The banking and financial services Royal Commission has unearthed the unethical practices and incentives of life insurers selling policies over the phone at the expense of the most vulnerable customers living in remote communities; via Financial Standard.
ASIC Indigenous Outreach Program senior policy analyst Nathan Boyle highlighted the rampant practice of signing up customers by being forced into policies they allegedly didn’t need or unwittingly signed up for.
Based on listening to several phone calls from ClearView Life Insurance, Boyle alleged staff coaxed customers into providing bank details and enough personal information which then entered them into a contract without knowing, he said.
This is the way “gratuitous concurrence can play out in practice,” he added.
Boyle was referring to ASIC’s review of ClearView in February, which used unfair and high pressure sales tactics when selling life insurance direct to consumers over the phone between 1 January 2014 and 30 June 2017.
Of 32,000 life insurance policies sold, 1166 were to consumers residing in areas with high indigenous populations that unlikely spoke English as their first language.
ClearView has since ceased selling life insurance directly to consumers and refunded $1.5 million to thousands of customers as a result of poor sales practices.
The Commission heard the story of Kathy Marika, an indigenous woman who was convinced into buying a funeral insurance policy with Let’s Insure (which is owned by Select AFSL) even though she was already covered.
Marika said she couldn’t fully understand the representative, who spoke over her and at great length and initially believed was calling about a survey. Ultimately, she said the representative was “forcing” her to sign up to a policy that deducted $60 per month from her account.
“I told them that I didn’t want it. I told them I’ve already had one, but he seemed to be really pushing or asking me to say ‘yes,'” she said.
When Marika eventually decided to cancel the policy, she said Let’s Insure was relentless with the phone calls.
Senior Counsel Assisting Rowena Orr asked: “And in your statement you say that sometimes they called you day after day and sometimes once a week?”
“Well, they never left me alone,” Marika said.
She eventually ran into financial difficulty and sought the assistance of Legal Aid. She told them she could no longer afford the funeral insurance.
In a written response, Let’s Insure said it disputes the allegations it didn’t act properly and in accordance with the law when it sold the policy.
“However, as an act of goodwill, we will refund all premiums paid on the above policies, currently 40 totalling $1,890.34, subject to your client’s authorisation for us to cancel their policies,” Let’s Insure said.
Select AFSL managing director Russell Howden admitted that in hindsight “we pushed our agents” and this practice was “regrettable.”
Some staff members were incentivised with a Vespa scooter and a cruise – which he conceded drove the wrong behaviour.
“We have evolved our commission structure. It was designed to make agents productive but, at all times, the intended outcome was compliant sales,” he said.
A Roy Morgan survey released in January found the phone was the most popular means of purchasing life insurance policies.
A multi-channel advertising campaign is being launched by the Mortgage & Finance Association of Australia to promote the value of brokers to the general public.
DFA comments that the industry should focus on fixing the inherent conflicts in the broker channel, as revealed in the Royal Commission. This is not marketing perception problem, it is the reality of current practices! The MFAA are fighting the wrong war… ASIC’s analysis showed that contrary to myth, borrowers who use brokers do NOT necessarily get a better deal.
Starting from this Saturday (7 July) and running through to the end of October, the Mortgage & Finance Association of Australia’s (MFAA) national advertising campaign – developed by creative agency Redhanded, in partnership with MFAA advisers GRACosway and Porter Novelli – will run across regional television, national newspapers, social media, national radio, as well as on billboards, bus stops and on branded buses, among other channels.
Featuring real broker customers, including winners of The Block, Kyal and Kara Demmrich, the advertising campaign aims to highlight the experiences customers have had with brokers and the value they place in the broker offering and service.
Several leading brokers will also front the campaign, including award-winning broker and director of Rise High Financial Solutions Marissa Schulze, and share what their typical day looks like.
The campaign, which runs with the tag line Your Broker Behind You (showcasing that the broker is supportive of the customer and their dreams of home ownership) and utilises the hashtag #findafairerdeal, also aims to involve other brokers.
The 30-second television commercial, social media posts and several other assets are being made available to brokers through the campaign website brokerbehindyou.com.au, and the MFAA is calling on all brokers to post their own videos, photos and posts using the hashtag to create a wealth of content showcasing how Australia’s brokers are making a difference.
‘We have a wonderful story to tell’
Highlighting that broker market share has increased over the past six years, with the MFAA’s recent stats showing that broker market share in the March quarter reached its higher ever figure, the association noted that while the recent negative publicity has not yet impacted the proportion of people using brokers, the association believed it was the “the right time” to come out in a public campaign to “promote and defend” the industry.
The CEO of the MFAA, Mike Felton, commented: “There is no doubt our reputation as an industry has been challenged through repeated regulatory reports, inquiries and negative media coverage over the past year, but we have a wonderful story to tell. Brokers drive competition, value and choice, which creates positive customer outcomes and fairness for all Australians.
“While we are continuing our ongoing efforts in advocacy and education, through such actions as our involvement in the Combined Industry Forum, this campaign will highlight more publicly the value of the mortgage broking industry.”
He continued: “Many broker businesses are comparatively small, but working together, we represent an industry of real significance, which is systemically important to the Australian economy. It’s time to make that size and scale count.”
Mr Felton revealed that the association tested and shaped the initiative with the help of an advisory panel made up of brokers, aggregators and lenders to ensure it reflected the views of the entire industry.
He continued: “We’re focused on the positives. The message is: ‘Your broker is behind you all the way, providing you with a choice of lenders and products, and support for the life of the loan. Your broker is on your side’.”
The marketing campaign comes off the back of calls from brokers for such an advertising campaign.
