Category: Banking Culture

CBA Complacent, Missed Risks, $1Bn Capital Add-in From APRA

The Australian Prudential Regulation Authority (APRA) today released the Final Report of the Prudential Inquiry into the Commonwealth Bank of Australia (CBA).

The report says CBA’s continued financial success dulled the institution’s senses to signals that might have otherwise alerted the Board and senior executives to a deterioration in CBA’s risk profile. APRA has applied a $1 billion add-on to CBA’s minimum capital requirement.

APRA announced the Prudential Inquiry on 28 August 2017 to examine the frameworks and practices in relation to the governance, culture and accountability within the CBA group, following a number of incidents that damaged the reputation and public standing of the bank. A Panel to conduct the inquiry – comprising Dr John Laker AO, Chairman of the Banking and Finance Oath, company director Jillian Broadbent AO and Professor Graeme Samuel AC, Professorial Fellow in the Monash Business School – was appointed on 8 September 2017 and the Inquiry’s investigative work began the following month. A Progress Report was released on 1 February 2018.

The Final Report is comprehensive and contains a large number of findings and recommendations. Its overarching conclusion is that “CBA’s continued financial success dulled the senses of the institution”, particularly in relation to the management of non-financial risks.

The Report also found a number of prominent cultural themes such as a widespread sense of complacency, a reactive stance in dealing with risks, being insular and not learning from experiences and mistakes, and an overly collegial and collaborative working environment which lessened the opportunity for constructive criticism, timely decision-making and a focus on outcomes.

The Report raises a number of matters of prudential concern. In response, CBA has acknowledged APRA’s concerns and has offered an Enforceable Undertaking (EU) under which CBA’s remedial action in response to the report will be monitored. APRA has also applied a $1 billion add-on to CBA’s minimum capital requirement.

As some of the recommendations deal with the way in which CBA interacts with customers, APRA will work closely with the Australian Securities and Investments Commission (ASIC) to ensure that the recommendations are addressed in full.

The Final Report’s findings

Over the past six months, the Panel examined the underlying reasons behind a series of incidents at CBA that have significantly damaged its reputation and public standing.

It found there was a complex interplay of organisational and cultural factors at work, but that a common theme from the Panel’s analysis and review was that CBA’s continued financial success dulled the institution’s senses to signals that might have otherwise alerted the Board and senior executives to a deterioration in CBA’s risk profile. This dulling was particularly apparent in CBA’s management of non-financial risks, i.e. its operational, compliance and conduct risks.

“These risks were neither clearly understood nor owned, the frameworks for managing them were cumbersome and incomplete, and senior leadership was slow to recognise, and address, emerging threats to CBA’s reputation. The consequences of this slowness were not grasped,” the Report stated.

The Panel identified:

  • inadequate oversight and challenge by the Board and its committees of emerging non-financial risks;
  • unclear accountabilities, starting with a lack of ownership of key risks at the Executive Committee level;
  • weaknesses in how issues, incidents and risks were identified and escalated through the institution and a lack of urgency in their subsequent management and resolution;
  • overly complex and bureaucratic decision-making processes that favoured collaboration over timely and effective outcomes and slowed the detection of risk failings;
  • an operational risk management framework that worked better on paper than in practice, supported by an immature and under-resourced compliance function; and
  • a remuneration framework that, at least until the AUSTRAC action, had little sting for senior managers and above when poor risk or customer outcomes materialised (and, until recently, provided incentives to staff that did not necessarily produce good customer outcomes).

The Final Report includes numerous recommendations for addressing these issues within CBA, focusing on five key levers:

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

APRA Chairman Wayne Byres said the Inquiry Panel’s findings show CBA’s governance, culture and accountability frameworks and practices are in need of considerable improvement.

“As the Panel notes, CBA has itself identified and begun taking steps to address many of these issues, but there is much to do and a risk that the same issues which have led to the need for the Inquiry undermine the bank’s efforts to comprehensively and effectively respond to the recommendations of the Panel.

“As a result, CBA has given to APRA an Enforceable Undertaking which establishes a framework by which CBA will demonstrate it is addressing the full set of recommendations made by the Panel in a timely manner. Until such times as these recommendations are addressed to APRA’s satisfaction, an add-on to CBA’s operational risk capital requirement will continue to apply.

“CBA is a well-capitalised and financially sound institution but CBA itself had acknowledged shortcomings in governance, culture and accountability ahead of this Inquiry. The comprehensive review, and set of recommendations set out by the Panel, provides CBA with a clear path towards restoring its public standing,” Mr Byres said.

