Maurice Blackburn Lawyers has confirmed that it is preparing court proceedings against the major banks and brokers in regards to alleged breaches of the NCCP, according to The Adviser.
On Monday, media reports began circulating about rolling litigation being levelled at the major banks and brokers relating to alleged breaches of the National Consumer Credit Protection Act 2009 (NCCP Act).
The move follows on from questions asked by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry over whether credit providers have adequate policies in place to ensure that they comply with “their obligations under the National Credit Act when offering broker-originated home loans to customers, insofar as those policies require them to make reasonable inquiries about the consumer’s requirements and objectives in relation to the credit contract, to make reasonable inquiries about the consumer’s financial situation, and to take reasonable steps to verify the consumer’s financial situation”.
Earlier this year, the royal commission was damning in its critique of the lenders’ policies when it came to ensuring customers can afford their home loans, with ANZ being called out for their “lack of processes in relation to the verification of a customer’s expenses”, and both Westpac and NAB revealing that there had been instances of their staff accepting falsified documentation for loans.
Further, Westpac recently admitted to breaches of responsible lending obligations when issuing home loans to customers and agreed to pay a $35 million civil penalty to resolve Federal Court proceedings.
While there has not been any systemic issues with arrears rates or housing affordability to date, Maurice Blackburn has suggested that the reliance on benchmarks, such as the Household Expenditure Measure, coupled with a softening property market and the “maturity of interest-only loans”, could “leave thousands in financial ruin, staring at the prospect of bankruptcy”.
In a statement to The Adviser, Maurice Blackburn principal Josh Mennen confirmed that the law firm is pursuing legal action, stating: “A combination of banks’ relaxed lending standards and brokers’ involvement in loan sales has resulted in widespread debt over-commitment that threatens the stability of the broader economy. A survey of more than 900 home loans conducted by investment bank UBS found that around $500 billion worth of outstanding home loans are based on incorrect statements about incomes, assets, existing debts and/or expenses.
“This means 18 per cent of all outstanding Australian credit is based on inaccurate information, often caused by poor advice or misrepresentations by a mortgage broker eager to generate a sale commission.”
It should be noted that the figures quoted are in relation to a UBS report which asked borrowers about the accuracy of their home loan applications, and that representatives from several bodies — including ASIC — have called into question the weight of this response, arguing that “for many consumers the additional work and additional steps that banks and other lenders are taking to verify someone’s financial situation won’t be apparent to them”.
For example, ASIC’s Michael Saadat, senior executive leader for deposit takers, credit and insurers, said last year that “consumers are probably not the best judge of what banks are doing behind the scenes to make sure borrowers can afford the loans they’re being provided with”.
In his statement to The Adviser, Mr Mennen continued: “A staggering 30 per cent of loans surveyed had been issued based on understated living costs and around 15 per cent on understated other debts or overstated income.
“Add to the equation the fact that a huge proportion of mortgage loans issued over the past decade were ‘interest-only loans’. These loans have an initial period (usually five years) where only the interest on the loan is repaid. However, after the interest-only period ends and the principal is also paid down, the loan repayments can increase between 30–60 per cent.”
While the principal conceded that this “problem has been contained” by investors being able to sell their interest-only investment properties and therefore “often fortunate enough to sell the investment property at a gain or at least break even, clearing the mortgage without too much pain,” he suggested that the current environment in which interest rates are rising, while some property markets (such as Sydney and Melbourne) are declining, could be cause for concern.
“These factors, in combination with the maturity of interest-only loans, will further drive up distress sales in a stagnant or contracting market and may leave thousands in financial ruin, staring at the prospect of bankruptcy,” the lawyer said.
Realising a prediction from UBS analysts that theevidence of “mortgage mis-selling and irresponsible lending” found during the royal commission could result in the banks being subject to “very costly” class actions, Maurice Blackburn is now mounting legal cases against banks and/or brokers.
Mr Mennen said: “We believe that, as consumers losses are crystallised, many will have strong claims for compensation against their lender and/or mortgage broker for breaches of the National Consumer Credit Protection Act 2009 (NCCP Act) for failing to comply with responsible lending obligations including by not making reasonable inquiries and verifications about customers’ ability to repay the loan.
“We are acting for many such customers and are preparing to commence court proceedings against major banks in the coming months.”
It is not yet known which brokers or broker groups, if any, will be targeted in the legal action.
However, the corporate regulator has reiterated its view that lenders should be held accountable for breaches of responsible lending obligations, irrespective of whether the loan was broker-originated.
