Industry insiders have revealed why banks are distancing themselves from wealth management and how their actions will reshape the Australian financial services sector; via InvestorDaily.
There
are a number of reasons why the big four have decided, to varying
degrees, to put a ‘for sale’ sign on their wealth management
businesses.
Some major bank chief executives have run a ruler
over their advice businesses and seen poorly performing divisions that
just don’t provide enough margin for the group’s bottom line.
Others,
like Westpac CEO Brian Hartzer, have seen the “writing on the wall” and
the mountain of increasing compliance that must be scaled to make
advice operational, let alone turn a profit.
But it may also have
been a strategic play based on negative sentiment, bad press and the
misguided belief that commissioner Hayne would propose an end to
vertically integrated wealth models.
“What
it looks like the banks have done in most cases, or in some cases, is
they’ve picked up their vertically integrated business, which consist of
advice and other products, and have looked to distance themselves from
that by either demerging or selling the wealth business,” Lifespan
Financial Planning CEO Eugene Ardino said.
Speaking exclusively
on the Investor Daily Live webcast on Wednesday (3 April), the dealer
group boss said the banks aren’t actually dismantling their conflicted
businesses – they’re selling them as bundled, vertically integrated
models where product and distribution sit under the same roof.
“That’s
not dismantling vertical integration. That’s really them trying to
distance themselves from wealth management. Whether that now goes ahead
in some cases remains to be seen,” he said.
“Perhaps what could have happened is some sort of recommendation around how to limit vertical integration or how to control it.
“The
issue you have is when you take a business that’s focused on sales and
that business takes over as the dominant force in a company that also
provides advice, then sales wins. I think that’s natural. Perhaps if
they had started there, that could have led to some moderation of
vertical integration.”
The royal commission hearings, more than
anything, were a targeted attack on the sales culture of large financial
institutions, many of which repeatedly defended their models as
profit-making businesses, often beholden to shareholders.
“In
product businesses, their job is to sell. That’s fine. There’s nothing
wrong with that. But if you’re putting an adviser hat on, there needs to
be some separation. That’s an issue of culture,” Mr Ardino said.
I
haven’t seen some of the employment contracts of the advisers from some
of the groups that got into trouble, but I would venture a guess that a
lot of their KPIs talk about new business rather than retaining
business and servicing clients.”
Fellow panellist and Thomson
Reuters APAC bureau chief Nathan Lynch said that despite Hayne’s failure
to propose banning vertical integration in wealth management, the model
will ultimately be dismantled by market forces.
“Hayne points
out that a lot of the dismantling of the vertically integrated model
comes down to the fact that it’s just not profitable. You have an
environment where vertical integration will be dismantled to some extent
by competitive forces and by technology,” he said.
“Servicing
the vast majority of client is going to become very difficult. Most
businesses are starting to pivot to the high end. I think we need to
view technology in advice as a positive, as an enabler.”
Deposit Bail-In is something which we have been discussing in recent times, not least because of the overt example now active in New Zealand under the Open Banking Resolution, the mandate from the G20 and the Financial Stability board and the implementation in several other countries in response to this.
In Australia, the situation has been unclear, since the 2018 bill was passed on the voice.
Treasury and politicians keep denying there is any intent to bail-in deposits to rescue a failing bank, but then divert to a discussion of the $250k deposit insurance scheme which first would need to be activated by the Government, and second only once a bank has failed. It is irrelevant to bail-in.
Bail-in is where certain instruments could be converted to shares in a bank to buttress its capital in times of pressure to attempt to stop a bank failing, and so would reduce the risk of a Government bail-out using tax payer funds. They will use private funds (potentially including deposits, which are unsecured loans to a bank), instead.
So, today we release an opinion from Robert H. Butler, Solicitor. This was addressed to the Citizens Electoral Council of Australia, and is published with their permission. The key finding is simply that:
Whilst not beyond doubt, it is my opinion that the provisions of the Act do provide for a power of bail-in of bank deposits which did not exist prior to the passing of the Act.
