noted that GDP growth in Australia’s major trading partners had picked up since mid 2016 and most forecasters had revised up their outlook for global growth. Recent data had generally confirmed this improved outlook. The stronger activity had been evident in a pick-up in various indicators, including industrial production and measures of business and consumer sentiment, as well as in a broad-based rise in global trade. For some countries, including the United States, Japan and Korea, this had been reflected in an increase in the growth of business investment.

Economic growth in China had retained momentum in early 2017. Property construction and government spending on infrastructure had been among the important drivers of growth and had supported Chinese demand for Australian iron ore and coal as inputs into steel production. The share of investment in nominal GDP had fallen in recent years, while the share of consumption had been rising. Members observed that as economies matured, the share of services in consumption generally increased, which was consistent with the rising share of services in Chinese economic output. Risks around rapid housing price growth had remained a source of concern for the authorities and some ratcheting up of tightening measures had been needed to contain housing price inflation and speculative activity. Members noted that the outlook for the Chinese economy, particularly the residential property market, was an ongoing source of uncertainty for Australian exports and the terms of trade. Another source of uncertainty was how the Chinese authorities might balance achieving their growth targets with the risks associated with high and rising leverage in the Chinese economy.

In the United States, consumption growth had slowed in the March quarter, although this was likely to have been temporary. At the same time, there had been an increase in business investment growth, some of which was related to the energy sector. Survey measures had suggested that the prospects for further growth in business investment were favourable. The unemployment rate had fallen to a level consistent with full employment, while GDP growth was still expected to be above potential over the next couple of years.

Members noted that growth in the euro area was expected to continue at around its recent pace in early 2017. Business credit had increased since late 2016, having declined for a number of years, and the unemployment rate had fallen to its lowest level in nearly eight years. Members noted that the unemployment rate was particularly low in Germany, but had been persistently high in some other countries in the euro area, including France. The Japanese labour market had tightened further and economic growth had exceeded estimates of potential growth in Japan over recent years. Wage growth in Japan had increased a little, but core inflation had remained close to zero and inflation expectations were low.

Core inflation in the major advanced economies had generally remained low. Headline inflation had risen in recent quarters, but was likely to fall back because the effect of the earlier increase in oil prices had started to dissipate. Core inflation was expected to rise gradually in the major advanced economies as spare capacity in labour markets declined further.

Financial Markets

Members noted that financial markets had been relatively stable over recent months and global financial conditions generally remained very favourable. Heightened geopolitical tensions and various political developments had had little effect on financial markets.

Members noted that the widening of the yield spread between French government bonds and German Bunds ahead of the French presidential election had partly unwound following the result of the first round of voting. Members observed that long-term sovereign bond yields in the major markets had remained higher than in the preceding year, but were still low in a historical context.

The Bank of Japan left monetary policy unchanged at its April meeting, but stated that more quantitative easing would be undertaken if needed to reach the inflation target. The European Central Bank also left policy unchanged at its April meeting. Market participants did not expect the US Federal Open Market Committee (FOMC) to change monetary policy at its May meeting. Market expectations were for three increases in the federal funds rate by the end of 2018, compared with five increases implied by the median projections of FOMC members.

Chinese financial market conditions had tightened following the announcement of regulatory measures aimed at reducing leverage in financial markets. Short-term money market rates had risen and corporate bond financing had declined since the end of 2016.

Share prices in major markets had risen over the prior month and equity market valuations remained at high levels. Corporate bond yields generally remained very low, with spreads to government bonds having narrowed over the prior year. Corporate bond yields had mostly moved in line with sovereign bond yields over the prior month, except in China, where yields had increased following announcements by the authorities aimed at addressing high and rising leverage.

Members noted that the cost of borrowing US dollars in short-term foreign exchange swap and bank funding markets had declined from the high levels of 2016, reflecting both demand and supply factors.

There had been relatively little change in major exchange rates over the prior month. The Australian dollar had been little changed against the US dollar and on a trade-weighted basis over the prior month, but had depreciated slightly over the previous few months, which was consistent with the decline in commodity prices.

Australian government and corporate bond yields had generally moved in line with global bond markets over preceding months. Corporate bond issuance had remained relatively subdued, with resource-related corporations using their higher cash flows to reduce debt.