In its most recent Enforcement Outcomes report, which outlines the action the financial services regulator has taken over the first half of the calendar year, the Australian Securities and Investments Commission (ASIC) stressed that lenders should not offload blame to third parties when a loan is found to be in breach of responsible lending obligations.
CBA has decided to remove SMSF lending from its services. Commonwealth Bank of Australia (CBA) has said it is “streamlining” its product offering and as such will no longer offer the ability for self-managed super fund (SMSF) trusts purchase investment property with their fund. Via Australian Broker.
In July, Westpac announced it would be removing its SMSF product. CBA also announced it would be removing low-doc loan products.
CBA’s SuperGear product currently available will cease at close of business on 12 October. New applications and refinancing applications will not be accepted after this date.
Any approvals before 12 October have the condition they must be settled and approved by 28 December 2018.
A CBA spokesperson said in a statement, “As part of our strategy to become a simpler, better bank, we are streamlining our product portfolio and have made the decision to discontinue our ‘SuperGear’ lending product which enabled investment in residential and commercial property through self-managed super funds.
“This change will be effective from close of business on 12 October 2018. We will continue to support our existing customers who have these loans with us.”
For brokers, commission payments will continue as per existing agreements.
AMP was aware that it was charging dead customers life insurance premiums as far back as 2016 but failed to report the matter to regulators, the royal commission has heard, via InvestorDaily.
On Monday (17 September), the Hayne royal commission learned of a number of emails between AMP staff members dating back to 2016 raising the issue of insurance premiums being charged to dead people.
A 2016 email from an AMP staff member, Luke Wilson, regarding a claim being paid to a dead person observed that “this has been going on well before I started in the team”.
Counsel assisting Mark Costello questioned witness and AMP chief customer officer Paul Sainsbury about what Mr Wilson meant by this.
The AMP executive told the royal commission that, as he understood it, the “problem” had been going on for some time.
That problem, the commission learned, was AMP’s practice of charging dead people insurance premiums.
In another email, AMP staffer Luke Wilson wrote:
The issue is that [corporate superannuation] continued to charge premiums for the insurance even after AMP has been notified of the member’s passing. We have raised this with [sic] corp in the past and asked them why they continue to charge the insurance premiums once they are notified of a customer’s death. Back in 2016 I believe that they were of the understanding that premiums are refunded when the policy is paid, which is incorrect.
However, AMP only opened an investigation into the matter in April 2018, which was prompted by similar events at CBA, Mr Sainsbury told the commission.
“It was as a result of the CBA’s circumstances around premiums on deceased members. A question was asked in AMP ‘could this happen to us?’” Mr Sainsbury told the commission.
Counsel assisting Mark Costello asked: “Stopping the premiums being charged when you’ve been notified that the person is dead seems like a rather obvious step, doesn’t it?”
“Yes it does,” Mr Sainsbury said.
Costello: “But it wasn’t taken in 2016?”
Sainsbury: “No. The system was coded to refund it when the claim was admitted.”
Costello: “Why was that?”
Sainsbury: “I couldn’t tell you.”
The royal commission then heard about a case in which a customer had died on 24 February 2015 but premiums were still being deducted at June 2016. There was a request for the charged premiums to be reversed. The issue was not reported to ASIC.
“I can only assume the claim wasn’t admitted at that time. It’s a process as I’ve described. A refund occurs automatically by the system when a claim is actually finalised,” Mr Sainsbury explained.
Commissioner Hayne then sought further clarification of what Mr Sainsbury meant by a “refund”: “A refund of what is deducted? A refund plus the earnings it would have earned? A refund of what?”
“Commissioner, I believe it is a refund of the premiums,” Mr Sainsbury said.
“So the time value of money goes to AMP’s benefit?” the commissioner asked.
Mr Sainsbury replied: “Potentially.”
“Charging premiums for life insurance to someone who’s dead. That’s the position isn’t it?” Mr Hayne said.
“Yes,” said the AMP executive. “That’s the way the system is treating it today for a portion of our business.”
The royal commission heard that neither APRA nor ASIC were told that AMP was aware that it was charging life insurance premiums to dead people in 2016.
AMP charged 4,645 deceased persons life insurance premiums totalling approximately $1.3 million, the commission heard.
National Australia Bank Limited (NAB) today announced changes to its Executive Leadership Team, subject to regulatory approval. Andrew Hagger, who was under examination in the Banking Royal Commission, will leave NAB after 10 years.
NAB chief executive officer Andrew Thorburn said the changes would bring greater focus and momentum to NAB’s commitment to being a simpler, more customer focussed bank.