Mr Byres thanked the panel members for their thorough Report. “The Panel, and those who supported them in undertaking the Inquiry, have delivered a comprehensive and high quality report that goes to the heart of the issues that led to the damage to CBA’s reputation. More importantly, the Report’s recommendations provide a roadmap for the CBA Board and executive team to deliver organisational and cultural change across the CBA group.

“The Panel notes in its Report that regaining community trust will require time, hard work and an undistracted risk and customer focus and that its recommendations should assist the CBA Board and staff in translating CBA’s undoubted financial strength and good intent into better meeting the community’s needs and expectations,” he said.

Mr Byres also said: “the findings of the Report provide important insight for all financial institutions, particularly about the need to maintain a broad focus on all aspects of risk and stakeholder interest and not allow financial success to mask or detract from other important measures of an institution’s performance and risk profile.”

Given the nature of the issues identified in the Report, all regulated financial institutions will benefit from conducting a self-assessment to gauge whether similar issues might exist in their institutions. APRA supervisors will also be using the Report to aid their supervision activities, and will expect institutions to be able to demonstrate how they have considered the issues within the Report.

For the largest financial institutions, APRA will be seeking written assessments that have been reviewed and endorsed by their Boards.

Changes ahead for product providers

From InvestorDaily.

There is currently no legal requirement for product providers to move legacy clients into cheaper products, but that could change in the wake of last week’s royal commission hearings, says NGM Consulting.

Product providers could be the next in line for an explicit ‘best interests’ obligation following the revelations at the royal commission hearings last week, says NGM Consulting.

In its latest ‘Trialogue’ article, NGM Consulting noted a distinct “adjustment” at last week’s hearings when it comes to product providers.

“It relates to the test that we should use when making ‘conflicted decisions’, where the interests of consumers are at odds with the commercial interests of the firm,” said NGM.

Counsels assisting the commissioner delved into examples where product providers had a range of products, said NGM – “the more contemporary of which are unambiguously known to be better and cheaper than the older, legacy products.”

“An adviser might be expected to shift the client into the better product, but as a product manufacturer many have declined the opportunity to carve up their own revenue line to ensure clients are shifted to the more contemporary product solution,” said NGM.

One example came about in evidence of AMP head of platform development John Keating, who failed to explain why clients had not been moved out of platforms AMP’s own benchmarking guide rated as ‘uncompetitive’ with the broader market.

It is unlikely product providers would fall into legal trouble for this kind of behaviour, said NGM – “until now”.

“There is a test of ‘community standard’ being applied to decisions made by for-profit institutions,” said the consulting firm.

“Regardless of where this all lands, it’s clear any attempt to walk-back the standard from the new high set by the commission will not help the industry’s reputation.”

“One thing is clear – change is coming.”

AMP’s Catherine Brenner Has Resigned As Chairman

AMP has announced that Catherine Brenner has resigned as Chairman.

Mr Wilkins will lead the company as Executive Chairman for an interim period while the process for selecting a Chairman, and appointment of an additional new non-executive director, is conducted. This will further strengthen governance and ensure stability while a measured process of board renewal is undertaken.  Mr Wilkins will now lead the selection process for a new Chief Executive Officer, which is in progress.

AMP also announces that Group General Counsel and Company Secretary Brian Salter will leave the company.  His outstanding deferred remuneration will be forfeited as a result of the Board exercising its discretion.

The Board has received advice from Philip Crutchfield QC, Tamieka Spencer Bruce of Counsel, and Tim Bednall of King & Wood Mallesons in relation to certain issues raised in the Royal Commission concerning the preparation of the Clayton Utz report on AMP’s fee for no service issue.  The advice follows the establishment of the Board Committee chaired by Mr Wilkins to examine the issues relating to AMP’s advice business that have been raised in the Royal Commission.

Having considered and assessed the matters, the Board is satisfied that the former Chairman Catherine Brenner, former Chief Executive Officer Craig Meller and the other directors did not act inappropriately in relation to the preparation of the Clayton Utz report.

The Board, including the former Chairman, were unaware of and disappointed about the number of drafts and the extent of the Group General Counsel’s interaction with Clayton Utz during the preparation of the report.  The Board commissioned and received the report.  It was not a matter for the Board’s approval.