Several brokers have taken to the comment section of The Adviser in recent months to call on the associations to put out a public-facing marketing campaign on the broker proposition, with one commentator calling on the associations to “launch an Australia-wide media campaign outlining the fact that the banks are in the process of killing the broking industry and when they do consumers will be far worse off”.
Some brokers have already taken steps to rebut the negative headlines and misinformation being disseminated to the public following the financial services royal commission and Productivity Commission’s inquiry into the financial sector.
Tasmania-based broker Lance Cure launched a local TV advertising campaign to strengthen the public’s perception of the broking industry, while Steve Milligan, broker and director of Mandurah-based brokerage Launch Finance, presented a whitepaper for Federal MP Andrew Hastie titled The Value of Finance Brokers and Positive Consumer Outcomes to “get the truth out there about why brokers are doing so well”.
Likewise, the MFAA recently presented to government departments and regulatory agencies a data package to provide an evidence-based rebuttal of the negative reports and to emphasise ASIC’s review of mortgage broker remuneration, which did not conclude that the upfront and trail commissions have detrimental impacts on consumers.
The association also revealed that a new Deloitte Access Economics report, Value of Mortgage Broking, will be released in the coming weeks.
ASIC’s review into credit card lending in Australia has found that 18.5% of consumers are struggling with credit card debt. ASIC reviewed 21.4 million credit card accounts open between July 2012 and June 2017.
ASIC’s report (REP 580) finds that while credit cards offer flexibility, they can present a debt trap for more than one in six consumers. In June 2017 there were almost 550,000 people in arrears, an additional 930,000 with persistent debt and an additional 435,000 people repeatedly repaying small amounts.
‘Our findings confirm the risk that credit cards can cause financial difficulty for many Australian consumers’, ASIC Deputy Chair Peter Kell said.
Consumers are also being provided with credit cards that don’t meet their needs. For instance, many consumers carry balances over time on high interest rate products, when lower-rate products would save them money. ASIC estimates that these consumers could have saved approximately $621 million in interest in 2016–17 if they had carried their balance on a card with a lower interest rate.
Deputy Chair Kell said that ‘only a handful of credit providers take proactive steps to address persistent debt, low repayments or poorly suited products. There are a number of failures by lenders to act in the interests of consumers and we expect them to respond swiftly to our findings. We will be following up to ensure the problems we have identified are addressed, including public updates later this year’.
ASIC also looked at balance transfers and their effect on debt outcomes. The data shows that while many consumers reduce their credit card debt during the promotional period of transfer to a new card, a concerning number of consumers increase their debt: over 30% of consumers increase their debt by 10% or more after transferring a balance.
ASIC found that rules introduced in 2012 that require lenders to apply repayments against amounts accruing the highest interest first have helped reduce the interest charged on credit card debt. However, four lenders (Citi, Latitude, American Express and Macquarie) have retained old rules for grandfathered credit cards open before June 2012. ASIC estimates that almost 525,000 consumers have paid more interest as a result.
ASIC found that while these four credit providers are not breaking the law, they are charging their longstanding customers more interest than they should have been, and their conduct is out of step with the rest of the industry.
In anticipation of a new Banking Code of Practice, from 2019 Citi and Macquarie will no longer retain the older repayment allocation methodology for grandfathered credit cards. American Express has also indicated that it will make this change in 2019. Lattitude is considering its position.
Background
On 16 December 2015 the Senate Economics References Committee released its report relating to credit card interest rates, Interest rates and informed choice in the Australian credit card market (the Senate Inquiry). A primary concern of the Committee was that too many Australians are ‘revolving’ credit card debt for extended periods of time while paying high interest charges.
In March 2018, the Government implemented the first phase of reforms in response to the Senate Inquiry. These reforms will help prevent future consumers from experiencing problem credit card debt by:
ensuring that credit providers assess a consumer’s ability to repay a credit card limit over a period prescribed by ASIC
banning unsolicited credit limit increase invitations, and
making it easier for consumers to cancel credit cards.
ASIC has also today released a consultation paper about the credit assessments reform proposing that ASIC prescribe a period of three years. Once implemented this reform will strengthen responsible lending assessments for credit cards.
ASIC’s review
In 2017, ASIC began a review into credit card lending in Australia. As well as picking up on issues highlighted by previous regulatory reforms and the Senate Inquiry.
ASIC’s review of credit card lending focused on:
consumer outcomes – including whether there are people with debt that causes problems, such as missing payments or carrying lots of credit card debt over time
the effect of balance transfers on the amount of debt, and
the tailored rules that apply to credit cards.
Snapshot of the market
As of June 2017:
there were 14 million open credit card accounts, an increase of over 300,000 since 2012.
Outstanding balances totalled almost $45 billion.
Approximately $31.7 billion in balances on credit cards that were incurring interest charges.
Consumers were charged approximately $1.5 billion in fees in 2016-17, including annual fees, late payment fees and other amounts for credit card use.
Around 62% of consumers had only one credit card between 2012 and 2017.
Consumers with multiple cards generally had two cards.
Fewer than 5% of consumers had five or more credit cards between 2012 and 2017.
A number of factors have contributed to this, including instability in the market value of farms, policy changes that make farms more reliant on financial instruments, and shifts in the global positioning of farm land relative to other forms of property.
The commission has heard that local lending brokers were not qualified to value farm properties, and that farm valuations have become fluid and unpredictable.
Sometimes farms and farmland were deliberately overvalued. Higher values enable farmers to borrow more money for farm improvements, and the local lending branch manager to earn higher commissions.
Not only do the central administrators in banks lack the information and expertise to question these assessments, their business models have encouraged overvaluation and overborrowing as a means to grow their businesses.