“We have a clear plan to transform NAB and create a sustainable business that puts customers first – and we are executing on that plan. Now is the right time to make these changes as we work to create a better bank and earn the trust of our customers,” Mr Thorburn said.
Customer Products & Services becomes Customer Experience – a division focussed on building advocacy and loyalty through the design and delivery of a leading banking experience. It includes Customer Experience, Marketing, Digital, Products, NAB Labs and NAB Ventures.
Rachel Slade will lead this division in the new role of Chief Customer Experience Officer. Ms Slade has been Executive General Manager, Deposits & Transaction Services since joining NAB in January 2017 after more than 10 years in senior positions at Westpac.
Former NSW premier Mike Baird has been appointed Chief Customer Officer, Consumer Banking. He will lead NAB’s retail banking business including more than 700 branches, 7000 bankers, broker partnerships, direct banking and the digital bank UBank. He will also take a lead in the setting of our reputation agenda. Mike has been Chief Customer Officer, Corporate & Institutional Banking since April 2017.
David Gall moves to the role of Chief Customer Officer, Corporate & Institutional Banking. David has been NAB’s Chief Risk Officer and part of the NAB Executive Leadership team since August 2014, having spent 29 years in corporate, commercial and retail banking.
Shaun Dooley joins the NAB Executive Leadership team as Chief Risk Officer. Shaun is currently Group Treasurer and has been with NAB since 1992, serving in various senior executive roles in Risk, Corporate and Institutional Banking.
Andrew Hagger will leave NAB after 10 years, including the past eight years as a member of the Executive Leadership Team. In that time he has led the Consumer Banking and Wealth businesses; MLC as Chief Executive Officer and; the Corporate Affairs, Marketing & People divisions.
“Rachel, Mike, David and Shaun are outstanding leaders who think customers first and bring terrific authenticity and values to NAB every day. These appointments also demonstrate the depth of talent we have inside NAB and I am particularly delighted to promote Rachel and Shaun to the Executive Leadership Team,” Mr Thorburn said.
“With the recent bringing together of the Wealth businesses under new MLC CEO Geoff Lloyd to prepare for separation from NAB, Andrew Hagger believes now is the right time to leave. We have been colleagues for a decade at NAB, I have valued his long-term contribution and I wish him and his family well as he pursues new opportunities.”
Mr Hagger said: “It has always been a privilege to serve our customers and play a role in a number of achievements, including the Break-Up campaign which attracted one million new NAB customers and core improvements in our consumer bank and UBank. I take accountability for what has occurred on my watch, and accept that alongside successes were failures, including instances where we did not act with the pace required. I leave NAB with confidence that we are creating a better bank.”
NAB is working towards an effective date of 1 October 2018 for these changes, subject to regulatory approval including applicable APRA registration requirements.
Welcome to the Property Imperative weekly to 15th September 2018, our digest of the latest finance and property news with a distinctively Australian flavour.
Watch the video, listen to the podcast or read the transcript.
On the 10th Anniversary of the failure of Lehman Brothers, the consensus seems to be that the financial system is still stressed, under the impact of sky high global debt, artificially low interest rates and asset bubbles. The shadow is long, and the risks high. I discussed this on ABC Radio Sydney, and also in a Video Post with Robbie Barwick from the CEC. Perhaps of most concern is the lack of acceptance that we have a problem, with the RBA this week recognising that household debt is high, but declaring it manageable and the Housing Industry Association calling for a relaxation of lending standards to support housing construction. That is in my view the last thing we need. The truth is, pressures on households, and tighter lending standards mean more price falls will follow. Those who follow my analysis will know I run four scenarios, including the one, the worst case, where prices could drop 40-45% from their highs over the next few years. This is the angle which the upcoming 60 Minutes programme, to be aired tomorrow, Sunday is driving at.
Just remember this is one of four scenarios! But its rated a 20% probability now.
There was more evidence this week as to the issues under the hood. For example, Domain says that whilst housing affordability has improved in all capitals where property prices have started to decline, the median multiple is still well above affordable housing thresholds in several capital city markets. They said that drawing on Domain price data and adjusted census income data, the change in price and the median multiple across capital city markets, since the respective peaks, was analysed.