This means that unless the law is changed to specifically exclude deposits (any side of politics going to volunteer to drive this?), bank deposits are not unquestionably free from the risk of bail-in. And we have the view that the vagueness is quite deliberate, and shameful.
Time to pressure our members of Parliament, and raise this issue during the expected election ahead.
Here is the full opinion:
I have been asked to provide an opinion as to whether the Financial
Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Act
2018 (“the Act”) creates a power of bail-in by Australia’s banks of
customers’ deposits.
At a minimum, the Act empowers APRA to bail in so-called
Hybrid Securities – special high-interest bonds evidenced by instruments which
by their terms can be written off or converted into potentially worthless
shares in a crisis.
However, the Act also includes write-off and conversion
powers in respect of “any other
instrument”. The Government has contended that these words do not extend to
deposits, on the basis that the power only applies to instruments that have
conversion or write-off provisions in their terms, which deposit accounts do
not. However, the reference to “any other
instrument” would be unnecessary if the power only applied to instruments
with conversion or write-off provisions; moreover, banks are able to change the
terms and conditions of deposit accounts at any time and for any reason,
including on directions from APRA to insert conversion or write-off provisions,
which would thereby bring them within the specific terms of the write-off or
conversion provisions of the Act.
The issue could now be simply resolved by Government
passing a simple amendment to the Act to explicitly exclude deposits from being
bailed in.
Bail-in is one of the 3 alternative actions which can be
taken in respect of a distressed bank.
The alternatives are:-
Bankruptcy and liquidation of the bank;
Bail-out, which is the injection into the bank
of the necessary capital to meet the bank’s liabilities. This is the action
which was undertaken after the 2008 GFC by governments through their Treasuries
and Central Banks bailing out the banks with taxpayers’ funds;
Bail-in, which is the injection into the bank of
the necessary capital to meet the bank’s liabilities either by the bank writing
off its liabilities to creditors or depositors or converting creditors’ loans
or deposits into shares whereby creditors and depositors take a loss on their
holdings. A bail-in is the opposite of a bail-out which involves the rescue of
a financial institution by external parties, typically governments that use
taxpayers’ money.
Liability
limited by a scheme, approved under Professional Standards Legislation
The provisions of the Act as they affect bail-in require a consideration
of the issue in 3 different sets of circumstances, and the provisions of the
Act need to be considered separately in relation to each such set of
circumstances.
Those 3 sets of circumstances are:-
Hybrid Securities issued by banks;
Customer deposit accounts with banks;
Bank documentation implementing deposit
accounts.
(i) Hybrid securities
The ASX describes Hybrid Securities as “a generic term used to describe a security
that combines elements of debt securities and equity securities.” Whilst there
are a variety of such securities, in short they are securities issued by banks
which permit the amounts secured by the security to be converted into shares or
written off at the option of the bank in certain circumstances.
The Act provides specifically for Hybrid Securities.
Section 31 adds “Subdivision
B-Conversion and write off provisions” to the Banking Act 1959 and inserts
a definition Section 11CAA which provides that “conversion and write off
provisions means the provisions
of the prudential standards that relate to the conversion or writing off of:
Additional
Tier 1 and Tier 2 capital; or
any
other instrument.”
The Act also inserts Section 11CAB which provides:
“(1)
This section applies in relation to an instrument that contains terms that are
for the purposes of the conversion and write off provisions and that is issued
by, or to which any of the following is a party:
(a) an ADI;
……
The
instrument may be converted in accordance with the terms of the instrument despite:
any
Australian law or any law of a foreign country or a part of a foreign country,
other than a specified law; and
…..
The
instrument may be written off in accordance with the terms of the instrument
despite:
any
Australian law or any law of a foreign country or a part of a foreign country;
…..
Under the Basel Accord, a bank’s capital consists of Tier 1
capital and Tier 2 capital which includes Hybrid Securities.
