Martin North – Page 516 – Digital Finance Analytics (DFA) Blog

ASIC reports on Credit Rating Agencies

ASIC has conducted a market-wide surveillance of credit rating agencies (CRAs) and made a number of recommendations for change.

The findings of the surveillance are outlined in REP 566 Surveillance of Credit Rating Agencies.

ASIC’s main areas of focus were the CRAs’ governance arrangements (including relating to conflicts of interest and their corporate structure), transparency and disclosure.

ASIC’s report makes a number of observations about CRAs’ activities with some leading to recommendations for change in areas such as board reporting, compliance teams and compliance testing, analytical evaluation of ratings and human resources.

ASIC Commissioner Cathie Armour said, ‘CRAs play an important role in our market by giving market users, for example, investors, issuers and governments, a better understanding of credit risks and informing their investment and financing decisions

‘While many of the CRAs operate in a global market with global standards, it is important that they do not lose sight of their regulatory obligations in Australia’, Ms Armour said.

ASIC is actively engaged internationally on policy development for credit rating agencies through its membership of the International Organization of Securities Commissions (IOSCO) and participates in supervisory colleges for the three large international CRAs – Fitch, Moody’s and S&P. Supervisory colleges were established to facilitate the exchange of information between the supervisors of internationally active CRAs in order to foster more effective supervision of these firms.

Background

Under the Corporations Act, CRAs are required to hold an Australian financial services (AFS) licence and to comply with the conditions of the licence, including requirements to comply with the IOSCO Code of Conduct Fundamentals for Credit Rating Agencies. CRAs are also required to provide assistance to ASIC, including in relation to their compliance with the Corporations Act.

There are currently six licensed CRAs operating in Australia and they all formed part of the surveillance – A.M Best Asia-Pacific Limited, Australia Ratings Pty Ltd, Equifax Australasia Credit Ratings Pty Limited, Fitch Australia Pty Limited, Moody’s Investor Services Pty Limited and S&P Global Ratings Australia Pty Ltd.

Employment Growth Slowing?

The ABS released the January 2018 employment data which shows that the trend unemployment remained steady at 5.5 per cent, where it has hovered for the past seven months.

The ABS says that full-time employment grew by a further 9,000 persons in January, while part-time employment increased by 14,000 persons, underpinning a total increase in employment of 23,000 persons.

Full-time employment has now increased by around 292,000 since January 2017 and makes up the majority of the 395,000 net increase in employment over the period. In line with the increasing female participation in the labour force, female full-time employment accounted for 55 per cent of the full-time employment growth over the past year.

Over the past year, trend employment increased by 3.3 per cent, which is above the average year-on-year growth over the past 20 years (1.9 per cent). Prior to the past two months, the last time it was 3.3 per cent or higher was back in February 2008, before the Global Financial Crisis.

The trend monthly hours worked decreased slightly, by 1.2 million hours (0.1 per cent), with the annual figure continuing to show strong growth (2.7 per cent).

The trend unemployment rate has fallen by 0.3 percentage points over the year but has been at approximately the same level for the past seven months, after the December 2017 figure was revised upward to 5.5 per cent.

Over the past year, the states and territories with the strongest annual growth in trend employment were the ACT (4.8 per cent) Queensland (4.7 per cent) and New South Wales (3.6 per cent).

All states and territories recorded a decrease in their trend unemployment rates, except the Northern Territory and the ACT (which increased 1.1 and 0.3 percentage points respectively).

Final Auction Results Up(ish)

CoreLogic’s final auction results are out for last Saturday. Higher than last week, but significantly lower than last year at this time.

Last week, the final auction clearance rate increased across the combined capital cities, returning a 63.7 per cent clearance rate across almost double the volume of auctions week-on-week (1,470).

Over the week prior, a clearance rate of 62.0 per cent was recorded across 790 auctions. Both auction clearance rate and volumes were lower than what was seen one year ago, when a 73.2 per cent clearance was recorded across 1,591 auctions.

Opinions Differ On The Australian Interest Rate Outlook

We heard from both Westpac and NAB on the outlook for interest rates both here and in the US. There is consensus that rates will rise in the US, but not in Australia.

Alan Oster, NAB Chief Economist says:

The RBA has indicated that it is in no rush to raise rates in lock-step with global central bank counterparts. However, lower unemployment, and evidence of wages growth moving upwards — even gradually — should be enough to give the RBA confidence that inflation will eventually lift above the bottom of the band. We continue to forecast two 25 basis point rate hikes in August and November, although acknowledge the risks are that these hikes could be delayed.

Whereas Bill Evans, Westpac’s Chief Economist sees no change in the RBA cash rate this year or next.

This raises an interesting question. How far can the “elastic stretch” between Australian and US rates? Bill Evans says “with two more Fed hikes expected in 2019, we now anticipate that the differential will reach negative 112 basis points by June 2019”.

That is uncharted territory with the previous record being negative 50 basis points in the late 1990s.