While the house price to income ratio is a simple, standard indicator for understanding affordability — particularly across countries — it is far from comprehensive. Other affordability metrics still spell out tough times ahead for homeowners. Rental affordability, mortgage serviceability and the deposit hurdle are also vital considerations. But Domain says that as of June 2018, data shows the median income household in Sydney would require 59.8 per cent of weekly income to service an owner-occupied mortgage (assuming a 5.2 per cent variable rate on a loan-to-value ratio of 80 per cent). This is down from 64.4 per cent at the peak of the latest cycle
Another angle is credit scoring, as Banking Day called out, as the remaining three Big Four banks are reportedly getting ready to join NAB as participants in the new Comprehensive Credit Reporting regime. This means a massive database will share their customers’ full credit history with each other for the first time from the end of this month, at which point comprehensive credit reporting will be a foregone conclusion with the remaining major banks. The new data-sharing regime will allow lenders to better verify loan applications and assess credit risk by accessing the full repayment history of a potential customer, including their total debts. The major lenders have pushed ahead with the changes following pressure from the prudential regulator, The Australian reported, noting that ANZ said it had been testing positive data reporting since the end of June, although the data was not shared with the public at this stage. The big banks’ embrace of the new regime would put pressure on others to sign up, since only lenders who supplied comprehensive reporting to the credit bureaus would have access to the data, Australian Retail Credit Association chairman Mike Laing told The Australian. “If they don’t join then the people who intend to borrow money but not pay it back will quickly find out which ones are not in the system and they’ll go to the lenders who don’t have access to verifiable data. So it’s risky for a lender not to take part once most of the data is in there”.
And yet another angle. Between 2008 and 2012, the number of self-managed super funds grew by 27 per cent to nearly half a million. That was more than 40 per cent of the growth of the whole superannuation system. The global financial crisis coincided with the Howard government lifting the ban on superannuation funds borrowing money. As a result, self-managed super funds have rushed to take advantage and racked up $32 billion in debt in little more than a decade. The Financial System Inquiry in 2014 recommended that borrowing by superannuation funds be banned. It’s a view shared by Saul Eslake, the former ANZ Bank chief economist, who describes the decision to allow super funds to borrow as “the dumbest tax policy of the last two decades.” “The last thing Australians really needed in the last 20 years is yet another vehicle or incentive for Australians to borrow more money in order to speculate on property prices continuing to rise,” Mr Eslake said.
Overlaying that is the perennial problem of property spruikers trying to persuade people to borrow big to buy, and tip their newly acquired, heavily leveraged, property into a self-managed super fund. Super fund borrowing is known as “limited recourse” — which means if the fund can’t pay off the loan, the bank can’t go after any other assets — just the property in question. Remember this was at the heart of the sub-prime mortgage fiasco 10 years ago, which morphed into the global financial crisis. Whilst not wanting to be alarmist, Saul Eslake is concerned with what he’s seeing now in self-managed super funds with their limited recourse borrowing. “You might have thought that someone would have heard the term ‘limited-recourse borrowing’ and recognised that there were some significant risks associated with it that we could have done without in the Australian context.”
And CoreLogic Reported that the combined capital cities returned a final auction clearance rate of 55.3 per cent last week, a slight improvement on the 55 per cent over the week prior when volumes were lower. There were 1,916 homes taken to auction last week, up on the 1,748 held the previous week. While one year ago, a higher 2,258 auctions were held with a 66.9 per cent success rate.
Melbourne returned a final auction clearance rate of 60 per cent this week; an improvement not only over the week but the highest seen since May, with clearance rates for the city remaining within the mid-high 50 per cent range up until this week. The improved clearance rate was across a higher volume of auctions week-on-week, with 891 auctions held, increasing on the 805 held the week prior when 57 per cent sold.
Sydney’s final auction clearance rate came in at 50.6 per cent last week across 656 auctions, falling on the week prior when a 53.8 per cent clearance rate was returned and auction volumes were a similar 664.
As usual the performance across the smaller auction markets was mixed last week, with clearance rates improving in Adelaide, Brisbane and Canberra, while Perth’s final clearance rate fell.
The Gold Coast region was the busiest non-capital city region last week with 56 homes taken to auction, although only 26.4 per cent sold. Geelong was the best performing in terms of clearance rate with 88 per cent of the 34 auctions successful.
And this week, CoreLogic is tracking 1,882 capital city auctions this week. If we compare activity to the same week last year volumes are down 25 per cent on the 2,510 auctions held one year ago.
And finally, APRA released their quarterly property exposure data to June this past week. APRA release their quarterly property exposure lending stats for ADI’s today. There are some interesting data points, and some concerning trends and loosening of standards recently. I will focus on the new loan flows here. First the rise in loans outside serviceability continues to rise, now 6% of major banks are in this category a record, reflecting first tightening of lending standards, but second also their willingness to break their own rules! This should be ringing alarms bells. APRA?