Across the Murray Darling Basin banks have taken the separation of water from land – a precursor to the marketisation of water – as a cue to devalue land.
This has provided a reason to void existing loan agreements and to offer refinancing under more arduous conditions. Farmers have no option to refuse, and so borrow with the expectation that a couple of good years will put them back on track.
And if the good years don’t materialise, farms fall into financial stress.
This confronts a third issue, which is that in the bad years farms are harder to sell so their market value plummets. This compounds the problem.
Farmers are more reliant on banks
Policy changes have made farms more reliant on banks.
Since Australia adopted open-market policies in the 1980s and agricultural markets have become global, farmers have been exposed to global price changes.
Drought assistance has also been reoriented to rely on market-based instruments, such as loans from banks rather than grants from governments. In the wake of the deregulation of the financial system, and the post-financial crisis consolidation of the farm lending sector, many farm-specific loan products have disappeared. So banks tend to treat farms as businesses like any other.
The open-market policies also create an imperative to expand landholdings (“get big or get out”) and to invest in the latest equipment and technologies. Since this requires borrowing, it thrusts farmers onto a credit treadmill.
Of course, low interest rates have also stimulated borrowing for farm expansion.
Increasing corporate control of farm inputs (seeds, fertiliser etc.) and outputs is squeezing farmers’ capacity to earn enough to service their loans.
To make matters worse, the declining terms of trade impel farmers to increase productivity just to stand still.
The farmers before the royal commission have mostly managed to stay on the treadmill, but only until the banks’ rule changes cranked up the speed to throw them off.
It’s clear that despite their crucial role, many banks still don’t really “get” the vagaries of farming. They don’t understand how different farm lending is – or should be – to commercial and housing lending. Neither do they seem to appreciate the broader social and economic dimensions of the role they have in managing farm risks.
Dramatic revisions to land valuations, as discussed in numerous cases described in the commission, can undermine an entire farming region’s equity.
The accelerated thinning out of the farming population impacts on local economies and sporting teams, among others. In the lead-up to and during the whole process of deregulation, farmers were continually reassured – in reports by the Productivity Commission, for example – that the credit market would evolve to meet their needs.
The evidence that the commission has heard in many respects represents a case of market – and regulatory – failure.
Since the global financial crisis, farm land has become an attractive investment for wealthy families and institutional investors, and for governments worried about food security.
As this pushes up land values, banks can be more aggressive towards failing farms. Foreclosures free up land for deep-pocketed investors.
It would be a mistake, then, to conclude that the stories coming out of the commission are an isolated issue relating to the one bank’s heavy-handed mopping up after the failure of a specialised rural lender – as was the case with ANZ and Landmark.
On the contrary, there are many stories of different banks imposing financial risk frameworks on farmers that are ill-equipped to accommodate the vagaries of farming production and pricing.
When farmers jest about being owned by the banks, they aren’t joking.
We should ask why the government took so long to acknowledge the problems of rural finance and the effects on farming communities.
After the commission concludes, it is likely that banks and regulators will tighten the risk parameters on farm lending and make it harder for smaller family farmers to access finance.
Vulnerable farms will not be able to borrow as much money as in the past. This might be prudent from a financial risk perspective.
However, if city bankers don’t understand farming and don’t make allowances for the volatile and uncertain economies of farming, there’s still no guarantee that tighter rules will translate into better decisions and more positive outcomes.
Rather, tighter rules are likely to have uneven consequences, further disadvantaging smaller family farms relative to deep-pocketed agribusinesses. So, in effect, restricting credit is likely to accelerate the transfer of farmland from family farms to more corporate entities including transnational corporations.
Author: Sally Weller Reader, Australian Catholic University; Neil Argent Professor of Rural Geography, University of New England
Welcome to the Property Imperative weekly to 30th June 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 global stage, U.S. stocks were met with heavy selling pressure this week as the trade war hotted up. While earlier in the week, Donald Trump decided against imposing measures to restrict Chinese investment in U.S. based technology, the market is still reacting to the initial U.S. and Chinese tariffs which are coming into effect next week. In the world of bricks and click, Amazon was back in the headlines after the e-commerce giant announced its entry into the pharmacy sector with the purchase of Pillpoint. This triggering widespread panic, sending shares of brick-and-mortar drug stores sharply lower. Nike, meanwhile, showed improved results after revealing its first positive North America sales number in over a year. The S&P 500 closed 0.08% higher to close 2,718.37.
Boomberg says a leaked report from a Chinese government-backed think tank has warned of a potential “financial panic” in the world’s second-largest economy, a sign that some members of the nation’s policy elite are growing concerned as market turbulence and trade tensions increase. Bond defaults, liquidity shortages and the recent plunge in financial markets pose particular dangers at a time of rising US interest rates and a trade spat with Washington, according to a study by the National Institution for Finance & Development The think tank warned that leveraged purchases of shares have reached levels last seen in 2015 – when a market crash erased $US5 trillion of value. “We think China is currently very likely to see a financial panic,” NIFD said in the study, which appeared briefly on the internet on Monday, before being removed. “Preventing its occurrence and spread should be the top priority for our financial and macroeconomic regulators over the next few years.” The Australian dollar fell against the Chinese yuan from March to early May.
The China effect is on top of damming criticism of Central Bank’s policy by the Bank For International Settlements, which we discussed in our post “Red Alert From The Bankers’ Banker”. They say, economies are trapped in a series of boom-bust boom-bust cycles which are driving neutral interest rates ever lower and driving debt higher. The bigger the debt the worse the potential impact will be should rates rise (as they are thanks to the FED). Yet in each cycle “natural” interest rates are driven lower. Implicitly the current settings are wrong. This was in the Bank for International Settlements latest annual report. They also discussed how banks are fudging their ratios using Repo’s in our post “Are Some Banks Cooking the Books?” Within its 114 pages, the BIS report painted a worrying picture of where the global economy stands. In fact, the risks in the global monetary system remain from the Lehman crisis in 2008 and aggregate debt ratios are almost 40 percentage points of GDP higher than a decade ago.
