Category: Banking Culture

New credit card rules will impact brokers, says lawyer

Brokers should be applying new credit card assessment rules to their loan applications, the solicitor director of The Fold Legal has suggested. Via The Adviser.

The Australian Securities and Investments Commission (ASIC) last year announced new assessment criteria that is to be used by banks and credit providers when assessing new credit card contracts or credit limit increase for consumers.

Under the changes, credit licensees are required to assess whether a credit card contract or credit limit increase is “unsuitable” for a consumer based on whether the consumer could repay the full amount of the credit limit within the period prescribed by ASIC.

ASIC outlined last year that, as part of the new measures, credit licensees undertaking responsible lending assessments for “other credit products”, including mortgages, should ensure that the consumer “continues to have the capacity to repay their full financial obligations” under an existing credit card contract, within a “reasonable period”.

Speaking of the new rules, Jaime Lumsden Kelly, solicitor director of The Fold Legal, has suggested that, while it is not mandatory for brokers, both lenders and brokers should apply the same rules to their loan applications.

Writing in a blog post for The Fold Legal, Ms Lumsden Kelly elaborated: “In the past, credit card contracts were assessed as unsuitable if the applicant couldn’t repay the minimum monthly repayment for that limit. Under the new rules, credit card providers must make their assessment based on whether the applicant can repay the entire credit card limit within three years.

“If a credit card applicant cannot repay the full credit limit in three years, it’s assumed that they will be in substantial hardship. This is because a consumer who cannot afford to repay the limit within three years will probably pay a staggering amount of interest that will take an extraordinarily long time to repay. 

“If the applicant is in substantial hardship, the credit card provider must decline the application as being unsuitable,” she said.

While the rule doesn’t “technically” apply to other lenders or brokers, the lawyer added that “all lenders and brokers have an obligation to reject a credit contract if it would place the consumer into substantial hardship”.

“If the inability to repay a credit card within three years is considered to be a substantial hardship when assessing a credit card application, how can it also not be substantial hardship, if a consumer will no longer be able to repay their credit card within three years because they’re meeting new repayment obligations on a car or home loan?” she said.

Ms Lumsden Kelly gave the following scenarios as an example to illustrate the point.

In the first scenario, an applicant with a $500,000 mortgage applies for a $15,000 credit card. When assessing the credit card, the provider determines that the applicant is “unsuitable” because they won’t have enough income to repay their credit card limit in full within three years. So the credit card provider declines the application.

However, if the same applicant already has a $15,000 credit card and then applies for a $500,000 mortgage (on identical terms as in the first scenario). The licensee is only required to consider whether the applicant can make the minimum monthly repayment on their credit card when determining if they will suffer substantial hardship. On this basis, the licensee approves the mortgage.

“The end result for the applicant is the same in both scenarios,” she said. “They have a $500,000 mortgage and a $15,000 credit card limit. So how can we say that they are in substantial hardship in one scenario but not in the other?

“It’s an absurd outcome that the same person could be approved or declined for a credit product just because they applied for them in a particular order.”

The Fold Legal solicitor concluded: “Over time, the courts and AFCA may seek to align the obligations of all credit providers and brokers. In the meantime, ASIC has said it expects all credit licensees to apply the rule to existing credit cards by 1 July 2019.

“This means credit providers and brokers should consider the implications of this situation when determining how they will assess a credit card holder’s capacity to pay and substantial hardship for other loan applications.”

She urged any brokers unsure of how the rules affect their business or credit obligations to contact a lawyer.

APRA On Financial Firm Conduct – Could Do Better

APRA’s report released today highlights the gaps which still exist across our financial firms, following the CBA analysis. Worryingly, despite firms’ boards and management teams being aware of the risk and accountability deficits which exist, some are not addressing them appropriately. Indeed, in some organsiations, there is still limited visibility of potential non-financial risks.

The Final Report of the Prudential Inquiry into the CBA found that continued financial success dulled the institution’s senses to signals that might have otherwise alerted the Board and senior executives to a deterioration in the bank’s risk profile. This was particularly evident in relation to the management of non-financial risks.

The Prudential Inquiry also found a number of prominent cultural themes; there was a widespread sense of complacency, a reactive stance in dealing with risks, insularity and not learning from experiences and mistakes, and an overly collegial and collaborative working environment that lessened constructive criticism, timely decision-making and a focus on outcomes.

