Category: Banking Culture

ECB Introduces Deposit Tiering System

On 12 September, the European Central Bank (ECB) announced that it will introduce a two-tier system for banks’ reserve remuneration, exempting a portion of deposits in excess of the minimum reserve requirement from the negative deposit facility rate and giving that portion a 0% rate instead. The introduction of the tiering system on banks’ excess liquidity placed at the central bank is credit positive, says Moody’s.

This is because it will reduce the cost of holding liquidity at the ECB, providing a partial offset. They expect that the tiering mechanism will be particularly positive for banks with material excess liquidity.

The announcement comes as the ECB’s Governing Council announced that it would maintain its accommodative monetary policy stance given slowing economic conditions in Europe, persistent downside risks of global trade tensions and muted inflationary pressures. As a result, the ECB relaunched its Asset Purchase Programme and lowered the rate on the deposit facility by 10 basis points to negative 0.50% from negative 0.40%.

The tiering system on banks’ excess liquidity will moderate the negative effect of persistent low rates on banks in the euro area.

The two-tier system will exempt from negative interest a maximum volume of six times the banks’ minimum reserve requirement, therefore paid at 0%. The minimum reserve requirement and the non-exempted portion of the excess reserves will be charged 0.5%.

The tiering system will apply to all banks and start at the end of October 2019.

Since the aggregated minimum reserve requirement is currently €132 billion, approximately €786 billion (six times the aggregated minimum requirement) would be exempt from negative rates. The remaining reserves and deposit facility would be subject to the new deposit rate of negative 50 basis points, providing a net annual benefit to the euro area’s banks of about €2 billion relative to the status quo of negative 40 basis points on the full balance of €1.9 trillion liquidity placed at the ECB, equivalent to 0.8% of EU banks’ annual net interest income.

In 2018, Moody’s estimate that banks’ €1.8 trillion of total liquidity placed at the central bank at a rate of negative 0.40% cost around €7 billion. This compares with US banks, whose deposits placed with the US Federal Reserve in 2018, remunerated at a rate of 2.35%, represented a revenue of around €40 billion.

The introduction of a two-tier system for banks’ reserve remuneration will be particularly positive for German and French banks, whose liquidity holdings exceed the most their reserve requirements and account for more than 60% of the total liquidity placed at the ECB. The tiering mechanism that the ECB has introduced is similar to the mechanism implemented by Switzerland’s central bank, which also set exemption thresholds for deposit rates as a multiple of banks’ minimum reserve requirements.

Southern European banks will benefit to a lesser extent because they do not hold large amounts of excess reserves at central banks.

However, they will continue benefiting from the third series of targeted longer-term refinancing operations (TLTRO III). The ECB in June 2019 announced that banks could access two years of funding at 10 basis points above the ECB’s refinancing rate of 0%. On 12 September, the ECB removed the 10-basis-point surcharge and announced that TLTRO funding would extend to maturities of three years instead of two, conditions that will be particularly favourable for banking systems with large outstanding repayments from previous TLTRO programmes, such as those in Italy and Spain.

Can AMP save financial advice?

From the excellent James Mitchell at InvestorDaily. The embattled wealth manager has outlined an ambitious strategy to deliver financial advice to more Australians at a time when its competitors are abandoning the sector completely.

When AMP announced its new advice strategy last month, including a significant reduction in practice values, the news was met with anger and frustration by a significant cohort of its advisers. 

But unlike its major bank competitors the group is not looking to sell off its advice arm; instead, it has set itself the challenging task of trying to service more customers.

“It’s about more advice to more people in more ways,” AMP group executive, advice, Alex Wade told Investor Daily. “We have to solve the problem of not enough advice for Australians.”

Research by Momentum Intelligence shows that 71 per cent of Australians who don’t have a financial adviser don’t actually know what one does. There is a fundamental lack of awareness among the population about the value of advice. The royal commission, which gained widespread media coverage, hasn’t helped groups like AMP or its 2,200-strong network of advisers. 

The company has announced plans to invest half a billion dollars in its advice channel, including the development of a digital offering, which Mr Wade says will aid human interactions rather than compete with them. 

“I think there is a very big market for face-to-face. I think that will grow given that competitors are leaving,” he said. 

“The trouble with face-to-face advice is it is becoming more expensive, given regulatory changes and compliance costs.