Foreign Banks are writing the greater share (relative percentage) of 80-90% LVR loans. Other lenders tracking lower.
Foreign Banks are lending more 90+ LVR loans in relative percentage terms.
New investor loans are moving a little higher for Credit Unions and Major Banks, suggesting a growth in volumes.
The share of interest only loans dropped below 20% but is now rising a little, as lenders seek to grow their books.
All warning signs, especially when as APRA reports ADIs’ residential term loans to households were $1.62 trillion as at 30 June 2018. This is an increase of $86.6 billion (5.6 per cent) on 30 June 2017. Of these: owner-occupied loans were $1,076.4 billion (66.4 per cent), an increase of $76.7 billion (7.7 per cent) from 30 June 2017; and investor loans were $544.0 billion (33.6 per cent), an increase of $9.9 billion (1.9 per cent) from 30 June 2017. Debt is sky high, the grow rate must be slowed substantially – there are rumours of more tightening to come, we will see.
Looking at the local markets, the ASX 100 was down at the end of the week, ended up at 5,065.90, up 29.8 on the day, and it continues to underperform compared with the US markets. In the banking sector, NAB ended the week at 27.35, after they announced they would not follow the lead of Westpac, CBA and ANZ for now by not lifting their variable mortgage rates, for now. NAB closed up 0.18% on the day. ANZ, who it was announced with be subject to civil proceedings from ASIC for an alleged continuous disclosure breach in relation to a $2.5 billion institutional share placement undertaken by the ANZ in 2015. Their shares rose 0.32% on Friday to 28.15. CBA who took some further knocks this week thanks to further evidence of poor practice in CommInsure in the Banking Royal Commission, among others in the industry. They ended the week at 71.50, and up 0.45% today. And Westpac ended the week at 27.76 up 0.69% on Friday. Despite the relatively benign employment figures out this week, still at 5.3%, the Aussie ended the week at 71.54 and down 0.57% on Friday. The downward trajectory is clearly in play. This risks importing inflation into the local economy.
Looking across to the USA, many investors may be inclined to dismiss yet another headline on global trade and focus on the more granular aspect of the markets. But make no mistake, the markets were gyrating with the twists in the saga between the U.S. and its trading partners. The latest salvo came Friday, when Bloomberg reported that Trump instructed aides the day before to proceed with tariffs on about $200 billion more in Chinese products, but that the announcement has been delayed as the administration considers revisions based on concerns raised in public comments.
Earlier in the week, China had welcomed an invitation by the United States to hold a new round of trade talks. The Trump administration had invited Chinese officials to restart trade talks, the White House’s top economic adviser said on Wednesday. In addition to those tariffs, Trump has said he’s ready to add an additional $267 billion in tariffs “on short notice if I want.”
Earlier in the week, Beijing indicated it will ask the World Trade Organization for permission to impose sanctions on the U.S. as part of a dispute over U.S. dumping duties that China started in 2013.
And there’s still the revamp of NAFTA to consider. The U.S. and Canada have been in talks to bring Canada into a new agreement between the U.S. and Mexico, but there have been on announcements to far. Talks are expected to continue through Monday.
Beyond the US manufacturing sector – for example Boeing is still pretty strong, at 359.80, while Caterpillar ended down 0.44% to 144.90; the potential spill over into the consumer sector impacted a range of stocks, with Whirlpool down 1.68% to 123.21, Walmart down 0.56% to 94.59 and Mattel was up 1.49% to 16.35. Among the financials, Morgan Stanley was at 48.19, a little higher on the day, but still well down on March highs. The S&P 500 ended up 0.03% to 2904.98, as did the Dow Jones Industrial Average to 26,154, while the NASDAQ was down just a little to 8,010.
Apple got the type of promotional attention some companies can only dream of when the eyes of tech lovers and investors alike were glued to its keynote event for details on its new products, especially phones. Apple announced Wednesday its new iPhone product line. Shares of Apple rose the day before the event in anticipation of the kind of surprise announcement for which former CEO Steve Jobs was famous. The stock sold off as details about the new iPhones arrived and shares ended the day lower. But shares bounced back on Thursday, leading the overall tech sector higher, despite negative analyst commentary about the price of the iPhone XR. Apple ended the week down 1.14% to 223.84.