The Final Report listed 35 recommendations focussing on five key levers of change:

  • more rigorous board and executive committee governance of non-financial risks;
  • exacting accountability standards reinforced by remuneration practices;
  • a substantial upgrading of the authority and capability of the operational risk management and compliance functions;
  • injection of the “should we” question in relation to all dealings with and decisions on customers; and
  • cultural change that moves the dial from reactive and complacent to empowered, challenging and striving for best practice in risk identification and remediation.

In releasing the Final Report, APRA noted that all regulated financial institutions would benefit from conducting a self-assessment to gauge whether similar issues might exist in their institutions. APRA subsequently wrote to the chairs of 36 institutions requesting a board endorsed written self-assessment of the effectiveness of their own governance, accountability and culture practices. APRA received all of these assessments by mid-December 2018.

APRA’s request for institutions to conduct the self-assessments was intentionally not prescriptive. Boards were asked to determine an approach to the assessment which would provide them with a comprehensive understanding of the effectiveness of governance, accountability and culture, and enable them to form a view as to the extent the ‘tone from the top’ is permeating through and across the institution. As a result, the structure, methodology and format each institution took to completing the self-assessment was considered an important indicator of how seriously boards approached the task.

APRA set three principles that it expected the self-assessments to reflect:

  • Depth – to enable the board to gain assurance that appropriate governance, accountability and culture are embedded in practices and behaviours, and enforced within the various levels and across the group-wide operations;
  • Challenge – either independent or self-challenge, to provide the board with fresh perspectives on the strength of governance, accountability and culture (e.g. the assessment should not only reflect the view of the risk function); and
  • Insights – to inform the board of areas requiring attention and improvement, and how better practice can be achieved.

Emerging themes

While the self-assessments exhibited considerable variation in the number and severity of findings, four themes emerged across all industries:

  • non-financial risk management requires improvement. This was evidenced through a range of issues identified by institutions, including resource gaps (particularly in the compliance function), blurred roles and responsibilities for risk, and insufficient monitoring and oversight. Institutions acknowledged that historical underinvestment in risk management systems and tools has also contributed to ineffective controls and processes.
  • accountabilities are not always clear, cascaded, and effectively enforced. Institutions noted that, while senior executive accountabilities are fairly well defined within frameworks, there is less clarity or common understanding of responsibilities at lower levels, and points of handover where risks, controls and processes cut across divisions. This is further undermined by weaknesses in remuneration frameworks and inconsistent application of consequence management.
  • acknowledged weaknesses are well known and some have been long-standing. The majority of self-assessment findings were reported to be already known to boards and senior leadership. Nevertheless, some issues have been allowed to persist over time, with competing priorities, resource and funding constraints typically cited as the basis for acceptance of slower progress. It was observed that these issues are often only prioritised when there is regulatory scrutiny or after adverse events.
  • risk culture is not well understood, and therefore may not be reinforcing the desired behaviours. Institutions are putting considerable effort into assessing risk culture, but many continue to face difficulties in measuring, analysing, and understanding culture (and sub-cultures across the institution). It is therefore unclear if these institutions can accurately determine whether their culture is effectively reinforcing desired behaviours (or identify how it would need to be changed to do so).

While the self-assessments contained some in-depth self-reflection and acknowledgement by institutions of issues within their organisations, the assessments relating to the effectiveness of boards and senior leadership were notably less critical. Many self-assessments noted that the institution is generally well governed, with a respected and suitably challenging board, strong executive leadership teams and a good tone from the top, although at the same time acknowledging weaknesses spanning most or all chapters of the Final Report. This raises the question of whether boards and senior management have a potential blind spot when it comes to assessing their own effectiveness.

Labor missed a trick with mortgages

Aussie Home Loans boss James Symond has described the mortgage industry’s mammoth lobbying efforts as a “case book study” in uniting a competitive industry – via InvestorDaily.

Few sectors of the financial services universe had more riding on the 2019 federal election than mortgage broking. A Labor victory would have been a devasting blow to the third-party channel, which is responsible for helping most Aussies secure finance to buy a home. 

“The industry banded together. You couldn’t be prouder of them all. This is a case book study of an industry that felt vulnerable and came together and stepped up to defend itself,” Mr Symond told Investor Daily. “You had individual mortgage brokers working in small businesses around the country having one-on-one meetings with MPs,” he said. 

Regardless of what their individual political views might have been, this election was deeply personal for mortgages brokers, who earn an average of around $86,000 – far from what some might consider the “big end of town” that Labor was hell bent on destroying. Shorten effectively galvanised a formidable opposition in the third-party channel by failing to back down on remuneration changes. 