Crude oil prices were strongly up, their highest since November 2014 extending a rally for a fourth-straight week as focus shifted to the prospect of deeper losses of Iranian crude supplies as the U.S. threatened sanctions on countries that fail to halt Iranian crude imports by Nov. 4. Then there were unexpected disruptions in Canada, Libya and Venezuela, together curbing supply and in addition, U.S. crude supplies fell by 9.9 million barrels. Crude futures settled 65 cents higher on Friday as data showed U.S. oil rigs counts fell for the second straight week, pointing to signs of tightening domestic output.
The US dollar was roughly unchanged for the week as heavy selling pressure on Friday reversed earlier gain after the euro rallied sharply on news of EU members agreeing on measures to tackle the migrant crises in the EU including stepping up border security and setting up holding centers to handle asylum seekers. A signal of easing political uncertainty within the bloc sent the EUR/USD sharply higher, to $1.1677, up 0.94%. The US dollar fell 0.82% to 94.22 against a basket of major currencies on Friday.
Gold tumbled further again this week and suffered its biggest monthly slump since September as investors preferred the US$. This was partly because the FED indicated they were comfortable with inflation running above the inflation target over the near-term, in reaction to the news that inflation hit the Fed’s 2% target for the first time since May 2012, raising the prospect of a faster pace of rate hikes.
And the crypto crunch continues. Bitcoin for example went below $6,000 and it could go lower still. No one is sure where the firm base is, so expect more volatility ahead.
And talking of volatility the COBE VIX index ended the week at 16.09, having been higher earlier in the week, up from the 10-12 range seen earlier in the year, but well below the peaks seen in February. As an indicator of perceived risk, this suggests there are more in the system than last year.
Locally the Australian Dollar ended at 74 cents, and the trend down since February is striking, perhaps mirroring rising UD Bond rates, higher capital market interest rates, and the Financial Services Royal Commission which recommenced this week in Brisbane with a focus on country’s $50 billion farm sector and farm finance, 70% of which resides in Queensland, New South Wales and Victoria. And it was more really bad news for the banks, who again demonstrated poor practice, and in some cases deception. But this is a complex area, with farmers sensitive to weather extremes, global commodity prices, and changing land prices. And players such as liquidators seemed to profit from the failure of farmers, despite selling land and equipment well below value. They are not in scope for the Royal Commission, but we think they should be. There is clearly a case for ASIC to take a more hands-on role in farm finance as some rural lenders, such as the non-bank ones, are not covered by existing complaints-handling systems. But overall, this is another example of poor culture in the banking industry, and players including ANZ and CBA are under the microscope. The findings were so damming that the Commission decided to spend more time looking at farming case studies. For bank-originating farm debt, some lenders changed loan contract terms for farm businesses that were late with payments or in default without warning or explanation. More broadly, the Commission heard about declining access to banking services for the 6.9 million Australians in rural areas, the inflexibility of lenders toward farm-specific challenges like weather, trade disputes, and lack of customized regulations for the sector.
The latest credit data from APRA and RBA, out yesterday, showed that May credit slowed sharply to equal a 6-year low of 0.2% m/m, and a 4-year low of 4.8% y/y. We discussed this in our post “May Credit Snapshot Tells the Story”.
As UBS highlights, private credit growth has weakened more quickly than expected to only 0.2% m/m, the equal weakest since 2012; also dragging the y/y to an equal 4-year low of 4.8% (after 5.1%). Also, total deposits growth collapsed in recent months to only 2.4% y/y, the weakest since the last recession in 1991. Meanwhile, the household debt-to-income ratio lifted to a record high of 190% in Q1- 18. However, mainly due to falling house prices, household wealth declined by 0.4% q/q, the largest fall since 2011. While this followed a surge to a record high level of $10.3 trillion in Q4-17, the change in wealth drives the household saving ratio, consistent with a fading ‘household wealth effect’ dragging consumption ahead. They say this will spill over and an ~8-10% fall in new car sales volumes is a strong possibility, Further evidence of the second order impacts.
Housing auction clearance rates slid to a ~6-year low of ~54%, housing credit growth eased to a >4- year low dragged by investors slumping to a record low, while industry data on owner occupier home loans suggests this also started to drop in May; while home prices are falling the most since 2012. Macroprudential policy is reducing borrowing capacity and leading to a clear weakening of housing, which will continue ahead.
CoreLogic says last week, 1,849 auctions were held across the combined capital cities, returning a final clearance rate of 55.5 per cent, increasing from the previous week when 52.4 per cent of the 2,002 auctions held were successful, the lowest clearance rate seen since late 2012. This time last year, the clearance rate was 66.5 per cent across 2,355 auctions.
Melbourne’s final clearance rate was recorded at 59.9 compared with a clearance rate of 70.7 per last year. Sydney’s final auction clearance rate was 50.1 per cent compared with a clearance rate of 68.2 per cent last year. Across the smaller auction markets, clearance rates improved everywhere except Tasmania, however only 3 auctions were held there over the week. Of the non-capital city auction markets, Geelong returned the highest final clearance rate, with a success rate of 71.4 per cent across 26 auctions.
This week they expect to see a lower volume of auctions this week with CoreLogic currently tracking 1,557 auctions, down from 1,849 last week.