Bucking the recent trend that’s made investors nervous about price pressure, the latest data showed inflation cooling. First, figures showed wholesale prices fell unexpectedly. Producer price index decreased 0.1% last month. In the 12 months through August, the PPI rose 2.8%. Economists had forecast the PPI rising 0.2% last month and increasing 3.2% from a year ago. The core PPI decreased by 0.1% from a month earlier and rose 2.3% in the 12 months through August. Analysts had predicted core PPI to increase 0.2% month on month and 2.7% on an annualized basis.
Next, retail inflation rose less than anticipated. The consumer price index advanced 0.2%, missing expectations for a gain of 0.3%. In the 12 months through July, the CPI increased 2.7%, below forecasts for a reading of 2.8% and down from 2.9% in July. The core CPI increased by 0.1% from a month earlier, below forecasts for a gain of 0.2%. The annual increase in the so-called core CPI was 2.2%. Economists were looking for it to hold steady at July’s 2.4% advance. But despite these softer inflation numbers, traders ended the week still predicting a more-than-80% chance of the Federal Reserve hiking rates at its December meeting on top of the expected boost this month.
Bond yields rose sharply this week, owing to confidence that the Federal Reserve will lift rates for a total four times this year. The rise was particularly strong Friday, when the United States 10-Year yield topped 3% briefly. A big reason for that was Friday’s retail sales numbers.
The August retail sales numbers were disappointing at first blush, rising 0.1%, compared with expectations for 0.4%. But July’s gain was revised up to 0.7% from 0.5%. That revision gave market watchers some more confidence that the U.S. could see GDP growth of 4% in the third quarter, which would all but guarantee another rise in rates in December.
Gold ended the week lower at 1,198, down 0.82%, with preference for the US Dollar as a safe haven. And Copper fell 2.61%, well down on the start of the year, with demand slowing. Oil prices were higher to 69.00, up 0.60% on Friday, reflecting concerns about supply thanks to Hurricane Florence, and trade concerns. Of course, with the lower Aussie, this means fuel prices will rise further ahead.
Finally, Bitcoin is still making lower highs, even though the cryptocurrency has seen slightly higher lows. The key is going to be when bitcoin trades back above $7,000. There is a trend line connecting all the recent highs going back to early 2018. If BTC can bust above that level, it will likely take out the high at $7,350 and make a higher high. Once that happens, institutions may start buying heavily and upside could be back above $10,000 within months. That said, it ended the week down 1.15% to 6,488.
According to Bloomberg, Morgan Stanley plans to offer trading in complex derivatives tied to the largest cryptocurrency, according to a person familiar with the matter, joining other Wall Street firms in creating ways for clients to play the digital currency market. The U.S. bank will deal in contracts that give investors synthetic exposure to the performance of Bitcoin, said the person, who asked not to be identified because the information is private. Investors will be able to go long or short using the so-called price return swaps, and Morgan Stanley will charge a spread for each transaction, the person said. Citigroup is developing a new mechanism for trading cryptocurrencies known as digital asset receipts, a person with knowledge of the plans said earlier this month. Goldman Sachs is exploring derivatives on Bitcoin called non-deliverable forwards, and is considering a plan to offer custody for crypto funds.
Finally, today a couple of quick reminders, first the 60 Minutes programme tomorrow evening and our live stream event on Tuesday at 20:00 Sydney, where you can discuss with me the latest on the outlook for home prices, as well as all our other analysis. You can bookmark the event by using this link. I look forward to your questions in the live chat.
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ASIC has commenced civil penalty proceedings in the Federal Court of Australia against Australia and New Zealand Banking Group Limited (ANZ) for an alleged continuous disclosure breach in relation to a $2.5 billion institutional share placement undertaken by the ANZ in 2015.
On 6 August 2015, ANZ issued a release to the Australian Securities Exchange (the ASX) entitled “ANZ announces Institutional Placement (fully underwritten) and share Purchase Plan to raise a total of $3 billion”.
On 7 August 2015, ANZ issued a release to the ASX in respect of the placement stating among other things, “ANZ today announced that it had raised $2.5 billion in new equity capital through the placement of approximately 80.8 million ANZ ordinary shares at the price of $30.95 per share”.
ASIC alleges that that ANZ contravened s.674(2) of the Corporations Act by failing to notify the Australian Securities Exchange (ASX) that approximately $791 million of the $2.5 billion of ANZ shares offered in the Placement was to be acquired by its underwriters rather than placed with investors.
ASIC is seeking a declaration that ANZ breached its continuous disclosure obligations and a pecuniary penalty order.
The proceedings are to be listed for a case management hearing in the Federal Court in Melbourne on a date to be fixed.
ASIC will be making no further comment at this time.