After the Hayne royal commission recommended scrapping broker commissions, the industry quickly united to lobby both sides of the government. The result saw an enlightened coalition confirm no changes would be made to broker remuneration. Labor, on the other hand, would act on Hayne’s view and ban trail commissions while introducing a higher cap of 1.1 per cent on upfront commissions. 

With the opinion polls prior to the election pointing to a Labor victory, the mortgage industry was making one hell of a gamble. 

“It was very much a bet, because we couldn’t infiltrate Labor,” Mr Symond said. “With the Liberals, we got onto the right people who listened, who were open to being educated about how the mortgage broking industry operates and its value to consumers. But Labor was simply not interested.

“We got lucky that the coalition got back in. We don’t have to worry about the fact that Labor wouldn’t listen.” 

 It was a major misstep for Labor not to interact with the mortgage broking fraternity, given the opposition’s strong stance on economic matters. Negative gearing reforms were a major policy for Labor, which could have easily won over an army of mortgage brokers and the first-home buyers they represent by coming to the table on remuneration. Linking affordability and home ownership with the value proposition of a mortgage broker is easy enough to spin. 

On the flipside, those with negatively geared properties who use the services of a broker would be highly unlikely to vote for a Shorten government. Including many brokers themselves. 

“Labor had their own agenda,” Mr Symond said. “They didn’t give a hoot about mortgage brokers.”

“Thankfully the coalition got in, because it would’ve been a different story if they didn’t. We have some stability now.”

The broking industry has the government on its side and will continue to drive competition in the mortgage market – something that was in serious jeopardy if Labor had succeeded and scrapped trail commissions. 

In addition to Aussie Home Loans, listed broking businesses like Mortgage Choice, AFG and Yellow Brick Road – which recently confirmed that it is doubling down on mortgages – will be the obvious beneficiaries of the Coalition’s win. 

What will be interesting to watch is how the major banks react. While they have historically moved as a group, the question hanging over the broking industry has led them in different directions in recent years. 

The royal commission and the 2019 federal election were arguably the final battles in a multiyear campaign that has ultimately sealed a victory for the third-party channel and the millions of home buyers it serves.

Why the banking royal commission will ultimately achieve little

From The Conversation.

Will the banking services royal commission have a lasting effect of improving the banking and financial sector? The answer is “no”. A temporary change is apparent, but the problems lie deeper than those addressed by the royal commissioner.

The worldwide pervasiveness of financial sector misconduct is an indication.

This is not a criticism of the Royal Commission as such. It had a limited mandate and limited time, although its approach of focusing on Australian case studies further limited its scope. And a broader investigation of economic and social underpinnings of financial sector misconduct would have required a different sort of Inquiry.

It’ll be hard to act on the report we had

Even then, any recommendations for fundamental changes to financial sector structure and activities needed to inhibit misbehaviour would have to run the gauntlet of gaining political support in the face of vested interests.

The response to, and government capitulation on, the Hayne recommendation regarding mortgage broking fees starkly illustrates the point.

Why will the recommendations not be a lasting solution? An important reason is that the royal commission interpreted “behaviour consistent with community standards” in a limited way to refer to situations in which customers were actually harmed.

But much of community angst over financial sector conduct relates to the broader use of market power and superior knowledge to extract an “unfair” share of the benefits from transactions with customers.

And it missed the broader problem…

Customers don’t get a fair share of the benefits from transactions, competition doesn’t work to make sure they do, and customers are often unaware that they have been exploited.

Why is it happening? The answer lies partly in this comment of Royal Commissioner Kenneth Hayne on page 54 of his interim report:

Much if not all of the conduct identified in the first round of hearings can be traced to entities preferring pursuit of profit to pursuit of any other purpose

Economists will rightly argue that there is nothing inherently wrong with the pursuit of profit or self-interest. It facilitates the efficient allocation of resources.

But unless it is accompanied by a concern with fairness (“do unto others as you would have them do unto you”) in situations of market power and superior information, as typically occurs in financial markets, it will lead to vulnerable consumers being exploited.

…which is a grey zone of unfairness

There is a large and poorly defined grey area between self-interested but clearly fair behaviour and self-interested unfair behaviour, which, in turn, merges into misconduct and illegal activity.

It is difficult for (particularly large) institutions operating in that grey area, even if committed to “fairness”, to ensure their employees do not slide towards the boundary. Or over it.

Moreover, competition between financial institutions in search of profits can lead to a “race to the bottom” in terms of lower financial product quality. This is not always apparent to some (or many) consumers – at their expense.

The financial sector particularly vulnerable to this problem.

First, many financial products and services are “credence goods” where the consumer needs them but is unable to assess their real worth either before or after the purchase.