Home prices are falling with the CoreLogic 5-city daily dwelling price index, which covers the five major capital city markets, declined another 0.15%. So far in June home values have fallen 0.24%, driven by Melbourne, Sydney and Perth. So far in 2018, home values have declined by 1.72%, with only Brisbane and Adelaide recording a value increase. Over the past 12 months, home values have fallen by 1.72%, driven by Sydney and Perth. Despite the continuing falls. values are now up 36.2% since the 2010 peak at the 5-city level, driven overwhelmingly by exceptionally strong gains in Sydney at 60.2% followed by Melbourne 42.6% and Adelaide 9.8%. Brisbane is 8.3% and Perth is down 11.4% This is before inflation adjustments, which means in real terms only Sydney and Melbourne prices are ahead.
We see more banks lifting rates on the back of the higher BBSW and LIBOR rates. For example, effective Friday 3 July, ING in Australia said it was making changes to variable rates for existing owner occupier home loan customers. This means interest rates for existing residential home loan customers will increase by 0.10%.
Bank of Queensland announced the variable home loan rate for owner occupiers (principal and interest repayments) will increase by 0.09 per cent, per annum; variable home loan rate for owner occupiers (interest only repayments) will increase by 0.15 per cent, per annum; variable home loan rate for investors (principal and interest and interest only repayments) will increase by 0.15 per cent, per annum; and Owner occupier and investor Lines of Credit will increase by 0.10 per cent, per annum. Anthony Rose, Acting Group Executive, Retail Banking said today’s announcement is largely due to the increased cost of funding. “Funding costs have significantly risen since February this year and have primarily been driven by an increase in 30 and 90 day BBSW rates, along with elevated competition for term deposits.
This just extends the list of players lifting rates, and we think more will follow. So it was interesting to see Bendigo Bank chairman Robert Johanson saying that he believes the RBA has waited too long to move rates. “They’ve been trying to do too much work with monetary policy,” he told Banking Day. “I’m concerned that apart from the impact we’ve already seen on asset values, mortgage rates are going to break from the official cycle and will do so in a disruptive way.” The funding pressures on lenders are emerging at an awkward time for the Turnbull Government, which is required to call a federal election within the next 12 months. A series of out-of-cycle increases across the industry could induce a blistering political response from government politicians who are cognizant of the historical links between election outcomes and mortgage rate rises. Even small hikes would create significant pain as a piece on Nine News, using our mortgage stress data explained.
I discussed the current situation with Economist John Adams this week in an extended interview – see Australia’s Debt Bomb. I recommend this post as we go through the critical issues are how it may play out.
Finally, as we hit the end of the financial year, it’s worth reflecting on the highlights and lowlights of the past year. It has been a bit of a roller coaster, but those with shares invested direct, or via superfunds will have done well, again – as in 9 of the past 10 years has proved to be. We suspect the next 12 months will be less positive, as rising interest rates, trade wars and political tensions all mount. We also have an election ahead, which will also potentially create waves. Trade wars is the area to watch. Our dollar has been sliding through the year, and this is likely to continue next year as we struggle with GDP growth in this volatile environment.
Corporate profits have been growing fast, as companies cut costs and rationalise their businesses and this has translated to higher dividends – and about half have come from the financial services sector overall. Banks will be hard pressed to maintain their dividends ahead, as lending growth slows, pressure on their culture continues thanks to the Royal Commission and regulators exercising their muscles. And the greatest of these is mortgage lending growth which we think will continue to languish. Provisions, which were cut this year, may need to rise ahead as 90 days plus default rates are rising, as wages and cost pressure hit home. Remember also the next round of penalty rate reductions for 700,000 workers in across sectors such as retail will cut pay by 10% comes in 1 July.
Property has done less well, despite being well up over the past year, in that the recent monthly trends are signalling a fall. In some states we will end the year well up, for example Hobart, Adelaide and Melbourne, in others less well. We expect more falls ahead because prices are most strongly linked to credit supply, which is being throttled back. Most centres will be impacted as investors tread water and foreign buyer momentum slows. This might be good news for first time buyers who have been enticed back into the market, partly thanks to recent FTB incentives. We are bearish on the property sector next financial year.
Those needing to get income from savings and deposit accounts have had a torrid time, as banks have cut, and cut again their returns on savings. Many are getting less than inflation, so their hard earned cash has taken a hit. This is likely to continue, despite banks lifting mortgage rates as international funding pressure continues to bite in the months ahead. Households continue to be taxed on their savings at their marginal rate, while those with property get massive tax breaks. If Labor does win the next election, this is set for a shake up!
So overall a mixed year, with some highs and lows, and we think next year will be no different, only more so. Credit trajectory is the one to watch.
Many Self Managed Super Funds (SMSF) trustees may not have received “best interest” advice with regards to their fund. This despite the considerable growth in the SMSF sector, which is driven, according to our research, by holders wanting to avoid retail fund fees, and greater control of their finances.
ASIC has released Report 575 SMSFs: Improving the quality of advice and member experiences and Report 576 Member experiences with self-managed superannuation funds.
ASIC reviewed 250 client files randomly selected based on Australian Taxation Office (ATO) data and assessed compliance with the Corporations Act’s ‘best interests’ duty and related obligations.
In 91% of files reviewed the adviser did not comply with Corporations Act’s ‘best interests’ duty and related obligations. The non-compliant advice ranged from record-keeping and process failures to failures likely to result in significant financial detriment. This included:
In 10% of files reviewed, the client was likely to be significantly worse off in retirement due to the advice;
In 19% of cases, clients were at an increased risk of financial detriment due to a lack of diversification.