This suggests the Australian dollar will be lower, towards 70 cents, compared with its current rate of close to 80 cents relative to the US dollar.

CBA Blocks Credit Card Purchases of Bitcoin Etc.

CBA has said that due to the unregulated and highly volatile nature of virtual currencies, customers will no longer be able to use their CommBank credit cards to buy virtual currencies. This came into effect as of 14 February 2018.

Our customers can continue to buy and sell virtual currencies using other CommBank transaction accounts, and their debit cards.

We have made this decision because we believe virtual currencies do not meet a minimum standard of regulation, reliability, and reputation when compared to currencies that we offer to our customers. Given the dynamic, volatile nature of virtual currency markets, this position is regularly reviewed.

The restriction on credit card usage for virtual currencies will also apply to Bankwest credit cards.

Q&A

Why are we making this change?

Virtual currencies are unregulated and, as has been made clear in recent months, highly volatile. Effective 14 February, we will no longer authorise credit card purchases for these currencies.

How can I buy virtual currencies?

You can still buy and sell virtual currencies using other CommBank transaction accounts, and debit cards, as long as you comply with our terms and conditions and all relevant legal obligations.

I recently tried to purchase virtual currencies using my debit card and it was declined. Why did this happen?

We are aware of some instances where customers found that their attempts to buy or sell virtual currencies did not work. This can be due to a number of reasons, including:

The virtual currency exchange the customer is using has been blocked by our security systems. A currency exchange will be blocked if a number of the transactions it has previously processed are found to have been fraudulent, inconsistent with our policies or outside of the Group’s risk tolerance.

The payment method the customer uses is no longer accepted by the currency exchange. Some exchanges have recently stopped accepting certain payment methods.

The virtual currency exchange’s bank blocks the transaction for security reasons.

Can I still get credits from virtual currency exchanges paid to my credit card?

Yes, credits will continue to be authorised by the Bank onto credit cards.

US Inflation Up 0.5% In January

More evidence of inflation lurking in the US economy, as the headline rate for January was higher than expected. This gives more support to the view the FED will indeed lift interest rates.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.5 percent in January on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index rose 2.1 percent before seasonal adjustment.

The seasonally adjusted increase in the all items index was broad-based, with increases in the indexes for gasoline, shelter, apparel, medical care, and food all contributing. The energy index rose 3.0 percent in January, with the increase in the gasoline index more than offsetting declines in other energy component indexes. The food index rose 0.2 percent with the indexes for food at home and food away from home both rising.

The index for all items less food and energy increased 0.3 percent in January. Along with shelter, apparel, and medical care, the indexes for motor vehicle insurance, personal care, and used cars and trucks also rose in January. The indexes for airline fares and new vehicles were among those that declined over the month.

The all items index rose 2.1 percent for the 12 months ending January, the same increase as for the 12 months ending December. The index for all items less food and energy rose 1.8 percent over the past year, while the energy index increased 5.5 percent and the food index advanced 1.7 percent.

ASIC welcomes establishment of the Australian Financial Complaints Authority

ASIC welcomes the passage through Parliament of the Bill to establish the Australian Financial Complaints Authority (AFCA).

AFCA will be the culmination of more than 20 months of public consultation and inquiry, commencing with the review of the dispute resolution framework by an independent panel led by Melbourne Law School’s Professor Ian Ramsay.

ASIC Deputy Chair Peter Kell said, ‘Fair, timely and effective dispute resolution is a cornerstone of the financial services consumer protection framework. The combination of firms’ internal dispute resolution procedures and access to a free independent external scheme currently provides redress for many tens of thousands of Australians each year. Strengthening these dispute resolution requirements will help deliver higher standards and better outcomes in the financial services market.’

‘The establishment of a single scheme for all financial services and superannuation complaints is a very positive development, building on the outcomes achieved over many years by the existing three schemes: the Financial Ombudsman Service (FOS), the Credit and Investments Ombudsman (CIO) and the Superannuation Complaints Tribunal.’

Higher monetary limits and compensation caps, including for primary production businesses, will give more consumers and small businesses access to a free and independent forum to resolve their complaints.

ASIC will work with Government and scheme stakeholders to ensure that the transition to the commencement of AFCA is as smooth as possible. In the interim, ASIC will retain direct oversight of the two ASIC-approved schemes – FOS and CIO – which will continue to provide high levels of service to consumers and firms. Separate arrangements are in place for the ongoing operation of the SCT to enable it to deal with existing complaints.

Important information about transition

AFCA will start accepting complaints no later than 1 November 2018

The operator of the scheme will be authorised by the Minister, and the scheme will be subject to ongoing oversight by ASIC.

In order to maintain access to external dispute resolution for consumers in the lead up to commencement of AFCA, ASIC will monitor member compliance with existing EDR scheme requirements as well as the effectiveness of scheme operations.