A perfect example is a visit to the doctor. Often the reason we are visiting the doctor is because we don’t know what’s wrong with us. It makes it necessarily difficult or impossible to tell whether the doctor is good at her job.

Bankers sharpen their claws on each other

Second, much of the activity in financial markets is about trading and making profits (supposedly using superior information and expertise) at the expense of the another party in those markets.

If it is “right” for that part of the entity that does that to make money at someone else’s expense, why is it wrong for the part of the entity that deals with consumers to do that?

Here’s how the Commission could have tackled these problems in order to achieve real, longer term benefits.

Yet we license them…

First, it could have considered whether giving financial institutions a valuable “social licence” to operate in important business areas under advantageous institutional structures should bring with it extra enforceable obligations.

It could have also considered whether, given the lack of misconduct found in the mutual and cooperative sector, banks and other financial institutions could be organised more like mutuals.

Second, it could have recommended changes that would have given stakeholders other than shareholders (such as depositors and employees) a greater say in running those organisations (perhaps at board level) and a say in shaping their culture.

…and we could change the way they’re run

Third, it could have recommended structural separation between the retail and wholesale arms of firms to reduce complexity and the risks of deficiencies in control systems.

Structural separation could have also reduced the risk that the culture of trading and position-taking, in which profits are made at the expense of another party, spilled over into other parts of the institution where it wasn’t wanted.

Finally, it could (and should) have concentrated more on consumer protection.

It is a much broader issue than deterring and penalising misconduct.

Until consumer financial literacy catches up with financial product innovation and complexity, there will continue to be a big “market for financial misconduct”.

Exhorting institutions to do no harm won’t take it away.

The arguments made in this paper are developed in more detail in “The Hayne Royal Commission and Financial Sector Misbehaviour: Lasting Change or Temporary Fix? Economics and Labour Relations Review, Vol 30 (2), June 2019.

Blue Sky in receivership

Brisbane group Blue Sky Alternative Investments has gone into receivership following the breach of its $47.7 million loan facility from US-based Oaktree Capital Partners., via InvestorDaily.

Oaktree has appointed receivers to the fallen group, enforcing its rights under the note facility after Blue Sky failed to reach its minimum required recurring earnings for the first quarter.

The administration is limited to the group and does not extend to its Alternative Access Fund along with its other subsidiaries.

Blue Sky last week withdrew from negotiations for Wilson Asset Management to take over management of the ASX-listed Alternative Access Fund.

The fund is now considering its options including a wind-down and a return of capital to shareholders.

“This appointment is necessary if Blue Sky is to maintain its investment teams, key clients and stabilise the operations and capital structure of the business,” Blue Sky told its shareholders.

The company added its administration follows “a period of significant instability and uncertainty for all stakeholders, including further commentary regarding possible class actions, turnover of senior corporate executives and departure of certain partners. There is considerable work to be undertaken in the immediate future.”

Blue Sky had $2.8 billion in fee earning assets under management as of 31 March, down from its half year result of $3 billion as reported at the end of December.

Blue Sky has now paused trading, but closed on Friday with its shares at 18 cents. They had once reached $14.99 in November 2017.

The company reported a $25.7 million loss for the half year, which it attributed to its business restructuring costs.

Mark Korda and Jarod Villani of advisory and investment firm KordaMentha have been appointed as receivers and managers, while Bradley Hellen and Nigel Markley of Pilot Managers will be acting as voluntary administrators.

 KordaMentha partner Mark Korda said the appointment would not affect the day-to-day operating activities of the asset manager.

“Our objective during the first phase of the receivership is to stabilise the business as a strategic assessment is undertaken,” Mr Korda said.

“Existing management and key contacts for relevant stakeholders, employees and unitholders will continue to be in place as normal.

“It will allow greater flexibility for the restructure of Blue Sky and seek to ensure the future of the business as an alternative asset investment management platform.”

Oaktree had given the Brisbane-based asset manager the loan facility in September last year.

The US investment group’s managing director Byron Beath resigned as a director on the Blue Sky board as the loan breach was announced to the market

NZ Reserve Bank censures ANZ

The Reserve Bank has revoked ANZ Bank New Zealand Limited’s (ANZ) accreditation to model its own operational risk capital requirement due to a persistent failure in its controls and attestation process.

ANZ is now required to use the standardised approach for calculating appropriate operational risk capital. From March 2019, this will increase its minimum capital held for operational risk by around 60%, to $760 million.