“The AMP strategy is that we are doubling down on all advice where the others are leaving. I think we need to focus on our face-to-face advisers having compliant, professional practices at a business level. We also need to solve the underlying problem with digital.”

Mr Wade sees the digital advice element effectively acting as an engagement tool for the mass market – customers that cannot afford to pay a financial adviser a hefty annual fee. Yet. 

“That will be supported by phones, people still want to speak to a person, but I think for the mass Australian, people who can’t afford face-to-face advice yet, we need to solve it with digital. That digital channel will then send people up the three tiers to phone or face-to-face. 

“I think it will help our advisers, both employed and aligned, because they will be able to use our digital service for some of those clients who can’t afford face-to-face advice. For example, the children of their clients,” he said. 

As fees for service replace commissions, the natural trend has been for advice practices to move up-market and begin servicing wealthier clients who can actually afford their fees. 

“This all creates a problem for those who can’t afford advice,” Mr Wade said. “We are trying to counter that. We have announced $500 million to invest in advice. A large part of that will be technology in practices, compliant in design, to make them as efficient as possible.”

No Australian company has been able to successfully deliver a digital advice offering that has been embraced by the mass market. Yet. But AMP believes it can do just that. 

The company’s brand has been badly bruised by a series of scandals in recent years. Its new advice strategy has triggered an ugly backlash from advisers that have already been given termination letters. But that’s only half of the story. 

The group recently raised $784 million from shareholders, much of which will be spent on its journey to bring a digital advice solution to market while continuing to develop its network of employed and aligned advisers. The company has been in the advice game a long time. Its new approach appears to be one that will use the power of digital channels to optimise face-to-face advice, rather than eradicate it.

Lenders sought for the First Home Loan Deposit Scheme

The National Housing Finance and Investment Corporation (NHFIC) is starting detailed consultations with lenders regarding their potential participation the Federal Government’s new First Home Loan Deposit Scheme, via Property Observer.

The Scheme is scheduled to commence on 1 January 2020.

It will be administered by NHFIC, subject to the passage of legislative amendments, which have been introduced into the Parliament today. 

It is known as the National Housing Finance and Investment Corporation Amendment Bill. Michael Sukkar, the Minister for Housing, presented the bill.

It seeks to establish a First Home Loan Deposit Scheme to assist eligible first home buyers with a minimum 5 per cent deposit (rather than the industry standard of 20 per cent) to purchase a home.

NHFIC is seeking feedback from lenders on implementation of the Scheme via a market sounding consultation process.

This market sounding is the pre-cursor to a procurement process which will be used to establish a panel of lenders to participate in the Scheme.

It builds on initial stakeholder consultations undertaken to date. 

All residential mortgage lenders are welcome to participate in the market sounding process.

NHFIC is making a Scheme Features paper available to participants for the purposes of the market sounding process. 

Further information on the market sounding process, including how lenders can participate and obtain a copy of the Scheme Features paper, is available via the NHFIC website

Responses to the market sounding are required to be submitted before 5pm AEST on Thursday 3 October 2019. 

The introduction of legislation giving effect to the Commonwealth Government’s deposit gap scheme is the first step in easing the pathway to home ownership, according to the Urban Development Institute of Australia (UDIA).

The UDIA’s National Executive Director Connie Kirk has welcomed introduction of the legislation and said the next critical step was getting design features right.

ASIC makes product intervention order banning short term lending model

ASIC has used its product intervention power to ban a model of lending in the short term credit industry which has been found to cause significant consumer detriment.

In its first deployment of this power ASIC targeted a particular business model where a short term credit provider and its associate charged fees under separate contracts.

The law allows short term credit providers to remain exempt from credit licensing, conduct and responsible lending obligations under the National Consumer Credit Protection Act 2009, if the fees charged for a loan of up to 62 days do not exceed 5% of the loan amount and 24% per annum interest.

Under the short term lending model, the short term credit provider charged costs within these limitations, however its associate charged significant upfront, ongoing and default related fees under a separate contract for management and administrative services in relation to the loan. When combined, these fees can add up to almost 1000% of the loan amount.

The model has been used by Cigno Pty Ltd and Gold-Silver Standard Finance Pty Ltd, and more recently by MYFI Australia Pty Ltd and BHF Solutions Pty Ltd.

In making the order, ASIC considered:

  • submissions received in response to CP 316, with only 2 out of 35 submissions opposing ASIC’s proposed product intervention order;
  • data provided by industry participants, demonstrating the size and scale of the short term credit industry; and
  • ASIC complaints data in relation to the short term lending model, which comprised over 200 reports of misconduct, with the      majority being about excessive fees and charges.