The Section 11CAB provisions mean that any law which would
otherwise prevent the conversion or write-off of Hybrid Securities does not apply
unless a particular legislative provision specifically provides that it does
apply. One of the principle types of legislation that this provision would be
directed towards is consumer legislation, particularly those provisions which
allow a Court to set aside or vary agreements if a party has been guilty of
false or misleading conduct – this is precisely the sort of argument which
could be raised in the circumstances referred to by outgoing Australian
Securities and Investments Commission (ASIC) Chairman Greg Medcraft in an
exchange with Senator Peter Whish-Wilson in the hearings of the Senate
Economics Legislation Committee on 26 October 2017: Mr Medcraft said: “There are two reasons we believe a lot of
the retail investors buy these securities. One is they don’t understand the
risks that are in over 100-page prospectuses and, secondly – and this is
probably for a lot of investors – they do not believe that the government would
allow APRA to exercise the option to wipe them out in the event that APRA did
choose to wipe them out.“
When Senator Whish-Wilson raised the spectre of
“bail-in”, Mr Medcraft confirmed: “Yes, they’ll be bailed in. The big issue with these securities is the
idiosyncratic risk. Basically, they can be wiped out – there’s no default; just
through the stroke of a pen they can be written off. For retail investors in
the tier 1 securities – they’re principally retail investors, some investing as
little as $50,000 – these are very worrying. They are banned in the United
Kingdom for sale to retail. I am very concerned that people don’t understand,
when you get paid 400 basis points over the benchmark [4 per cent more than
normal rates], that is extremely high
risk. And I think that, because they are issued by banks, people feel that they
are as safe as banks. Well, you are not paid 400 basis points for not taking
risks…” He emphasised: “I
do think this is, frankly, a ticking time bomb.“
The over-riding intention behind Sections 11CAB(2) and
11CAB(3) is to deal with issues arising from the examples in the comments of
Graeme Thompson of APRA in an address on 10 May 1999 when he said: “… APRA will have powers under proposed
Commonwealth legislation to mandate a transfer of assets and liabilities from a
weak institution to a healthier one. This is a prudential supervision tool that
the State supervisory authorities have had in the past, and it has proved very
useful for resolving difficult situations quickly. We expect the law will
require APRA to take into account relevant provisions of the Trade Practices
Act before exercising this power, and to consult with the ACCC whenever it
might have an interest in the implications of a transfer of business.”
The new Sections 11CAB(2) & (3) mean that APRA does not need to consider
those issues (or any other) in relation to conversion and write-off of Hybrid
Securities.
(ii) Deposits
Whether or not bail-in of other than Hybrid Securities is
implemented by the Act has been the subject of debate and concern since the
Bill which led to the Act became public. The principal area of concern is
whether or not the bail-in regime was extended by the Act to deposits made by
customers with banks.
The central issue is the wording of the definition in
Section 11CAA quoted above and what “any
other instrument” means. “Instrument”
is not defined in the Act but a “financial
instrument” is defined by Australian Accounting Standard AASB132 as “any contract that gives rise to a
financial asset of one entity and a financial liability or equity instrument of
another entity.” As confirmed by the Reserve Bank, a deposit with an
ADI bank comes under such a definition – it is a contract with terms and
conditions as to the deposit being set by a bank, accepted by a depositor on
making a deposit and creating a financial asset (a right of repayment) and a
financial liability in the bank (the obligation to repay).
Deposits are created by “instruments” and are governed by the terms and conditions of
those instruments.
The intent of the reference to “any other instrument” in Section 11CAAAA is assisted by the
Explanatory memorandum which accompanied the Exposure Draft and which states:
“5.14
Presently, the provisions in the prudential standards that set these
requirements are referred to as the ‘loss absorption requirements’ and
requirements for ‘loss absorption at the point of non-viability’. The concept
of ‘conversion and write-off provisions’ is intended to refer to these, while
also leaving room for future changes to APRA’s prudential standards, including
changes that might refer to instruments that are not currently considered
capital under the prudential standards.”
Section 11AF of the Banking Act provides that APRA can
determine Prudential Standards which are binding on all ADIs. These standards
are in effect regulations which have the force of legislation by virtue of the
authorisation in the Banking Act. That Section provides, inter alia:
“(1)
APRA may, in writing, determine standards in relation to prudential matters to
be complied with by: (a) all ADIs; …..”