The Reserve Bank requires banks to maintain a minimum amount of capital, which is determined relative to the risk of each bank’s business. The way that risk is measured is important for ensuring that each bank has an appropriate level of capital to absorb large and unexpected losses.

“Accreditation is earned through maintaining high risk management standards, and comes with stringent responsibilities for the bank’s directors and management,” says Deputy Governor Geoff Bascand.

“The Reserve Bank’s role is to review and approve internal models. The onus is then on bank directors to ensure, and attest, that their bank is compliant with the Reserve Bank’s regulatory requirements. To do that, bank directors need to be satisfied that the internal assurance processes that sit behind the attestations are being adhered to.

“ANZ’s directors have attested to compliance despite the approved model not being used since 2014. The fact that this issue was not identified for so long highlights a persistent weakness with ANZ’s assurance process.”

The Reserve Bank had encouraged ANZ to undertake a full review of its attestation process, and assess its compliance with capital regulations, Mr Bascand says.  ANZ’s failure to use an approved model was revealed through that review.

“A bank’s disclosure statement is required to contain certain statements signed by each director of the bank. These must state, among other things: whether the bank has systems in place to monitor and control adequately the banking group’s material risks and whether those systems are being properly applied; and whether the bank has complied with its conditions of registration over the period covered by the disclosure statement.

“These directors’ attestations are important because they strengthen the incentives for directors to oversee, and take ultimate responsibility for, the sound management of their bank.

“We continue to work with ANZ in assessing its systems controls before determining any further action.” 

ANZ is one of four big banks in New Zealand that are accredited by the Reserve Bank to use their own risk models – the internal models approach – in calculating their regulatory capital requirements.

The Reserve Bank is currently consulting on its capital framework for banks. Among the many decisions to be made, and in part due to proven weaknesses with the internal models approach, it is proposing that all banks adopt a new standardised approach for calculating operational risk capital.

Note to editors:

Attestation regime

A bank’s disclosure statement is required to contain certain statements signed by each director of the bank. These must state, among other things: whether the bank has systems in place to monitor and control adequately the banking group’s material risks and whether those systems are being properly applied; and whether the bank has complied with its conditions of registration over the period covered by the disclosure statement.

These directors’ attestations are important because they strengthen the incentives for directors to oversee, and take ultimate responsibility for, the sound management of their bank.

What are capital requirements?

Bank capital is a source of funding that banks use that stand first in line to absorb financial losses they might make. The Reserve Bank, like other regulators around the world, sets the minimum level of capital a bank must use to fund its operations. The more capital a bank has, the less likely it is to fail.

There are three broad types of risks that banks are required to have capital for:

Credit risk – the risk that borrowers will be unable to pay back their loans

Market risk – the risk that a change in market conditions, such as changes in the exchange rate, will cause losses for banks

Operational risk – other risks that relate largely to the systems of a bank, such as a computer systems failure

What is internal modelling?

Locally incorporated banks in New Zealand can calculate their capital requirements in two ways: the internal models approach or the standardised approach.

Under the internal models approach a bank is able to use statistical models to assess the riskiness of its business such as the risk of its mortgage loans, or its level of operational risk. The bank’s internal models need to be approved by the Reserve Bank to ensure they are conservatively designed. Banks also need to meet several qualitative criteria to use this approach, such as proper governance and validation of these internal models. The banks in New Zealand that are accredited to use the internal models approach are ANZ, ASB, BNZ, and Westpac.

Under the standardised approach, the amount of capital that is required is prescribed in a set of formulae by the Reserve Bank.  This approach is simpler for banks to use than the internal models approach and easier to implement.

What is an operational risk model?

Operational risk capital requirements are designed to provide banks with sufficient capacity to absorb a wide range and magnitude of operational risk-related losses (from, for example: inadequate or failed internal processes, people or systems; or from external events, including legal risks). Underestimation of the amount of operational risk capital that a bank needs can undermine a bank’s financial soundness and could make it more likely to fail.

What is the Capital Review?

The Capital Review is a review of the capital requirements that the Reserve Bank sets for locally incorporated banks. It seeks to address several questions about New Zealand’s current framework: What should New Zealand’s risk tolerance be for banking crises? Do banks have sufficient levels of capital? What should the quality of capital be in New Zealand? Should we allow internal modelling for capital requirements? Should there be a significant difference between internal modelling and standardised approaches?

As part of its current Capital Review, the Reserve Bank is reviewing its capital framework for banks. Due in part to proven weaknesses with the internal models approach and in line with moves by other supervisor banks around the world, the review proposes that all banks adopt a new standardised approach for calculating operational risk capital.