The order does not seek to modify the existing exemption for short term credit; rather, it ensures that short term credit providers and their associates do not structure their businesses in a manner which allows them to charge fees which exceed the prescribed limits for regulated credit.

In announcing ASIC’s decision Commissioner Sean Hughes said “ASIC is ready and willing to use the new powers that it has been given. The product intervention power provides ASIC with the power and responsibility to address significant detriment caused by financial products, regardless of whether they are lawfully provided.

ASIC will take action where it identifies products that can or do cause significant consumer detriment. In this case, many financially vulnerable consumers incurred extremely high costs they could ill-afford, often leading to payment default that only added to their financial burden.”

The order is an industry wide order made by legislative instrument and will apply to any person that attempts to use this short term lending model or variations of the model. The order was registered with the Federal Register of Legislation on 12 September 2019 commencing on 14 September 2019 and remains in force for 18 months unless it is extended or made permanent. ASIC can extend the order’s duration or make it permanent, but only with Ministerial approval.

There are criminal and civil penalties for breaching the product intervention order, including up to 5 years imprisonment and fines of up to $1.26 million per offence.

Broker remuneration at “lowest levels ever observed”

The Mortgage and Finance Association of Australia (MFAA) has released a report examining the broker channel’s performance over the past six months; via AustralianBroker.

The eighth edition of the Industry Intelligence Service Report (IISR) drew on data supplied by 12 major aggregators from October 2018 to March 2019. 

While the the broker channel achieved a record high market share of 59.7% during the period, it settled just $87.56bn in home loans – the lowest six-month value recorded since the MFAA commenced reporting in 2015, down 10.32% on the previous year. 

The average value of new home loans settled per broker also continued to decline but at a rate “far greater than ever before,” down 10.66% on the year before. 

The number of loan applications also reached never before charted territories, with applications down 8.53% from the period before and 13.39% year-on-year.  

Further, the average number of applications lodged per broker declined across all states excepting Tasmania. 

The broker population is down from the record high of 17,040 industry participants, with the net industry turnover – accounting for those joining and leaving the industry, as well as those moving between aggregators – up to 10.9% from 9.6% a year ago. 

Notably, despite the proportion of new female recruits increasing by 10% compared to new male recruits, the population of female brokers declined over the six months, down 1.79%.

All of these factors contributed to a fall in the average total broker remuneration “to the lowest levels ever observed” by the IISR. 

Average combined remuneration has dropped 3.49% from the last six month period and is down 3.08% year on year. Compared to the high of April to September in 2016, it’s down 9.64%. 

The report linked the decline to the lower upfront commissions as trail increased across all states. 

The MFAA reiterated throughout the report that the inhospitable credit environment did not only impact the broker channel, as the value of home loans settled directly with lenders was down 15.71% from the last six months and 19.1% from the year before.

COBA CEOs remind MPs, don’t lose sight of competition

More than 30 CEOs and Directors from customer owned banking institutions will arrive in Canberra today to remind Members of Parliament to keep competition in mind as the Financial Services Royal Commission recommendations are implemented.

The leaders of Australia’s customer owned banking institutions and the Customer Owned Banking Association will urge MPs to adopt the principles of proportionate regulation and invest in more ways to boost competition in the retail banking market.

Customer Owned Banking Association CEO Michael Lawrence said that customer owned banking institutions are key to improving competition in the retail banking market but need to be given the opportunity to compete fairly.

“The message is clear, greater competition leads to greater customer outcomes. Government must keep competition front of mind if consumers are to receive a better outcome from their banking.

“Without robust competition consumers are the ones who lose out. If there isn’t fear that your customers will up and leave you, there is very little incentive for banks to do what is best for customers.

“The customer owned banking model is the customer focused alternative to the investor owned model. Our CEOs are here to remind MPs that for more than 150 years, our sector has been trusted by Australians to look after their banking and financial well-being.”

Mr Lawrence said customer owned banking institutions aren’t asking to be regulated differently; but in proportion to the size, scale and complexity of their organisation.

“Using the one size fits all approach for all authorised deposit taking institutions with no consideration of the size or complexity of the organisation has serious consequences.

“The cost of compliance for a smaller institution may outweigh the benefits of the regulation, leading to stifled innovation and reduced investment in the community.”