Australian share prices had increased a little over the prior month, with the exception of resource stocks, which had fallen in response to lower iron ore prices.

Members observed that housing credit growth had steadied in early 2017. Growth in investor housing credit had been rising for a time, but had stabilised in preceding months, consistent with the decline in loan approvals to investors. Household credit overall had grown at an annualised rate of 6 per cent over the six months to March. Variable housing interest rates had increased since late 2016, particularly for investors and interest-only lending. As a result, the average estimated interest rate on major banks’ outstanding housing lending had increased slightly, while the average cost of funding was estimated to have been little changed.

Financial market pricing indicated that market participants expected the cash rate to remain unchanged at the May meeting and over the remainder of the year.

Considerations for Monetary Policy

In considering the stance of monetary policy, members noted that the outlook for the global economy remained positive. The broad-based nature of the data supporting this outlook provided some confidence that the expansion could become self-reinforcing. At the same time, the improved conditions and ongoing accommodative stance of monetary policy globally had not, to date, led to a sustained increase in inflation. Members noted that various policy, financial and geopolitical risks to the ongoing expansion in the global economy were still present. The improvement in global economic conditions had helped to support commodity prices, although recent commodity price movements had also been affected by commodity-specific supply factors, such as disruptions to Australian coking coal exports following Cyclone Debbie.

Domestically, inflation outcomes had been as expected in the March quarter. The central forecast for headline inflation was that it would be above 2 per cent over the forecast period; underlying inflation was expected to increase gradually from its current rate of 1¾ per cent. Subdued growth in labour costs and strong competition in the retail sector had continued to have a dampening effect on aggregate inflation. Working in the other direction, rises in utilities prices and the cost of new dwelling construction had increased inflationary pressures.

Members noted that, although it seemed unlikely that wage growth would slow much further, wage pressures were expected to rise only gradually as the effects of structural adjustment following the mining investment and terms of trade boom, which had weighed on aggregate wage growth, continued to wane. Data on the labour market had been somewhat mixed, but forward-looking indicators continued to suggest that employment growth would maintain its recent pace and spare capacity in the labour market would decline gradually.

Recent data suggested that the Australian economy had grown at a moderate pace at the beginning of 2017. The outlook was little changed from three months earlier and continued to be supported by the increase in the terms of trade and the low level of interest rates, although lenders had announced increases in mortgage rates, particularly those paid by investors and on interest-only loans. The pick-up in non-mining business investment had been modest and forward-looking indicators of investment remained mixed. The drag from the fall in mining investment (and the spillover effects of this on non-mining investment and activity) had continued to ease. Recent data had provided further signs that the downswings in the Western Australian and Queensland economies were coming to an end. The depreciation of the exchange rate since 2013 had assisted the economy through this transition; an appreciation of the exchange rate would complicate this adjustment process.

Conditions in the housing market continued to vary considerably across the country. Conditions in established housing markets in Sydney and Melbourne remained robust, but housing prices had been falling in Perth. The additional supply of apartments scheduled to be completed over the next couple of years in the eastern capital cities was expected to put some downward pressure on growth in apartment prices and on rents, particularly in Brisbane.

Growth in housing credit had continued to outpace growth in household incomes, which suggested that the risks associated with household balance sheets had been rising. Recently announced supervisory measures were designed to help mitigate these risks by reinforcing prudent lending standards and ensuring that loan serviceability was appropriate for current financial and housing market conditions. However, it would take some time to assess the full effects of recent increases in mortgage rates and the additional supervisory focus.

The Board continued to judge that developments in the labour and housing markets warranted careful monitoring. Taking into account all the available information and the updated forecasts, the Board’s assessment was that maintaining the current accommodative stance of monetary policy would be consistent with achieving sustainable growth and the inflation target over time.

The Decision

The Board decided to leave the cash rate unchanged at 1.5 per cent.

ASIC’s Michael Saadat on the remuneration review

From Mortgage Professional Australia.

As brokers, lenders and consumers go head-to-head over ASIC’s remuneration review, the man behind it gives MPA editor Sam Richardson an insider’s view

ASIC launched its review of broker remuneration in November 2015, and since then brokers have talked about little else. It’s very possible you’ve at some point criticised ‘those bureaucrats at ASIC’; if so, Michael Saadat is your man. You won’t find Saadat’s name in the review, but ASIC’s senior executive leader played a huge role in its production, staying behind the scenes. Now, two years later, he’s finally free to talk about the review and how it could change your business.