Members of each of CIO and FOS – including licensees and credit representatives – must continue to maintain their EDR membership through this period, including paying membership and other scheme fees in full as required. ASIC has asked the two schemes to report any failure of members to do so.

A memorandum of understanding between CIO and FOS will prevent members inappropriately moving between the schemes in the transition period.

ASIC will be consulting soon on updated Regulatory Guide 139 (REG 139), which will set out details of ASIC’s oversight of AFCA. This will be finalised and published when AFCA commences operations.

ASIC will also publicly consult on new IDR standards and the mandatory IDR reporting requirements that are also contained in the AFCA Bill – but this consultation will not take place until afterAFCA commencement.

Current legislative IDR requirements for superannuation trustees and retirement savings account providers (including 90-day timeframes and requirements for written reasons) will continue to apply in their current form until ASIC consults on and then issues updated IDR policy (RG 165).

ANZ comments on APRA capital discussion paper

ANZ today noted the release of the Australian Prudential Regulation Authority’s (APRA) discussion paper on revisions to capital requirements and confirmed ANZ’s APRA CET1 position of 10.8% as at December 2017 is already in compliance with APRA’s existing Unquestionably Strong requirements.

The paper outlines proposed changes to the capital framework following the finalisation of the Basel III reforms in December 2017 and changes to its risk framework, with APRA’s implementation timetable extending to 2021.

ANZ will continue to consult with APRA to fully understand the impact of the proposed changes. APRA has confirmed that if the proposed changes result in an overall increase in risk weighted assets, it will reduce the capital ratio benchmark of 10.5% flagged in July 2017.

ANZ’s current capital ratio of 10.8% includes the proceeds of the sale of Shanghai Rural Commercial Bank and a small benefit of the sale of its Asian retail and wealth businesses. Further benefits will be achieved following completion of other asset sales, including the sale of the Australian wealth businesses.

APRA has also proposed a minimum leverage ratio requirement of 4% for Internal Ratings-Based (IRB) banks and changes to the leverage ratio exposure measure calculations for implementation by 1 July 2019. ANZ’s leverage ratio at December 2017 is 5.5%.

ANZ’s previously announced buy-back up to $1.5 billion of shares on-market relating to the sale of ANZ’s 20% stake in Shanghai Rural Commercial Bank remains ongoing.

ANZ Chief Financial Officer Michelle Jablko said: “The divestment of non-core businesses should continue to provide ANZ with the flexibility to consider further capital management initiatives in the future. Further initiatives will be considered once we receive the proceeds of our announced sales and will remain subject to business conditions and regulatory approval.”

Royal Commission updates online form

From The Adviser.

Following an article in The Adviser highlighting a ‘major flaw’ in the online form for the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, the commission has now updated the form to better reflect channel choice.

On Wednesday, The Adviser ran a story in which Queensland-based broker Nicki McDavitt warned that the figures cited by the initial hearing of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry could be wrong, after she identified what she called a “major flaw” in the commission’s online form.

The form asks users to identify the “nature of the dealings” in which misconduct took place.

However, the only option specifically relating to home loans fell under the category ‘mortgage broker’. Ms McDavitt therefore said that the commission’s figures on mortgage broker-related misconduct could be “false” as they may include information relating to bank branch home loans (and therefore be miscategorised).

However, the royal commission has today (14 February) updated the form to allow users to select ‘home loan/mortgage’ under the ‘personal finance’ option (see below). The mortgage broker option has also been updated to read ‘entity that arrange homed loan/mortgage’

Speaking to The Adviser following the change, Ms McDavitt said: “I’m absolutely thrilled. I’m thrilled that I was listened to and I’m thrilled that it has been changed.”

Ms McDavitt said the Royal Commission thanked her for bringing it to their attention as they had “not even realised that it was not even there” and brought it up with the web designers who changed it today (14 February).

“I said to [the contact]: ‘It does mean that those statistics that you have been flouting will be wrong’ and she acknowledged that it could be a risk, but said: ‘Thankfully we’ve caught it early’. And I said ‘yes’.”

The Adviser had asked the commission yesterday (13 February) for a comment on the issue and whether it would be changing the form, and received the following response: “The online submission process is working well and based on the number of submissions received to date, we are confident that those using the form have been able to identify correctly the nature of their dealings, including to identify home loans taken out with banks.

“We are also reviewing submissions as they come in to ensure that they are appropriately categorised.

“We are committed to ensuring that the information on our website is clear and easy to understand, so we will continue to review and improve the website going forward.”

The heads of both the mortgage broker associations had spoken to The Adviser this morning, both highlighting that they would be raising this issue of the online form error with the royal commission.

Speaking to The Adviser after the change, the executive director of the FBAA, Peter White, welcomed the change, but added that he believed the bank branches “still get off lightly, as the grouping/sections for arranging loans is highlighted separately for brokers, whereas the bank branches are not identified separately but rather in the cluster titled ‘Personal Financial’”.

He added: “This should read as ‘Personal Banking’ or the like, and then have the itemisation in brackets following it.”