While a more pro-competitive mindset is important, Mr Lawrence said customer owned banking institutions encourage government to do more to make it easier for consumers to switch banks. “There is a role for Government to play to help make it easier for consumers to switch. Creating a task force of Treasury, ACCC, ASIC, industry and consumer groups to investigate the barriers to switching is a good start.”

ASIC Westpac HEM Battle Is Not Over, Yet…

The ABC, via Michael Janda is reporting that ASIC is appealing the recent judgment which found in favour of Westpac and their use of the Household Expenditure Measures benchmark.

This is important because the Federal Court’s decision in the landmark ASIC v Westpac test case on responsible lending laws could mean the poverty line becomes the new test for whether a loan is responsible or not.

Justice Perram’s judgment, should it stand, effectively validates the bank’s use of the HEM benchmark in assessing loan applications — a benchmark used in some way by most home lending institutions.

ASIC commissioner Sean Hughes said the regulator felt compelled to appeal after Justice Perram ruled that a lender “may do what it wants in the assessment process”.

“The Credit Act imposes a number of legal obligations on credit providers, including the need to make reasonable inquiries about a borrower’s financial circumstances, verifying information obtained from borrowers and making an assessment of whether a loan is unsuitable for the borrower,” he said in a statement.

“ASIC considers that the Federal Court’s decision creates uncertainty as to what is required for a lender to comply with its assessment obligation, nor does ASIC regard the decision as consistent with the legislative intention of the responsible lending regime.

“For those reasons, ASIC will appeal to the Full Court of the Federal Court.”

ASIC sues Bendigo and Adelaide Bank for use of unfair contract terms

ASIC has commenced proceedings in the Federal Court of Australia against Bendigo and Adelaide Bank concerning unfair contract terms in small business contracts.

ASIC alleges that certain terms used by Bendigo and Adelaide Bank in contracts with small businesses are unfair. If the Court agrees with ASIC, the specific terms will be void and unenforceable by the Bendigo and Adelaide Bank in these contracts.

ASIC alleges that certain terms used by the Bendigo and Adelaide Bank and are unfair, as the terms:

  • cause a significant imbalance in the parties’ rights and obligations under the contract;
  • were not reasonably necessary to protect the Bendigo and Adelaide Bank’s legitimate interests; and
  • would cause detriment to the small businesses if the terms were relied on.

Some of the unfair terms pleaded by ASIC include clauses that give lenders, but not borrowers, broad discretion to vary the terms and conditions of the contract without the consent of the small business owner, along with clauses that allow the bank to call a default, even if the small business owner has met all of its financial obligations.

ASIC is also seeking a declaration from the Federal Court that the same terms in any other small business contract are also unfair.

Background

If the Federal Court finds that any of the terms of the standard form contracts are unfair, the unfair terms are void (it is as if the terms never existed in the contracts). ASIC is seeking that the terms are declared void from the outset – not from the time of the court’s declaration. The remainder of the contract will continue to bind parties if it can operate without the unfair terms.

Since 1 July 2010, ASIC has administered the law to deal with unfair terms in standard form consumer contracts for financial products and services, including loans.

With effect from 12 November 2016, the unfair contract terms provisions applying to consumers under the Australian Consumer Law and the ASIC Act were extended to cover standard form ‘small business’ contracts.

Small businesses, like consumers, are often offered contracts for financial products and services on a ‘take it or leave it’ basis, commonly entering into contracts where they have limited or no opportunity to negotiate the terms. These are known as ‘standard form’ contracts. Small businesses commonly enter into these ‘standard form’ contracts for financial products and services, including business loans, credit cards, and overdraft arrangements.

The unfair contracts law applies to standard form small business contracts entered into, or renewed, on or after 12 November 2016 where:

  • the contract is for the supply of financial goods or services (which includes a loan contract);
  • at least one of the parties is a ‘small business’ (under the ASIC Act, a business employing fewer than 20 people is a ‘small business’); and
  • the upfront price payable under the contract does not exceed $300,000, or $1 million if the contract is for more than 12 months.

In March 2018, ASIC released Report 565: Unfair contract terms and small business loans. The report:

  • Identifies the types of terms in loan contracts that raise concerns under the law;
  • Provides details about the specific changes that have been made by the ‘big four’ banks to ensure compliance with the law; and
  • Provides general guidance to lenders with small business borrowers to help them assess whether loan contracts meet the requirements under the UCT law