YBR overhauls company, CEO to step down

Yellow Brick Road Holdings Limited has announced that it is to create a “much simpler business” by disposing of its head office wealth business functions and focusing on mortgages, which will see CEO Frank Ganis step down from his role. Via The Adviser.

In an update to the ASX, YBR revealed a new business strategy which would not include wealth advisory – but instead focus on mortgages, both through distribution and servicing, as its mortgage businesses “offer significant leverage to the market”.

Under the new structure, YBR would retain its franchise network (which currently consists of 115 branches and more than 140 accredited business writers) that has an underlying mortgage book of approximately $7.6 billion.

According to the company, the present value of the net trail commission receivable as of the end of the calendar year was around $15.7 million.

YBR will also retain Vow Financial aggregation, which reportedly has a network of 505 broker firms with more than 1,000 accredited brokers origination around $785 million in mortgage settlements per month.

The underlying mortgage book is reportedly around $39.8 billion with net trail commission receivable at $13.6 million.

The new YBR group will also retain its mortgage servicing arm, via the manufacture and servicing of mortgage originations through its existing Resi Mortgage Corporation business.

The Resi and Loan Avenue brands under this business have a current underlying mortgage book of around $1.8 billion and net trail receivable of $18.5 million, according to YBR.

The Resi sales team currently sources and services the mortgage distribution networks and mortgage funding entities and will reportedly undertake the credit function for the YBR group’s intended securitisation programme, when that comes to fruition.

This securitisation programme will be taken “in joint venture with a major US alternative asset manager” and intends to manufacture and fund mortgage products for YBR’s in-house and third-party distribution outlets.

According to YBR, the joint venture is “in the later stages of final due diligence and negotiation and documentation in this long and complex process with multiple parties”.

Speaking of the Resi business, YBR said: “This existing business allows us to more closely manage and track mortgage application and approval times and outcomes and assist in directing flow to the most appropriate funding sources and is an essential component of the mortgage value chain, particularly in the post Hayne Royal Commission period. It allows us to bring our distribution partners closer to the process of approving loans.”

Wealth business to be ‘disposed of, outsourced, or otherwise restructured’

In order to “concentrate its efforts” as a mortgage distribution, servicing and manufacturing group – and “reduce significantly the cost-to-income ratio of the business” – the YBR board has reportedly decided to commence a process to “dispose of,outsource or otherwise restructure the head office wealth business functions”.

This will therefore result in “a headcount reduction to the business overall”.

While YBR franchisees will still be able to distribute wealth products and give wealth advice to their existing and future clients, it is intended that this would be done under a separate Australian Financial Services Licence (AFSL) with one or more third parties.

“Going forward, the cost of maintaining YBR’s AFSL and associated compliance functions and liabilities would then no longer be borne by the YBR Group.

“The restructure of the wealth business is expected to significantly reduce our cost base allowing us to run a leaner and more cost-effective organisation,” the update reads.

However, YBR said that “there is no certainty that the securitisation initiative or the wealth restructure process will result in a definitive proposal or transaction, however YBR will continue to implement the operational improvements and the restructure of key operational roles.”

Given the changes, Group CEO Frank Ganis will step down from his role to take up a part-time position where he will “consult to the group on a number of initiatives, including “building [its] securitisation programme and funding partnerships, growing [its] brands, continue operational and customer service improvements, and industry advocacy”.

Executive chairman Mark Bouris will oversee the transition of the YBR Group to the “new, streamlined business structure”.

The move comes following a difficult year for the brokerage brand, with its unqualified audit-reviewed half-year report for the six months to 31 December 2018, reporting a net loss after tax (NLAT) of $34.15 million.

However, the company’s most recent financial results for the quarter ending 31 March 2019 (3Q19), recorded an operating cash surplus of $40,000, a $110,000 increase from a deficit of $70,000 in the previous quarter.

The increase was partly driven by a 5 per cent reduction in its operating cash outflows (excluding its branch and broker share of revenue), which declined from $8.4 million to $8 million.

The improvement in YBR’s cash position was also reported against a backdrop of falling home lending volumes, with settlements declining by 20 per cent in 3Q19, from $3.1 billion to $2.5 billion.

The group stated that its lending performance was “impacted by regulatory factors and the royal commission into banking and financial services”.

Its decision to offload its wealth business follows a spate of similar divestments, with several major banks – including CBA and ANZ – announcing in the past year that they would offload their wealth businesses and run “more simplified” banking businesses.

APRA accused of downplaying competition risks

A new report has found that APRA has “downplayed” and “dismissed” competition risks associated with its regulatory reforms, according to a new report, via InvestorDaily.