ASIC Deputy Chair Peter Kell said the standard of advice on SMSFs must improve. ‘A healthy and robust SMSF sector is an important part of our super system. However, it is clear lots of people are setting up self-managed super funds without knowing whether this is the best option. The financial advice sector has significant work to do to lift their performance on this issue.’
ASIC will be taking follow up regulatory action, in particular where consumers have suffered detriment.
ASIC also conducted market research which included interviews with 28 consumers who had set up an SMSF and an online survey of 457 consumers who had set up an SMSF. Through this work we found a lot of people do not understand fully the risks of SMSFs, or their legal obligations as trustees.
In the online survey:
38% of respondents found running an SMSF more time consuming than expected;
32% found it to more expensive than expected;
33% did not know the law required an SMSF to have an investment strategy; and
29% mistakenly believed that SMSFs had the same level of protection as prudentially regulated superannuation funds in the event of fraud.
Mr Kell said, ‘Decisions about super are some of the most important a person can make. However, ASIC found there is a lack of basic knowledge of the legal obligations in setting up or running an SMSF. It is also concerning many people with an SMSF have not understood the importance of diversification, which puts their financial future at risk.’
ASIC also found some people had moved to SMSFs as a way to get into the property market, and were using it solely for this purpose without a wider investment strategy.
The interviews also identified a growing use of ‘one-stop-shops’ where the adviser has a relationship with a developer or a real estate agent whose products the person is encouraged to invest in. This put people at increased risk of getting poor advice that did not take account of their personal circumstances or is not given in their best interests.
ASIC’s findings are supported by the recent Productivity Commission super report which found smaller SMSFs (with balances under $1 million) delivered on average returns below larger funds, and that the costs for low-balance SMSFs are higher than for funds regulated by the Australian Prudential Regulation Authority (APRA).
ASIC’s SMSF report will inform its surveillance and regulatory work into the SMSF sector. ASIC will take enforcement action as appropriate, including ensuring licensees with non-compliant advisers undertake client review and remediation.
More broadly, ASIC and the ATO will have an increased focus on property one-stop-shops. This will include sharing data and intelligence, and ASIC taking enforcement action where it sees unscrupulous behaviour.
As widely reported, a new digital bank with the name 86 400 is being set up in Australia and it is pitched by its founders as a potential “genuine alternative” to the big four banks. Their site went live, but it is only a placeholder.
This from Business Insider. British banking pioneer Anthony Thomson, the entrepreneur who co-founded the highly successful Metro Bank in the wake of the GFC (the UK’s first new high street bank in 150 years), and in 2014, the country’s first digital bank, the now publicly listed Atom, has set his sights on Australia with a new digital challenger bank.
Banking startup 86 400 (named after the seconds in a day) will launch in early 2019, and is wholly funded by the Sydney-based payments services company Cuscal, best known for rediATMs.
Thomson has signed on as chairman with former ANZ Japan CEO, Robert Bell as CEO. Cuscal Payments CIO Brian Parker takes on that role at 86 400.
The heavy-hitting management team also includes Westpac’s former digital GM, Travis Tyler; CBA’s former International Chief Risk Officer, Guy Harding, as CRO; and Cuscal’s former Head of Finance, Neal Hawkins, as CFO.
While the project has been set up and funded by Cuscal (which is part-owned by the likes of Bendigo Bank and Mastercard) – one of the key architects of the New Payments Platform (NPP), a real-time payments system – it will operate as a separate entity, with a separate board and team.
NPP is at the core of 86 400’s real-time banking pitch, something Thomson says the big banks “have been very slow to make available”.
The neobank will look to raise more than $250 million capital over the first three years of operation and will likely take additional shareholders on board.
Having raised more than $AU1 billion for his previous ventures, Thomson says 86 400 is his “best prepared, most capable and well-funded venture to date” and in “the unique position of not going out to look for money”.
And he’s not mucking around.
“I’m not here to build a small bank. We’re here to build a big bank,” he said.
Eight years on, Metro Bank is worth $AU1.95 billion with annual revenues in excess of $AU500 million, having floated in 2014.
By October last year, Atom – Thomson left the business in January – had around £900 million ($AU1.6 billion) in deposits, but lost £42 million ($AU75m) in 2016.
86 400’s app-based banking has been 18 months in development, with a team of 60 based in Sydney, amid conversations with Australian Prudential Regulation Authority (APRA) for a full banking license as an Authorised Deposit-taking Institution (ADI) expected by the end of the year.
It plans to launch in beta towards the end of 2018 before going public in the first quarter of 2019 with a transaction and savings account. It will operate on both iOS and Android smartphones.
The launch comes amid a litany of complaints about the behaviour of the Big Four banks at the royal commission into misconduct in the financial services sector.
Cuscal managing director Craig Kennedy, said the organisation put forward the idea because they believed “nobody in Australia is leveraging all of the capabilities available to maximise the banking experience on your mobile”.
Cuscal produced Australia’s leading white-label mobile banking app, and has led the way in digital banking solutions.
Thomson, who last year invested in Melbourne-based fintech startup, Timelio, said Australia needed another bank “because the big banks have treated customers really, really badly”.
“Look at the levels of dissatisfaction with the banks… all of the big banks have negative net promotor scores,” he said.
“I read a piece of data which really stuck in my mind. It was from the Australia Institute and said that 2.9% of Australian GDP goes to bank profits. So $3 out of every $100 hardworking Australians make in their businesses goes to the banks in profits. This is just enormous. It’s three times bigger than the UK – and I think the UK banks rip off their consumers.
“So I think there’s a real opportunity to create the first real alternative to the real banks. Someone who does put the customer first.”
Like other digital startups, part of the opportunity CEO Robert Bell sees is avoiding the baggage around the industry’s incumbents.