Banks are ADIs.
The various Prudential Standards issued by APRA are
accordingly headed with the phrase: “This
Prudential Standard is made under section 11AF of the Banking Act 1959 (the
Banking Act).”
That power then leads into the issue of APRA using this
authority to expand the meaning of “capital”
the subject of conversion or write-off, to encompass deposits if deposits are
not already covered by the reference to “any
other instrument”.
That these provisions as to conversion and write-off are
not limited to Hybrid Securities is confirmed in Section 11CAA itself as quoted
above. The provisions extend to “any
other instrument” by sub-section (b) of that Section and must relate
to instruments other than those referred to in sub-section (a), i.e. other than
“Additional Tier 1 and Tier 2 capital”
(being instruments which themselves contain an explicit provision for
conversion or write-off). All instruments that the Act refers to as to being
able to be converted or written off “in
accordance with the terms of the instruments” come under the
definition of “Additional Tier 1 and Tier
2 capital” – “any other
instruments” is not only an entirely unnecessary addition if the Act
is intended to apply only to instruments with conversion or write-off terms,
its very broad language must be intended to encompass some other instruments (“which are not currently considered capital”
as stated in the Explanatory memorandum) and that could extend to instruments
relating to deposits.
If Section 11CAA thus extends to instruments relating to deposits then APRA
can as the Prudential Regulator issue a Prudential Requirement Regulation or a
Prudential Standard for the writing-off
or conversion of deposits.
APRA already has a power to prohibit the repayment of
deposits by ADIs, a power which already verges on the writing off of those
deposits. The Banking Act Section 11CA provides:
“(1)
… APRA may give a body corporate that is an ADI … a direction of a kind
specified in subsection (2) if APRA has reason to believe that:
…..
the body
corporate has contravened a prudential requirement regulation or a prudential
standard; or
the
body corporate is likely to contravene this Act, a prudential requirement
regulation, a prudential standard or the Financial Sector (Collection of Data)
Act 2001, and such a contravention is likely to give rise to a prudential risk;
or
the
body corporate has contravened a condition or direction under this Act or the
Financial Sector (Collection of Data) Act 2001 ; or
….
(h)
there has been, or there might be, a material deterioration in the body
corporate’s financial condition; or
….
(k)
the body corporate is conducting its affairs in a way that may cause or promote
instability in the Australian financial system.
…..
(2)
The kinds of direction that the body corporate may be given are directions to
do, or to cause a body corporate that is its subsidiary to do, any one or more
of the following:
….
not to repay any money on deposit or
advance;
not to
pay or transfer any amount or asset to any person, or create an obligation
(contingent or otherwise) to do so;
…..”
This provision was inserted into the Banking Act in 2003 by
the Financial Sector Legislation Amendment Act (No 1).
It is not known whether this power has been exercised by
APRA. Relevantly Graeme Thompson in the address referred to above said: ”
… Particularly in the case of banks and
other deposit-takers that are vulnerable to a loss of public confidence, APRA
may prefer to work behind the scenes with the institution to resolve its
difficulties. (Such action can include arranging a merger with a stronger
party, otherwise securing an injection of capital or limiting its activities
for a time.)“
It is a relatively small step to then convert or write-off
what the ADI has been prohibited from repaying or paying out.
It might be argued that APRA’s powers in existing Sections
of the Act are not absolute and are subject to various qualifications and
limitations arising out of their context within the Act or the balance of the
Section or Sections of the Act in which they appear. To avoid such an
interpretation, Section 38 of the Act inserts 2 new sub-sections to Section
11CA in the Banking Act:
“(2AAA)
The kinds of direction that may be given as mentioned in subsection (2) are not
limited by any other provision in this Part (apart from subsection (2AA)).
(2AAB)
The kinds of direction that may be given as mentioned in a particular paragraph
of subsection (2) are not limited by any other paragraph of that subsection.”