APRA today published a letter relating to the Committed Liquidity Facility which is available to just 15 of the banks in Australia (The LCR banks). These have the back-stop option of calling on funds from the RBA to buttress their liquidity in case of need – so they can meet their obligations under the Basel III regime.
For a fee, if used, these banks essentially have a safety net in times of distress. Now APRA has outlined the arrangements for next year. Of course the other lenders have to operate without these supports.
More evidence of a lack of a level playing field in the system, and how the regulators are supporting the big end of town. No surprise then that big players are regarded by the markets as too big to fail.
But as Australian Government debt is hurtling beyond $500 billion, I have to say their so called justification – lack of liquidity in the local securities (mainly Australian Government Securities and securities issued by the borrowing authorities of the states and territories) is wearing a bit thin.
Why is this facility needed at all?
This is what APRA said today:
The Australian Prudential Regulation Authority (APRA) is today releasing aggregate results on the Committed Liquidity Facility (CLF) established between the Reserve Bank of Australia (RBA) and certain locally incorporated ADIs that are subject to the Liquidity Coverage Ratio (LCR).
APRA implemented the LCR on 1 January 2015. The LCR is a minimum requirement that aims to ensure that ADIs maintain sufficient unencumbered high-quality liquid assets (HQLA) to survive a severe liquidity stress scenario lasting for 30 calendar days. The LCR is part of the Basel III package of measures to strengthen the global banking system.
In December 2010, APRA and the RBA announced that ADIs subject to the LCR will be able to establish a CLF with the RBA. The CLF is intended to be sufficient in size to compensate for the lack of sufficient HQLA (mainly Australian Government Securities and securities issued by the borrowing authorities of the states and territories) in Australia for ADIs to meet their LCR requirements. ADIs are required to make every reasonable effort to manage their liquidity risk through their own balance sheet management before applying for a CLF for LCR purposes.
Committed Liquidity Facility for 2019
All locally incorporated LCR ADIs were invited to apply for a CLF amount to take effect on 1 January 2019. All fifteen ADIs chose to apply. Following APRA’s assessment of applications, the aggregate Australian dollar net cash outflow (NCO) of the fifteen ADIs was estimated at approximately $381 billion. The total CLF amount allocated for 2019 (including an allowance for buffers over the minimum 100 per cent requirement) is approximately $243 billion.
The CLF will enable participating ADIs to access a pre-specified amount of liquidity by entering into repurchase agreements of eligible securities outside the Reserve Bank’s normal market operations. To secure the Reserve Bank’s commitment, ADIs will be required to pay ongoing fees. The Reserve Bank’s commitment is contingent on the ADI having positive net worth in the opinion of the Bank, having consulted with APRA.
The facility will be at the discretion of the Reserve Bank. To be eligible for the facility, an ADI must first have received approval from APRA to meet part of its liquidity requirements through this facility. The facility can only be used to meet that part of the liquidity requirement agreed with APRA. APRA may also ask ADIs to confirm as much as 12 months in advance the extent to which they will be relying on a commitment from the Bank to meet their LCR requirement.
The Fee
In return for providing commitments under the CLF, the Bank will charge a fee of 15 basis points per annum, based on the size of the commitment. The fee will apply to both drawn and undrawn commitments and must be paid monthly in advance. The fee may be varied by the Bank at its sole discretion, provided it gives three months notice of any change.
Eligible Securities
Securities that ADIs can use under the CLF will include all securities eligible for the Reserve Bank’s normal market operations. In addition, for the purposes of the CLF, the Reserve Bank will allow ADIs to present certain related-party assets issued by bankruptcy remote vehicles, such as self-securitised residential mortgage-backed securities (RMBS). This reflects a desire from a systemic risk perspective to avoid promoting excessive cross-holdings of bank-issued instruments. Should the ADI lack a sufficient quantity of residential mortgages, other ‘self-securitised’ assets may be considered, with eligibility assessed on a case-by-case basis.
The Reserve Bank has discretion to broaden the eligibility criteria and conditions for the various asset classes at any time. The Bank will provide one years notice of any decision to narrow the criteria for the facility.
Interest Rate
For the CLF, the Bank will purchase securities under repo at an interest rate set 25 basis points above the Board’s target for the cash rate, in line with the current arrangements for the overnight repo facility.
Margining
The initial margins that the Reserve Bank will apply to eligible collateral will be the same as those used in the Bank’s normal market operations. Consistent with current practice, each day the Bank will re-value all securities held under repurchase agreements at prevailing market prices.