A new report commissioned by the Customer Owned Banking Association (COBA) and compiled by Pegasus Economics – titled Reconciling Prudential Regulation with Competition – has found that changes to the regulatory capital framework have undermined competition in the mortgage market.  

According to the report, the Australian Prudential Regulation Authority (APRA) did not give enough credence to competition risks when applying the internal ratings basis (IRB) method for calculating risk weights provided for under Basel II – a banking regulations framework designed to promote financial stability.

The report found that under Basel II, credit and operating risk weights determined under the standard method were “much higher” than those under the IRB method used by the major banks.

Research from the Reserve Bank of Australia was cited, in which the central bank found that at the end of June 2015, the average risk weight of residential mortgage exposures using the IRB method was 17 per cent, compared to 40 per cent using the standardised approach used by smaller lenders.

The report noted that as a result of the disparity, higher costs were incurred by lenders using the standard method, which influenced the pricing of lending products and, in turn, reduced competitiveness with major banks.

According to the report, due to the imbalance, the major banks have enjoyed a funding cost advantage in excess of $1,000 annually on a residential mortgage of $400,000.

“APRA downplayed as well as dismissed competition concerns during its implementation of Basel II and did not follow due process by completing the required competition assessment checklist in the Regulation Impact Statement it prepared for Basel II,” the report noted.

“The actions of APRA, in turn, implies the competition-fragility view of banking is endemic to the organisation.

“The outcomes arising from the interaction of the global financial crisis (GFC), coupled with the implementation of Basel II, vindicates the criticisms of Basel II from a competition perspective.”

The report went on to state: “Through its implementation of Basel II, APRA put smaller ADIs at a major competitive disadvantage and undermined competitive neutrality.

“The available evidence suggests the interaction of the GFC combined with the implementation of Basel II provided a major fillip to the major banks to the detriment of other ADIs.”

In addition, the report found that APRA’s decision to increase the average risk weight for IRB banks from an average of 16 per cent to a minimum of 25 per cent has prompted some lenders to engage in “cream skimming” by targeting home loans with the lowest risk profile, which focused competitive pressures on “high-demand” borrowers.

“Cream skimming has adverse consequences as it skews the level of risk in house lending away from the major banks and towards other ADIs who have to deal with an adversely selected and far riskier group of home loan applicants,” the report noted.

With APRA set to release a draft revised capital framework, the COBA-commissioned report called for policy measures that would ensure regulation does not continue to “stifle” competition in the banking sector.  

The recommendations include:

  • Addressing the lack of coordination between prudential regulation and competition policy and overcoming the “competition-fragility view” of banking, which the report stated would ensure that competition considerations are given due deliberation in prudential regulatory policy decisions through a statutory secondary competition objective for APRA.
  • Compelling IRB banks to hold more capital, which the report stated would reduce the fragility of the banking system and ensure benefits achieved from injecting greater competition into the banking system can be realised.
  • Increasing granularity for risk weights for banks using the standardised approach, which would “improve competition in home lending”.

Reflecting on the findings of the report, COBA CEO Michael Lawrence said it’s “timely” given the “acute need for a competitive and efficient home lending market”.

“Following the financial services royal commission, there’s a renewed focus on how regulators and government can improve competition in banking and ensure major banks are accountable without reducing financial stability,” Mr Lawrence said. 

He added: “The rules on risk weights mean there is too large a gap between the amount of capital that smaller banks must hold compared to the major banks.

“The report says APRA should be looking to close the gap in risk weights and it should ensure that it does so in a way that prevents the major banks cream-skimming the lowest-risk home loans.”

Mr Lawrence recently welcomed the passage of the Treasury Laws Amendment (Mutual Entities) Bill 2019 through both houses of Parliament.

The bill includes a new definition for a mutual entity as a company where each member has no more than one vote, changes to demutualisation rules to ensure that it is only triggered by an intended demutualisation, not by other acts such as capital raising, and the creation of a mutual-specific instrument that can be used to raise capital.

COBA has also published a ‘Comptetition Agenda’ahead of the federal election, designed to promote pro-competitive reform in the banking sector.

Fund managers slammed for paying ratings agencies and platforms

A damning new report recommending extensive reform in the financial sector has taken aim at fund managers that pay a sponsorship fee to have their product offered on wraps and platforms, via InvestorDaily.

In its 60-page report entitled Professionalising Financial Advice, the CFA Institute and CFA Societies Australia detailed their concerns over the practice where some platforms or adviser groups place ‘wraps’ around existing funds and then market their own ‘products’ to clients as a way to access certain funds or investment managers. 