APRA has already adopted the need for certain capital to be
capable of conversion or write-off, regardless of laws, constitutions or
contracts which may affect such decisions, the Explanatory Statement for
Banking (Prudential Standard) Determination No. 1 of 2014 stating:
“The Basel Committee on
Banking Supervision (BCBS) has developed a series of frameworks for measuring
the capital adequacy of internationally active banks. Following the financial
crisis of 2007-2009, the BCBS amended its capital framework so that banks hold
more and higher quality capital (Basel III). For this purpose, the BCBS
established in Basel III more detailed criteria for the forms of eligible
capital, Common Equity Tier 1 (CET1), Additional Tier 1(AT1) and Tier 2 (T2),
which banks would need to hold in order to meet required minimum capital
holdings.
Basel III provides that
AT1 and T2 capital instruments must be written-off or converted to ordinary
shares if relevant loss absorption or non-viability provisions are triggered.
Banking (prudential
standard) determination No. 4 of 2012 incorporated the Basel III developments
into APS 111 with effect from 1 January 2013. …”
(iii) Bank documentation implementing deposit accounts
Even if the words “any
other instrument” in Section 11CAA do not encompass deposits, there is a
further issue in relation to the implementation of bail-in of deposits
revolving around the issue of the documents/instruments issued by banks in opening
accounts and accepting deposits from customers.
The documentation issued by each Australian bank when
opening such an account, has a provision which enables the Bank to change the
terms and conditions from time to time without the consent of the customer. The
specifics of the power vary from bank to bank but each fundamentally contain
such a power. Some examples of various clauses are set out in Appendix 1.
If APRA as the Prudential Regulator issued a Prudential
Requirement Regulation or a Prudential Standard requiring a bank to insert a
provision into its documentation/instruments relating to deposit-taking
accounts providing for the bail-in of those deposits – their write-off or
conversion – then those provisions would then clearly come within the specific
provisions of conversion or write-off within the Act and the deposit the
subject of the account could be bailed-in immediately.
Such a directive could be issued by APRA in accordance with
the secrecy provisions in the Australian Prudential Regulation Authority
Act1998 and be implemented with little or no notice to the account holder.
Whilst not directly relevant to an interpretation of the provisions of the Act, there are a number of unusual and concerning aspects to its introduction, passing and intentions.
As noted above, the issue could now be simply resolved by
Government passing a simple amendment to the Act to explicitly exclude deposits
from being bailed in i.e. written off or converted into shares.
Whilst not beyond doubt, it is my opinion that the provisions of the Act do provide for a power of bail-in of bank deposits which did not exist prior to the passing of the Act.
As both the interim and final report from your Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry
has confirmed, the good, decent, hardworking people of Australia are
under attack from their own banking system in a manner reminiscent of an
attack from a foreign invader that wants to destroy the will and
financial resources of the citizens in order to gain absolute control of
the country.
Americans, more than any other people in the world, can understand
and relate to the precarious predicament in which you now find
yourselves. The devious vices and devices of your banksters to transfer
the meager savings of the common man and woman to their own greedy
pockets have been laid bare by your Royal Commission. But just as
happened here in the United States following the report of the Financial Crisis Inquiry Commission, no concrete measures to end the domination of the banks has occurred.
Australians, like Americans, remain on the road to financial ruin at
the hands of predatory banking behemoths that are using their
concentrated money and political power to attack each and every
democratic principle that we cherish as citizens – from repealing
consumer-protection legislation to installing their own shills in
government to regulatory capture of their watchdogs to corrupting the
overall financial system that underpins the stability of our two
countries. Sadly, citizens at large do not understand that their own deposits at these mega banks are being used to accomplish these anti-democratic goals.