What ASIC wants
Over two years ASIC collected 200 million data points from 1.4 million home loans, before boiling that data down to 243 pages. “It was a very time-consuming process,” Saadat recalls. “Not only did we look at the raw data and provide conclusions, but we also controlled the data for customer characteristics.”

In their quest to achieve an ‘apples for apples’ comparison of broker and non-broker customers, Saadat and his team broke down comparisons into, for instance, the difference in loan amounts taken out by low-income customers going to brokers and to banks.

Now ASIC is explaining its methodology and the data it has collected to the industry.

“We’ve had a few roundtable discussions with stakeholders; we’re planning on having more, and when we speak at industry events or conferences we will definitely be discussing the report and taking questions from people who are interested in hearing more about it,” Saadat says. At the time of writing he was confirmed to speak at the Annual Credit Law Conference in October.

These discussions will chiefly concern ASIC’s six proposals. Firstly, ASIC wants to change the standard commission model to take into account factors other than loan size (1). It also recommends moving away from bonus commissions (2) and soft-dollar benefits (3). ASIC believes there should be clearer disclosure of ownership structures (4) and proposes establishing a new public reporting regime on consumer outcomes and competition in the home loan market (5). Finally, ASIC wants to improve the oversight of brokers by lenders and aggregators (6).

Now that the review has moved into the consultation phase, Saadat is effectively powerless. Under Minister for Revenue and Financial Services Kelly O’Dwyer, the Treasury will be managing the process, in which industry associations, lenders, aggregators, consumer groups and individuals can have their say on the proposals before the end of June. Saadat, however, will not be taking part: “We wouldn’t put in a submission to our own report.”

On the sidelines
ASIC is now consigned to the role of spectator, left on the sidelines, observing the furore surrounding the separate Sedgwick review, which published its final report a few weeks after ASIC’s.

Stephen Sedgwick’s Australian Bankers Association-sponsored review ran concurrently with ASIC’s, but Saadat insists there was no collaboration between the two. “[ASIC] did not share any data with him that has not been made public by ASIC,” he says.

Nevertheless, in its final report ASIC did repeatedly refer to Sedgwick’s review and was condemned for doing so by the MFAA and FBAA.

ASIC was right to refer to the Sedgwick review, Saadat insists: “We know the Sedgwick review only covers the banks, and that’s why we said in our report that the banks need to work with the rest of the industry in responding to [ASIC’s] recommendations.”

When writing his report, Saadat had no idea what Sedgwick’s recommendations would be; in fact Sedgwick’s final report was published just 30 minutes before Saadat talked to MPA.

Sedgwick’s recommendations go much further than ASIC’s, urging banks to decouple commission from loan size. ASIC had recommended a change to the standard commission model to avoid incentivising brokers to write larger loans, while recommending that banks work with brokers to develop a response.

Instead the major banks, on the day Sedgwick published his recommendations, all agreed to implement them in full by 2020. This unilateral decision bypassed brokers, ASIC and the Treasury’s consultation process.

Despite this, Saadat says he is “pleased that industry is working to improve remuneration structures to create better outcomes for consumers, and improved trust in the sector”.

Acknowledging the review and the banks’ response, he “encourage[s] all industry stakeholders to provide feedback to Treasury as part of the current consultation process”. Commissions, in Saadat’s view, “are obviously commercial arrangements, and it’s up to both individual banks, aggregators and brokers businesses to work out what those commercial arrangements should be”.

Expanding ASIC
Regardless of whether Saadat or Sedgwick get their way, ASIC’s remit looks likely to expand. Sedgwick and the banks want ASIC to enact regulation to facilitate a move to a new commission structure, while ASIC will play a role in implementing whatever rule changes the government decides to introduce after June. wFurthermore, Saadat explains, “ASIC’s ability to intervene may also be bolstered by law reform proposals that are currently being considered by government, including those recommended by the Financial System Inquiry”.

Already Saadat has more immediate work on his plate: a shadow-shopping of brokers by consumers, which he will start planning by the end of 2017. “It is early days,” Saadat says. “We’re planning on commencing that work before the end of this calendar year, and are still working through the detail.” Shadow shopping will take place, Saadat confirms, regardless of the Treasury’s ongoing consultation process on the remuneration review, and “once it kicks off it’s going to be a pretty significant piece of work”.