The Board announces the following further actions:

  • Recognising collective governance accountability for the issues raised in the Royal Commission and for their impact on the reputation of AMP, the Board is reducing fees for all AMP Limited Board Directors by 25 per cent for the remainder of the 2018 calendar year; and
  • The employment and remuneration consequences for the individuals within the business responsible for the fee for no service issue will be determined on finalisation of an ongoing external employment review, which is expected to complete shortly

Catherine Brenner said: “I am honoured to have been Chairman of AMP.  I am deeply disappointed by the issues at hand and am particularly concerned for the impact they have had on our customers, employees, advisers and shareholders.

“As Chairman, I am accountable for governance.  I have always sought to act in the best interests of the company and have been in discussions with the Board about the most appropriate course of action, including my resignation.  The Board has now accepted my resignation as Chairman as a step towards restoring the trust and confidence in AMP.”

Mike Wilkins, Executive Chairman, AMP Limited said: “The Board acknowledges Catherine’s leadership and thanks her for her professionalism, integrity and dedication to the company over the past eight years.  We will now begin a process of board renewal, including fast-tracking selection of a Chairman, and a new director.  This process will help ensure stability and further strengthen governance.

“AMP respects the Royal Commission process.  I can assure you that the evidence and submissions presented by Counsel Assisting are being treated extremely seriously by the Board.  Appropriate steps are being taken to address the issues raised, and remediating our customers is being given utmost priority.  On behalf of the Board, I reiterate our sincerest apology to our customers, and know we have significant work to do to rebuild their trust.”

AMP will be making a formal submission to the Royal Commission by Friday 4 May in response to the matters raised in closing submissions by Counsel Assisting the Royal Commission.

Bluestone moves into near prime space

From MPA.

Non-bank lender, Bluestone Mortgages, has announced its entry into the near prime space.

The move includes rate cuts of up to 2.25 basis points across its entire product suite, at a time when “PAYG and credit impaired customers are affected by the tightening criteria of traditional lenders”.

It comes off the back of extra funding through the acquisition of Cerberus Capital Management.

The Crystal Blue portfolio is being seen as particularly ambitious, comprising of full and alt doc products geared to support established self-employed borrowers and PAYG borrowers with a clear credit history.

Head of sales and marketing at Bluestone Mortgages, Royden D’Vaz, said, “The recent acquisition of the Bluestone’s Asia-Pacific operations by Cerberus Capital Management has enabled a number of immediate opportunities to be realised, most notably the assessment of our full range of products and to ensure they fully address market demands.

“We’re now in an ideal position to aggressively sharpen our rates based on the new line of funding, and pass on the considerable net benefit to brokers and end-users alike.

“The rate reductions have significant strategic implications as it places the company in a position to expand its operations into the near prime space as a natural extension of its specialist lending focus. This comes at an opportune time as a growing volume of self-employed, PAYG and credit impaired customers are affected by the tightening criteria of traditional lenders.

“Unlike big banks, we don’t have credit scorecards, which means we’re able to assess every borrower based on their merits and individual circumstances. We’re not one-size-fits-all by any means, which is increasingly appreciated.”

The move is being actively supported by the extension of the BDM, credit assessor and support teams to enhance access to decision makers to help brokers get more deals done, more often.

Bluestone’s is now focussed on actualising a number of imminent opportunities that address current market demands. The company says the series of rate reductions are the beginning of many initiatives that will enhance or expand the company’s portfolio.

Lax lending by banks could see our debt problem come crashing down

Via ABC Online.

Under the National Consumer Credit Protection Act 2009, credit providers are required to lend responsibly.

This means that before lending, the credit provider must assess the suitability of a loan for a borrower, which involves an assessment of the borrower’s capacity to repay the loan as well as an assessment of the extent to which the loan will meet the objectives and requirements of the borrower.

A failure to undertake these assessments before lending will amount to a breach of the act, which should result in sanctions ranging from enforceable undertakings to the cancellation of a credit provider’s credit licence.

There is clearly a need for a robust and well-enforced responsible lending regime to curtail undesirable market practices and prevent increased financial stress on households in Australia.

The evidence that has come out of the Financial Services Royal Commission must lead to a serious re-assessment of the efficacy of the responsible lending regime, particularly in relation to its enforcement by ASIC. It also calls into question the efficacy of the prudential regulator, APRA.

It is now clear that the major banks have based many lending decisions on flawed information, leading to what have been labelled “liar loans”.

ANZ bank, in its submissions to the royal commission, acknowledged a lack of evidence that it had made genuine enquiries into customers’ living expenses.