What has now occurred in Australia is precisely what has occurred in
America. Last year Bob Katter, MP in your House of Representatives,
introduced the Banking System Reform (Separation of Banks) Bill 2018 in
the Australian Parliament. This year, Senator Pauline Hanson introduced a
bill of the same name in the Australian Senate. The legislation is
tailored after the 1933 legislation that was passed in the United
States, the Glass-Steagall Act, to defang the banking monster that
brought on the 1929 stock market crash and ensuing depression by
separating commercial banks, which take in the deposits of risk-adverse
savers, from the globe-trotting, risk-taking, derivative-exploding
investment banks. (An unsavory group of bank shills succeeded in
repealing the Glass-Steagall legislation in the U.S. in 1999 and then
enriched themselves from the repeal. One year later the U.S. experienced
the dot.com bust and eight years after that the country experienced the
greatest financial crash since the Great Depression – what you call the
GFC or Global Financial Crisis but U.S. bank lobbyists prefer to dub
The Great Recession.)
U.S. Senator Elizabeth Warren, a Democrat, and the late Senator John McCain, a Republican, had been introducing the 21st Century Glass-Steagall Act
for the past five years in the U.S. Congress. Just like the legislation
proposed in Australia, it would have restored integrity to
deposit-taking commercial banks by separating them from the predatory
investment banks that financially incentivize their employees to fleece
unsuspecting customers while using the deposits to engage in high-risk gambles
that regularly implode. The powerful mega banks in the U.S. and their
legions of lobbyists have worked hard to prevent this legislation from
gaining momentum.
Despite the critical need for this legislation in both countries,
mainstream media has not done its share to inform and educate the public
about the pending legislation. We know this to be true in Australia
because the Royal Commission received more than 10,000 submissions from
the Australian public while the Senate’s request for public comment on
the Glass-Steagall legislation has thus far received just 350 responses.
The Senate Committee has elected to publish just a sliver of those responses.
You can submit your comments on the Australian legislation using an online form; or you can email your submission to economics.sen@aph.gov.au;
or you can mail your submission to Senate Standing Committee on
Economics, PO Box 6100, Parliament House, Canberra ACT 2600, Australia. The deadline for submissions is a week from this Friday, April 12, 2019.
In a falling property market, who still has to sell? Property expert Joe Wilkes and I discuss. We also note how the banks are targetting some of these cohorts.
ASIC has welcomed the passage of key financial services reforms contained in the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) legislation introducing:
a design and distribution obligations regime for financial services firms; and
a product intervention power for ASIC
The design and distribution obligations will bring accountability for
issuers and distributors to design, market and distribute financial and
credit products that meet consumer needs. Phased in over two years,
this will require issuers to identify in advance the consumers for whom
their products are appropriate, and direct distribution to that target
market.
The product intervention power will strengthen ASIC’s consumer
protection toolkit by equipping it with the power to intervene where
there is a risk of significant consumer detriment. To take effect
immediately, this will better enable ASIC to prevent or mitigate
significant harms to consumers.
These reforms were recommended by the Financial System Inquiry in
2014 and represent a fundamental shift away from relying predominantly
on disclosure to drive good consumer outcomes.
ASIC Chair James Shipton said the reforms were a critical factor in
the development of a financial services industry in which consumers
could feel confident placing their trust.
‘These new powers will enable ASIC to take broader, more proactive
action to improve standards and achieve fairer consumer outcomes in the
financial services sector. This will be a significant boost for ASIC in
achieving its vision of a fair, strong and efficient financial system
for all Australians,’ he said.
‘This will also provide invaluable assistance to ASIC as we all seek
to rebuild the community’s trust in our banking and broader wealth
management industries. And we note the overwhelming level of support
this attracted from across the Parliament.’
Mr Shipton also welcomed the amendments to the original legislation,
which extended the reach of these reforms, providing a comprehensive
framework of protection for most consumer financial products. It will
also empower ASIC to intervene in relation to a wider range of products
where ASIC identifies a risk of significant detriment to consumers.
In the final part of my discussion with Ex-ANZ Director John Dahlsen, ahead of the closing date for submissions into the Senate Inquiry into Banking Structural Separation, we discussed the core questions, and what barriers really need to be overcome.
ANZ CEO Shayne Elliott has told a parliamentary inquiry that banks triggered the credit downturn impacting the supply of housing finance, via InvestorDaily.