ASIC’s work will not end with commissions. Instead Saadat and his team are faced with a Sisyphean task. The role of referrers was flagged by the review for further investigation, while consumer groups have demanded more oversight of cross-selling. And, says Saadat, the data that was published was just the tip of the iceberg.

For now it’s up to the industry to make changes, he says. “It was more about us trying to get the industry to respond without being forced by legislation to have change imposed upon them. We think the industry has an opportunity to respond and to take positive steps to make changes that will deliver wimproved consumer outcomes without necessarily needing the government to legislate for changes.”

ASIC and ASBFEO hold banks to account on unfair contract terms

ASIC says following intervention by the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) and the Australian Securities and Investments Commission (ASIC), the big four banks are taking action to protect small businesses from unfair terms in loan contracts.

Following a round table hosted by ASBFEO and ASIC, the big four banks have committed to a series of comprehensive changes to ensure all small business loans entered into or renewed from 12 November 2016 will be protected from unfair contract terms.

ASBFEO and ASIC have publicly raised concerns that lenders, including the big four banks, needed to lift their game in meeting the unfair contract terms legislation.

The big four banks have committed to:

  • Removing ‘entire agreement clauses’ from small business contracts. These are concerning terms that absolve the lender from responsibility for conduct, statements or representations they make to borrowers outside of the contract.
  • Removing financial indicator covenants from many applicable small business contracts. For example, loan-to-valuation ratio covenants that give lenders the power to call a default when the value of secured property falls, even where a small business customer has met financial repayments, will be removed.
  • Removing material adverse event clauses from all small business contracts. These are concerning terms that give lenders the power to call a default for an unspecified negative change in the circumstances of the small business customer.
  • Significantly limiting the operation of indemnification clauses. These are concerning terms that aim to broadly protect the lender against losses, costs, liabilities and expenses that arise even outside the control of the small business borrower.
  • Significantly limiting the operation of unilateral variation clauses. In addition to providing applicable small business customers with a minimum of 30 days notice for any contract changes, banks will clearly limit the circumstances in which unilateral variations can be made.

The banks have agreed to contact all small business customers who entered into or renewed a loan from 12 November 2016, about the changes to their loans. In many cases, banks have agreed to implement the changes so that they apply to all existing applicable small business customers.

The banks have agreed to significantly limit the operation of potentially concerning contract clauses (such as financial indicator covenants) to loan products where such clauses are essential to the operation of the product (such as margin lending contracts). Where such clauses continue to exist, banks will re-draft them to ensure that they are clear, transparent and limited to the appropriate circumstances.

ASBFEO and ASIC have made it clear to the banks that simply including the word ‘reasonable’ in contracts does not go far enough.

The ASBFEO, Kate Carnell, said that her role was to consider the interests of small business and to ensure that the unfair contract term legislation was working across all industries. She said it was clear what “unfair” means – to protect the interests of the advantaged party, in this case it is the banks, against the interests of small business.

Ms Carnell said: “The banks have been given every opportunity, including a one-year transition period from November 2015, to eliminate unfair contract terms from their loan agreements and their response has been unsatisfactory.”

ASIC Deputy Chairman Peter Kell said: “We made it clear that lenders had to significantly improve their lending agreements to small business to ensure they meet the new rules.”

“It is important that the banks have committed to improving
their small business loan contracts. ASIC will be following up with the big four banks – and other lenders – to ensure that small business contracts do not contain unfair terms.”

Background

From 12 November 2016, the unfair contract terms legislation was extended to cover standard form small business contracts with the same protections consumers are afforded. In the context of small business loans, this means that loans of up to $1 million that are provided in standard form contracts to small businesses employing fewer than 20 staff are covered by the legal protections.

In March 2017, ASBFEO and ASIC completed a review of small business standard form contracts and called on lenders across Australia to take immediate steps to ensure their standard form loan agreements comply with the law (refer: 17-056MR).

ASIC has released Information Sheet 211 Unfair contract term protections for small businesses (INFO 211) which gives guidance to assist small businesses understand how the law deals with unfair terms in small business contracts for financial products and services, and the protections that are available for small businesses.