“This allows the adviser to charge higher fees than would apply if the client was given direct access to the underlying investment product,” the report noted. 

While the royal commission final report did not cover platform fees in detail, Hayne’s interim report stated: 

Licensees may and often do include third party manufacturers of products on their approved product lists (including the approved product lists maintained by platforms) but, much more often than not, advisers recommend that clients use products that are manufactured by entities associated with the advice licensee with which the adviser works.

Related to this practice is the issue of fund managers paying a ‘sponsorship fee’ or ‘shelf space fee’ to have their products offered on platforms, the CFA Institute said. 

“This means that even if a firm claims to be independent and use ‘open architecture’ (offering access to all products), the best products are not necessarily those that are put in front of a client seeking advice.”

In its comments on platforms, the interim report of the Hayne royal commission noted that the charging of platform fees evoked comparisons with “fees for no service” because the default setting seemed too often to be “set and forget”. 

“Charging platform fees evoked comparison with inappropriate advice because, very often, the platform that an adviser recommended the client use was a platform provided by an entity associated with the licensee with which the adviser was aligned or by which the adviser was employed and the arrangements were allowed to stay in operation despite the platform not remaining cost-competitive” said Mr Hayne in his interim report. 

“Both the practice of ‘set and forget’ and the ways in which fees for, and services provided by, platforms could remain unaltered over time show that customers using platform services exert little or no effective competitive pressure on platform operators.”

The CFA Institute argues that, just as when recommending investment products, financial advisers should have the client’s best interest in mind when recommending an investment platform. 

“This is consistent with the financial services regime which treats platforms as financial products and hence best interest must be observed when one is recommended.”

The CFA Institute also warned about fund managers paying to have their products rated by rating agencies.

“The conflict is obvious – an agency is being paid by a fund manager to rate that manager’s fund offerings. [A] fund manager also may shop around to find an agency that will provide them with a better rating. They then pay this rating firm and advertise the resulting rating of their funds in their marketing material,” the report said.

Finance sector one of the most at risk of data breaches

The inaugural review of the Notifiable Data Breaches Scheme has revealed that the finance sector is one of the most at-risk sectors when it comes to data breaches, via InvestorDaily.

The Notifiable Data Breaches Scheme was set up over a year ago when it became a legal requirement for entities to carry out an assessment whenever they suspected that there had been a data breach. 

The report, that looks back over the scheme’s last 12 months, found that the finance sector had the second highest number of data breach notifications under the scheme. 

In 12 months the NDB reported 964 notifications of which 134 were made by the finance sector with human error accounting for 41 per cent of the data breaches. 

“The consistent presence of the health and finance sectors at the top of the rankings throughout the year likely reflects the scale of data holdings, volume of processing activities and/or sensitivity of the personal information held by those sectors, as well as those sectors’ higher preparedness to report data breaches,” said the report. 

The scheme is clearly working given that data breach notifications went from 127 under the voluntary scheme in 2018-19 to 722 as a result of the compulsory scheme. 

The report also acknowledged that the finance sector had a great financial reward for cyber criminals which they attributed to the rise in attacks in recent years. 

“Accordingly, a high proportion of finance sector breaches—56 per cent—were attributed to malicious or criminal attacks,” it said. 

Despite this, contact information was the most common form of personal information disclosed through data breaches, with 86 per cent of notifications. 

Over half of all breaches (60 per cent) across the regulated entities were attributed to malicious or criminal attacks with phishing continuing to be the most common method. 

There was also 28 per cent of cyber incidents where credentials were obtained by unknown means as the entities had not detected any phishing-based compromise. 

Fortunately, 83 per cent of breaches affected fewer than 1,000 people with most attacks affecting just one person, but there were 19 attacks where an unknown number of people were affected. 

The Australian information and privacy commissioner Angelene Falk, who operates the scheme, said that many entities were actively engaged with the scheme to create better practices. 

“Many entities have taken a proactive approach in engaging with the OAIC, and we have been able to work constructively with those in their response. 

“As the year has progressed, some maturation has been evident in entities assessing the likely consequences of a data breach and in their subsequent notification processes,” she said. 

Moving forward Ms Falk said that she expected entities to take proactive steps to prevent breaches. 

For the finance industry, steps are already being taken with the introduction of APRA’s prudential standard on information security which will help ensure the finance sector’s resilience to information security incidents. 

“I encourage entities regulated by the Privacy Act to review the report and use the learnings to enhance their prevention and response strategies for the benefit of all Australians,” said Ms Falk