Termination
Subject to the ADI having positive net worth, the Reserve Bank will give at least 12 months notice of any intention to terminate the CLF. The Bank’s commitment to any individual ADI will lapse if the fee is not paid.
The Hayne royal commission has learned that the corporate watchdog allowed CBA to pay a substantially reduced fine despite misleading customers in its advertising, via InvestorDaily.
The royal commission has heard that ASIC not only gave CBA a severe discount for the misleading conduct but also let Australia’s biggest bank draft the media release regarding the action.
Senior counsel assisting Rowena Orr, QC opened Thursday’s hearing by questioning Helen Troup, the executive general manager of CBA’s insurance business CommInsure.
Ms Troup was taken through four pieces of advertising for CommInsure’s life and trauma insurance policy to determine how they discussed coverage for a heart attack.
Ms Troup accepted that in every case someone reading the adverts would believe the trauma policy covered all heart attacks.
The royal commission heard that CommInsure made a $300,000 voluntary community benefit payment as part of its agreement with ASIC to resolve the issue of misleading advertising.
Ms Orr pointed out to the commission that the maximum penalty for misleading conduct was 10,000 penalty units or almost $2 million per contravention.
In this instance, as Ms Troup had agreed to four adverts being misleading, it could have led to a fine of $8 million. But CommInsure only had to pay $300,000 as part of its agreement with ASIC to resolve the issue.
ASIC in fact seemed to have asked CBA if they thought the $300,000 was appropriate as Ms Orr read out to the commission a letter from the senior executive of ASIC, Tim Mullaly, addressed to CBA:
Could you please consider and let us know whether this is sufficient for CommInsure to resolve the matter, including by way of payment of the community benefit payment, in absence of infringement notices.
This provoked commissioner Hayne to ask if it was a case of the bank stipulating the terms of the punishment.
“The regulator asking the regulated whether the proposal was sufficient in the eyes of the party alleged to have broken the law, is that right?” he asked.
“We could have taken the approach of continuing to defend our position, so this was the alternative,” Ms Troup said.
Commissioner Hayne continued and asked Ms Troup if CommInsure viewed the community payment as a form of punishment.
“The $300,000 community benefit payment was a form of punishment,” she said.
Up until today’s hearing, CBA had not acknowledged the misleading adverts and had even advised ASIC on what language to use in their press release, said Ms Orr.
Ms Orr concluded by summarising that ASIC had given CommInsure notice of its findings, took no enforceable action and gave CommInsure the opportunity to make changes to the media release.
CBA’s life insurance business CommInsure has admitted to not following recommendations from the corporate regulator to update its medical definition of a heart attack so it could deny the payout of a trauma claim to one of its customers, via InvestorDaily.
On Wednesday, the royal commission heard that ASIC had sent a letter to CommInsure flagging its concerns that its reliance on outdated medical definitions in assessing claims – while not in breach of the duty of utmost good faith in Section 13 of the Insurance Contracts Act – fell significantly short of consumer expectations.
The counsel assisting Rowena Orr cited a letter from 22 March 2017 from the ASIC deputy chair at the time, Peter Kell, who noted that in, 2012, the European Society of Cardiology, the American College of Cardiology, the American Heart Association and the World Health Federation published an expert consensus document about the definition of heart attacks.
Sitting in the witness box, CommInsure managing director Helen Troup was questioned by Ms Orr on whether she was aware that this had been reached at the time.“Yes,” Ms Troup said.
“And that report endorsed the use of troponin as a means of detecting heart attacks?” Ms Orr continued.
“Yes,” Ms Troup responded.
“And the report said that laboratories should use a cut-off value of the 99th percentile of a normal reference population to determine whether there had been a heart attack?” Ms Orr said.
Ms Troup replied in the affirmative.
Ms Orr then noted Mr Kell’s comments in the letter that CommInsure’s decision to select the 11 May 2014 as the effective date of the change had no robust rationale, given the joint report was published in 2012.
She then noted the letter said CommInsure’s conduct was unreasonably slow in responding to the changes in medical practice, that it was on notice that the standard was to be updated and had not done that even three years after the joint report was published, and that seven other insurers had updated their definition by 11 May 2014.
“While this is not contrary to the law, it is ASIC’s view that this has unfairly impacted on some consumers and better practice would be to select an earlier date,” Ms Orr said.
Hot on the heels of Slater & Gordon launch of the ‘Get Your Super Back’ campaign, today I discussed the current state of the mortgage industry with Roger Brown a prime mover in the class action being planned against both major lenders and banking regulators. Looks like November will be an important check point.