Softening
conditions in the credit and housing space has sparked debate among
market analysts regarding the cause of the downturn, with some
stakeholders, including governor of the Reserve Bank of Australia (RBA)
Phillip Lowe claiming that the “main story” of the downturn is one of
“reduced demand for credit, rather than reduced supply”.
Mr Lowe claimed that falling property prices have deterred borrowers, particularly investors, from seeking credit.
According
to the Australian Prudential Regulation Authority’s latest residential
property exposure statistics for authorised deposit-taking institutions,
new home lending volumes fell by $25.1 billion (6.5 per cent) over the
year to 31 December 2018. The decline was driven by a sharp reduction in
new investment lending, which dropped by $17.7 billion (14 per cent),
from $126.9 billion to $109.2 billion over the same period.
However,
the ANZ CEO has told the House of Representatives’ standing committee
on economics that he believes the downturn in the credit space has been
primarily driven by the tightening of lending standards by lenders off
the back of scrutiny from regulators and from the banking royal
commission.
Liberal MP and chair of the committee Tim Wilson
asked: “Is the reported credit squeeze more demand-driven by borrowers
pulling back or supply-driven by banks being more conservative?”
To
which Mr Elliott responded: “This is a significant question that’s
alive today, and there are multiple views on it. I can’t portion between
those two.
“I’m probably more in the camp that says conservatism
and interpretation of our responsible lending obligations and others
has caused a fundamental change in our processes, and that has led to a
tightening of credit availability.
“It’s a little bit ‘chicken and
egg’,” Mr Elliott added. “If people find it a little bit harder to get
credit, they might step back from wanting to invest in their business or
buy a home, so I think they’re highly correlated, but I do think banks’
risk appetite has had a significant impact.”
Mr Elliott said
that “vagueness and greyness” regarding what’s “reasonable” and “not
unsuitable” as part of the responsible lending test have left the law to
the interpretation of lenders.
“Unfortunately, we haven’t always
had the benefit of a significant amount of precedence or court rulings
on some of those definitions, so we’ve done our best,” he said.
“I
think the processes recently, the questions that this committee has
asked, the questions in the royal commission, have started a debate, not
just with the regulators but with the community about what is the real
definition of [responsible] lending.”
He added: “As a result of
that, we’ve become more conservative in our interpretation, and so we’ve
tightened up, [and some] Australians will find it a little bit harder
to either get credit or get the amount of credit that they would have
otherwise had in the past or would like.
“I’m not suggesting for a minute that it’s wrong, it’s just the reality.”
A Hong Kong-based banker has applauded Australia for shedding light on issues within its financial sector and warned that the issues revealed by the royal commission are widespread across the globe, via InvestorDaily.
CFA
Institute managing director, Asia Pacific, Nick Pollard has held a
number of senior banking roles, including the MD of exclusive British
bank Coutts and CEO of Coutts Asia.
Speaking to Investor Daily,
Mr Pollard said that while the major banks in Australia have shown a
clear interest to be rid of their troubled wealth businesses, the fact
remains that people need wealth management and financial advice.
“The challenge for Australia, which is the
challenge the rest of the world has, is how do you ensure the demands of
the customers are able to be met by organisations that can provide that
advice in a fair and transparent way?
“The industry as a whole
hasn’t been very good at that over the last few years. That’s why
regulators have become involved and it has become tougher to operate in
this climate.”
While the Hayne royal commission has cast a shadow
over the Australian financial services sector over the past 12 months,
Mr Pollard believes the conversations that are now being had off the
back of the inquiry reflect a positive approach that other markets are
yet to benefit from.
“What Australia is doing, which many
countries aren’t, is bringing this out into the public domain and having
those critical conversations and hopefully can look forward with some
optimism that the industry is owning up to the fact that it need to
improve and needs to do something about it,” he said.
“In many
ways, the issues that are coming out of the royal commission don’t just
apply to Australia. Don’t think that the rest of the world has got these
things right. If there is any kind of introspection by those in the
financial services communities of Hong Kong and Singapore it is ‘Where
do we stand on these issues?’