William Rankin who was responsible for ANZ’s home loan portfolio stated that from October 2016 to September 2017 ANZ sold $67 billion in home loans and that 56 per cent of those ($38 billion) came from mortgage brokers.

Damningly, Mr Rankin confirmed that ANZ did not take steps to verify the information provided by brokers regarding customers’ expenses.

Gym owner among NAB ‘introducers’

In its submission to the inquiry, CBA acknowledged inaccuracies in calculations, insufficient documentation and verification, and deficiencies in controls around manual loan approval processing.

Daniel Huggins, who supervises the home buying division at CBA, gave evidence that while the bank had explicitly documented its recognition that volume based commissions to brokers (as opposed to flat fee payments) encouraged poor quality loans and poor customer outcomes, the bank had continued with volume based commissions and in fact “de-accredited” brokers who did not refer a sufficient volume of loans.

He also stated that CBA continued to rely on the customer information provided by mortgage brokers, notwithstanding an explicit acknowledgment by CBS that customer information provided by brokers could not be relied upon.

Anthony Waldron, the executive general manager for broker partnerships at NAB, gave evidence regarding NAB’s “introducer program”, which included a number of shocking admissions.

The program involved introducers who were not necessarily carrying on lending businesses (one introducer ran a gymnasium), who formed relationships with bankers employed by NAB.

Both bankers and introducers benefitted from the loan referrals (through bonuses and commissions), and introducers were required to meet minimum loan referral thresholds.

Mr Waldron acknowledged that the program led to unsuitable loans, false documentation, dishonest application of customers’ signatures on consent forms and misstatements of information in loan documentation.

He agreed that the bankers were more concerned with sales than keeping customers and the bank safe.

ASIC and APRA should be doing more

Westpac had acknowledged in its submission that it was the subject of ASIC enforcement action in relation to breach of the responsible lending obligations, for failure to properly assess whether borrowers could meet their repayment obligations before entering into home loan contracts.

Westpac had also acknowledged that in 2016 some of its authorised home lending bankers were not correctly verifying customer income and expenses.

There is now no doubt that the financial regulators, ASIC and APRA, should be doing more to ensure prudent lending standards by credit providers in Australia.

The prospective harm that could result to Australian households from elevated levels of indebtedness, and the adverse flow-on effects to the Australian economy, cannot be ignored.

The evidence at the royal commission has confirmed a current tendency of lenders to reduce lending standards to increase credit activity and profitability, but it will all come crashing down soon if it is allowed to continue.

For an increasing number of households, even small increases in the loan interest rates, a decline in real estate values, or a reduction in working hours or conditions may have grave consequences.

There are also more significant risks for borrowers which include unemployment, the removal of government benefits, rapid and significant increases in loan interest rates, a recession, a housing or equity market crash, or a financial crisis.

Therese Wilson is an associate professor at Griffith law School; Gill North is a professor at Deakin University Law School

Full Disclosure: Gill North is also a Principal at Digital Finance Analytics!

APRA’s actions will reduce borrowing power

From The Adviser.

The banking regulator has swapped one lending curb for another as Australia’s lending crackdown continues. But new debt-to-income curbs could see many priced out of the property market.

At first glance, it would appear that APRA has reopened the floodgates for banks to turbocharge lending to property investors after announcing that its 10 per cent benchmark will be removed.

Price was the natural lever for the banks to pull when the 10 per cent cap came into play four years ago, and the banks have no doubt profited from the regulator’s actions.

What brokers and their customers will now be waiting to see is whether the removal of the cap will cause banks to lower their rates. Four years is a decent amount of time, but not too long to forget that many of the banks used APRA’s 10 per cent cap as an excuse to hike rates multiple times since 2014. Without the cap, it would make sense for them to begin reducing rates. That is, of course, if their interests are aligned to their customers’. Unfortunately, as the Hayne royal commission is discovering, listed mortgage providers also have shareholders to satisfy and profits to make.

APRA isn’t simply scrapping its cap on investor loan growth — it is doing so on the proviso that the banks “maintain a firm grip on prudence of both policies and practices”. Failure to do so will see the 10 per cent benchmark continue to apply.

Confident that the 10 per cent cap has “served its purpose”, APRA is now training looking at Australia’s ballooning household debt woes.

With investors suitably calmed, the regulator wants to ensure that banks don’t go crazy and start lending to people who are leveraged to the hilt.

APRA chairman Wayne Byres explained that, with the 10 per cent cap now gone, ADIs will be expected to develop internal portfolio limits on the proportion of new lending at very high debt-to-income levels, and policy limits on maximum debt-to-income levels for individual borrowers.