“Large banks have an enormous drag in terms of very big, costly legacy real estate/branch networks, legacy technology that’s very expensive to change. Most of their digital pieces have been add-ons,” he said.
“We’ve got the huge advantage that we’re starting from scratch.”
The heart of 86 400 is its investment in what Bell calls “digital working memory”. It’s data analysis that has the potential to warn you like a parent or spouse about when you’re being a spendthrift – budgeting for the avocado toast generation – with a predictive cashflow model.
“For example, helping customers know what there balance will be in one week’s time or four week’s time if the normal things that happen in their life happen over the next couple of weeks,” he said.
“No one gives any insight into what might happen in the future.”
Thomson says: “As we get to know you, and with your permission, we can use the data to better predict what your needs are going to be. So we know that in summer you go on holidays and your insurance comes up for renewal, we can start to model that and bring it to you attention in advance”.
If you’re the sort of person who runs out of cash three days before your next payday, it could come in handy to amend your spending habits.
Bell says 86 400 plans to launch with no or low fee accounts as “just the start”, promising “value customers have never had from a bank before”.
86 400’s launch could potentially take advantage of growing resentment towards the major banks in the wake of the royal commission.
While dissatisfaction may be growing, customer churn remains surprisingly low. However, the banks are facing something of the perfect storm of a potential margin squeeze from a likely rise wholesale funding costs ahead, at the same time that credit growth has risen faster than deposit growth in recent months.
The risk of out-of-cycle mortgage rate increases is rising in Australia, giving borrowers another reason to start shopping around.
While Thomson and Bell were keen to downplay any focus on interest rates for 86 400’s potential savers and borrowers, the neobank’s tech-focused low operating costs will negate pressure on its margins as it cases new business.
ASIC has accepted a variation to an enforceable undertaking provided by National Australia Bank Limited (NAB) relating to its wholesale spot foreign exchange (FX) business.
The variation imposes additional undertakings after an independent expert’s report identified significant deficiencies in NAB’s remediation program developed as part of the original EU, accepted in December 2016 (refer: 16-455MR).
Under the original EU, NAB was required to develop a program of changes to its existing systems, controls, monitoring, training and supervision of employees within its spot foreign exchange business to prevent, detect and respond to certain types of conduct. The program and its implementation was to be assessed by an independent expert.
In accordance with the EU, NAB provided its program of changes on 28 November 2017. On 29 March 2018, the independent expert reported on NAB’s spot foreign exchange program noting significant deficiencies regarding its:
Governance, Risk Management and Compliance Framework
Policies and Procedures
Risk Management Practices
Human Resource Management.
The independent expert also concluded that it was unable to complete the expert assessment of the program’s effectiveness required by the EU because NAB has made incomplete progress in designing items to be included in the program.
The expert’s report states ‘progress in developing the program has been slow’ and that the program ‘appears to have evolved iteratively during 2017, rather than through a well-defined process. For instance, there appears to have been no comprehensive risk assessment across NAB’s Spot FX business against the EU requirements and relevant regulatory standards and guidance.’
The variation of the EU imposes an additional undertaking on NAB to prepare an updated program that adequately addresses all required components. This updated program will then be subjected to further assessment by the independent expert. After these new undertakings are satisfied, NAB will be able to progress with the undertakings in the original EU.
Commissioner Cathie Armour said, ‘ASIC is disappointed with the delay in the development and assessment of a remediation program to address the conduct outlined in the EU. However, we are pleased that the process has been sufficiently robust to ensure any ongoing deficiencies have been identified and are being addressed, with oversight by an independent expert. ASIC’s ultimate objective is to ensure NAB has effective mechanisms in place to adequately train, monitor and supervise its employees to provide financial services efficiently, honestly and fairly’.
The wholesale spot FX market is an important financial market for Australia. It facilitates the exchange of one currency for another and thus allows market participants to buy and sell foreign currencies. As part of its spot FX businesses, NAB entered into different types of spot FX agreements with its clients, including Australian clients.
Spot foreign exchange refers to foreign exchange contracts involving the exchange of two currencies at a price (exchange rate) agreed on a date (the trade data), and which are usually settled two business days from the trade date.
“We welcome the feedback received from the independent expert in its initial report, which has helped us identify areas where we can do better to implement the program of changes,” Mr Gall said.
CBA’s decision to distance itself from Aussie Home Loans via the bundled spin-off of its wealth management business has been labelled a “clean and timely exit” by CEO Matt Comyn.
Any conflicts of interest to be found in the ownership of Australia’s biggest mortgage brokerage by Australia’s biggest bank will soon be a thing of the past.
On Monday morning, CBA announced that it will demerge Aussie, along with several wealth management businesses such as Colonial First State, into a separate company known as CFS Group. That group will list on the ASX.
“Ultimately, we believe that they will perform better outside the Commonwealth Bank Group,” CBA chief executive Matt Comyn said.
“Aussie Home Loans [is] the leading mortgage broking franchise, and we have decided to put that inside the demerged group. It is a very successful business, over nearly 20 years, and we believe again that the best opportunities for growth and performance from Aussie Home Loans is inside the CFS Group, rather than inside the Commonwealth Bank Group.”
Mr Comyn said that a demerger, rather than a sale, offers a couple of important benefits.
“Firstly, it is a clean and timely exit of all of these businesses,” he said. “I think each of them are good businesses in their own right. We think the best chance for these businesses to perform at their potential, is outside the Commonwealth Bank Group. And CBA shareholders will receive a proportionate interest in the demerged entity, relative to their CBA shareholding. And that enables them to either participate in the growth of the CFS Group over time, or if should they prefer, they can also exit and sell on market.”