“At least Australia has been bold enough to being this out into the public domain.”
According
to global research consultants Cerulli Associates, Australia remains an
attractive market for investment managers and asset consultants, both
local and global.
While the royal commission has caused
significant reputational damage, Cerulli Associated managing director
for Asia, Ken Yap, said super funds in particular will still need to
make exactly the same decisions about asset allocation, currency
hedging, and liquidity as they always did, and nothing in the royal
commission is likely to make them choose any different underlying
managers than they have done in the past.
ASIC has released new research revealing many consumers confuse ‘general’ and ‘personal’ advice exposing them to greater risk of poor financial decisions.
The ASIC report, Financial advice: Mind the gap (REP
614), presents new independent research on consumer awareness and
understanding of general and personal financial advice, identifying
substantial gaps in consumer comprehension.
“This disturbing gap in understanding whether the advice they are
getting is personal or not means many consumers are under the false
premise their interests are being prioritised, when no such protection
exists,” said ASIC Deputy Chair, Karen Chester.
Millions of Australians will likely seek financial advice at some
stage in their lives. When they do, it is critical they understand
whether that advice is personal, whether it is tailored to their
circumstances and does the adviser have a legal obligation to act in
their interest.
“The survey not only revealed consumers are not familiar with the concepts of general and personal advice, but only 53 per cent of those surveyed correctly identified ‘general’ advice. And even when provided the general advice warning, nearly 40 per cent of those surveyed wrongly believed the adviser had an obligation to take their personal circumstances into account,” Ms Chester said.
The report highlights the importance of consumer awareness and
understanding of the distinction between personal and general advice
with the Future of Financial Advice (FOFA) protections only applying
when personal advice is provided. These include obligations for advisers
to act in their client’s best interests, to provide advice that is
appropriate to their client’s personal circumstances and to prioritise
their client’s interests. These obligations do not apply when general
advice is provided.
“The survey also revealed that the responsibilities of financial
advisers, when providing general advice, is not well understood. Nearly
40 per cent of those surveyed were unaware that advisers were not required by law to act in their clients’ best interests,” Ms Chester said.
ASIC anticipates the need for financial advice to grow, reflecting an
ageing population and many financial products, especially retirement
products, becoming more complex. ASIC reports that much of the advice is
likely to be general advice, and while appropriate in some
circumstances, it is inevitably of limited use.
“ASIC is seeing increased sales of complex financial products under
general advice models – so not tailored to personal circumstances –
leaving many consumers, especially retirees, exposed to the potential
risk of financial loss. And whilst the Financial Services Royal
Commission, and the Government’s response, dealt with the most egregious
risks of hawking of complex financial products, consumer confusion
about what is personal and general advice needs to be addressed,” Ms
Chester said.
The report’s findings reinforce those of the Murray Financial System
Inquiry and the Productivity Commission reports on the financial and
superannuation systems. Those reports made recommendations about the use
of the term ‘general advice’, which is likely to lead to false consumer
expectations as to the value of and protections afforded advice
received.
Ms Chester said, “This consumer research is timely. It comes as the
Government is considering policy recommendations on financial advice
from the Productivity Commission’s twin reports on Australia’s financial
and superannuation systems. And at a time when the financial system
itself undergoes much change, following the intense scrutiny of the
Financial Services Royal Commission, including considering new financial
advice and distribution business models”.
The report includes quantitative and qualitative research
commissioned by ASIC and undertaken by independent market research
agency, Whereto Research. The research used hypothetical advice
scenarios to test consumer recognition of when general and personal
advice was being provided, and awareness of adviser responsibilities
when being given each type of advice.
Report 614 Financial advice: Mind the gap is the first stage
in ASIC’s broader research project into consumer experiences with and
perceptions of the financial advice sector. Additional research by ASIC
will get underway in 2019 to identify a more appropriate label for
general advice and consumer-test the effectiveness of different versions
of the general advice warning.
We discuss the findings from today’s House Economics Committee questioning of NAB’s new CEO, and look specifically at the issue of mortgage loan approvals.