While there has been no mention of conflicts of interest or vertical integration in Mr Comyn’s statements about cutting ties with Aussie, there has been plenty of criticism over the bank’s ownership of the brokerage that no doubt weighed on an already heavily saddled CBA.
Representatives from both Aussie and CBA appeared as witnesses during the first round of the Hayne royal commission. Bank ownership of brokerages was also brought up by the Productivity Commission in its draft report on competition in financial services. The PC report concluded that the mortgage broking revolution, which disrupted the major banks in the 1990s, has failed and many brokers now act in the best interest of the banks that own them and not consumers.
“The early 2000s was the last time Australia’s financial system saw a period of fierce competition,” PC chairman Peter Harris said. “If we are to see its like again, we will need a series of policy shift, and a champion to own them.”
CBA’s decision this week may foreshadow some of the policy shifts the PC chairman has suggested, which could see changes to bank ownership of broking businesses. The PC will deliver its final report on Monday.
Meanwhile, it’s business as usual at Aussie Home Loans, according to CEO James Symond.
“Aussie Home Loans confirms CBA Group’s announcement about the planned demerger of its mortgage broking businesses along with its wealth management operations into a new, independent and separately ASX-listed company to be known as [the] CFS Group,” Mr Symond told The Adviser.
“As has been the case since we started, Aussie is committed to providing the best, independent service to our customers, ensuring they get the most suitable home loan tailored to their needs.
“While important in terms of our ultimate ownership, CBA’s announcement will not change this commitment to our customers or have any impact on the service we provide them. As a larger part of a smaller group, this opens greater opportunity for Aussie.”
This week’s announcement is the end of an era for Aussie, which sold its first 20 per cent stake to CBA back in 2008. In August last year, founder John Symond received 2.1 million of CBA shares — worth nearly $164 million — for his remaining 20 per cent stake in the brokerage.
The Banker’s Bank, in their annual report confirmed that there is evidence that some banks are massaging their quarter end results to fit within certain capital ratios using Repurchase Agreements (REPO’s). So Central banks’ own financial operations with bank counterparties are making a mockery of any macroprudential regulation attempts by central banks … plain alarming!
Several years ago we showed how the Fed’s then-new Reverse Repo operation had quickly transformed into nothing more than a quarter-end “window dressing” operation for major banks, seeking to make their balance sheets appear healthier and more stable for regulatory purposes.
And this is a snapshot of what the reverse-repo usage looked like back in late 2014:
Today, in its latest Annual Economic Report, some 4 years after our original allegations, the Bank for International Settlements has confirmed that banks may indeed be “disguising” their borrowings “in a way similar to that used by Lehman Brothers” as debt ratios fall within limits imposed by regulators just four times a year, thank to the use of repo arrangements.
For those unfamiliar, the BIS explains that window-dressing refers to the practice of adjusting balance sheets around regular reporting dates, such as year- or quarter-ends and notes that “window-dressing can reflect attempts to optimise a firm’s profit and loss for taxation purposes.”
For banks, however, it may also reflect responses to regulatory requirements, especially if combined with end-period reporting. One example is the Basel III leverage ratio. This ratio is reported based on quarter-end figures in some jurisdictions, but is calculated based on daily averages during the quarter in others. The former case can provide strong incentives to compress exposures around regulatory reporting dates – particularly at year-ends, when incentives are reinforced by other factors (eg taxation).”
But why repo? Because, as a form of collateralised borrowing, repos allow banks to obtain short-term funding against some of their assets – a balance sheet-expanding operation. The cash received can then be onlent via reverse repos, and the corresponding collateral may be used for further borrowing. At quarter-ends, banks can reverse the increase in their balance sheet by closing part of their reverse repo contracts and using the cash thus obtained to repay repos. This compression raises their reported leverage ratio, massaging their assets lower, and boosting leverage ratios, allowing banks to report them as being in line with regulatory requirements.
So what did the BIS finally find? Here is the condemning punchline which was obvious to most back in 2014:
“The data indicate that window-dressing in repo markets is material”
The report continues:
Data from U.S. money market mutual funds point to pronounced cyclical patterns in banks’ U.S. dollar repo borrowing, especially for jurisdictions with leverage ratio reporting based on quarter-end figures (Graph III.A, left-hand panel). Since early 2015, with the beginning of Basel III leverage ratio disclosure, the amplitude of swings in euro area banks’ repo volumes has been rising – with total contractions by major banks up from about $35 billion to more than $145 billion at year-ends. Banks’ temporary withdrawal from repo markets is also apparent from MMMFs’ increased quarter-end presence in the Federal Reserve’s reverse repo (RRP) operations, which allows them to place excess cash (right-hand panel, black line).
This is problematic because this central-bank endorsed mechanism “reduces the prudential usefulness of the leverage ratio, which may end up being met only four times a year.” Furthermore, the BIS alleged that in addition to its negative effects on financial stability, the use of repos to game the requirement hinders access to the market for those who need it at quarter end and obstructs monetary policy implementation.
This is hardly a new development, and as we explained in 2014, one particular bank was notorious for its use of similar sleight of hand: as Bloomberg writes, the use of repo borrowings is similar to a “Lehman-style trick” in which the doomed bank used repos to disguise its borrowings “before it imploded in 2008 in the biggest-ever U.S. bankruptcy.”
The collapse prompted regulators to close an accounting loophole the firm had wriggled through to mask its debts and to introduce a leverage ratio globally.
How ironic, then, that it is central banks’ own financial operations with bank counterparties, that make a mockery of any macroprudential regulation attempts by central banks, and effectively exacerbate the problems in the financial system by implicitly allowing banks to continue masking the true extent of their debt.