“This provides a simple backstop to complement the more complex and detailed serviceability calculation for individual borrowers, and takes into account the total borrowings of an applicant, rather than just the specific loan being applied for,” the chairman said.

This will most likely come in the form of loan-to-income (LTI) limits, similar to those that regulate the UK mortgage market.

Some Australian banks have already started reducing how much people can borrow. For example, late last year NAB announced that its LTI ratio would be capped at 8. In February, this was tightened to 7, meaning that a person earning $100,000 can only borrow a maximum of $700,000.

The monthly mortgage repayments on a $700,000 P&I mortgage (25-year term) at a variable rate of 5.24 per cent are $4,191.

A person earning a gross income of $100,000 (not including superannuation and provided they don’t have any student debt) receives an after-tax monthly income of around $6,100.

This means that more than two-thirds, or 68 per cent, of their take-home pay will go to mortgage repayments.

While lenders are likely to reduce their LTI ratios in accordance with APRA’s new guidelines, there is only so far they can go before borrowers are forced out of expensive markets like Sydney, where the average house price is $1.15 million and the average unit sells for $740,000.

At these prices, it’s hard to see a mortgage under $700,000 doing much for a Sydney home buyer. Particularly when the average Sydney household earns $91,000 a year (ABS 2016 Census of Greater Sydney). An increased focus on living expenses will also no doubt see borrowing power further impacted.

The Property Imperative 10 Report Released

The latest and updated edition of our flagship report “The Property Imperative” is now available on request with data to April 2018.

This Property Imperative Report is a distillation of our research in the finance and property market, using data from our household surveys and other public data. We provide weekly updates via our blog – the Property Imperative Weekly, but twice a year publish this report.  This is volume 10.

Residential property, and the mortgage industry is currently under the microscope, as never before. The currently running Royal Commission has laid bare a range of worrying and significant issues, and recent reviews by the Productivity Commission and ACCC point to weaknesses in both the regulation of the banks and weak competition in the sector. We believe we are at a significant inflection point and the market risks are rising fast. Portfolio risks are being underestimated.  Many recent studies appear to support this view. There are a number of concerning trends.

Around two thirds of all households have interests in residential property, and about half of these have mortgages. More households are excluded completely and are forced to rent, or live with family or friends.

We have formed the view that credit growth will slow significantly in the months ahead, as lending standards tighten. As a result, home prices will fall. We note that household incomes remain flat in real terms, the size of the average mortgage has grown significantly in the past few years, thanks to rising home prices (in some states), changed lending standards, and consumer appetite for debt. In fact, consumer debt has never been higher in Australia. Household finances are being severely impacted, and more recent changes in underwriting standards are making finance less available for many. But the risk is in those loans made in recent years under looser standards, including interest only loans.

Property Investors still make up a significant share of total borrowing, and experience around the world shows it is these households who are more fickle in a downturn. Many use interest only loans, which create risks downstream, and regulators have recently been applying pressure to lenders to curtail their growth.  Already we are seeing a drop in investor loans, and a reduction in interest only loans. A significant proportion will be up for review within tighter lending rules. This may lift servicing costs, at very least and potentially cause some to sell.

We hold the view that home prices are set to ease in coming months, as already foreshadowed in Sydney. We think mortgage rates are more likely to rise than fall as we move on into 2019.

We will continue to track market developments in our Property Imperative weekly video blogs, and publish a further update in about six months’ time.

If you are seeking specific market data from our Core Market Model, reach out, and we will endeavour to assist.

Here is the table of contents.

1	EXECUTIVE SUMMARY
2	TABLE OF CONTENTS
3.	OUR RESEARCH APPROACH
4.	THE DFA SEGMENTATION MODEL
5	PROFILING THE PROPERTY MARKET
5.1	Current Property Prices
5.2	Property Transfer Volumes Are Down
5.3	Clearance Rates Are Easing
5.4	But Can We Believe the Auction Statistics Anyway?
6	MORTGAGE LENDING TRENDS
6.1	Total Housing Credit Is Up
6.2	ADI Lending Trends
6.3	Housing Finance Flows – Bye-Bye Property Investors
6.4	The Rise of the Bank of Mum and Dad
6.5	Lending Standards Are Tightening
6.6	How Low Will Borrowing Power Go?
6.7	The Portfolio Mix Is Changing
6.8	Funding Costs Are Higher
6.9	The Interest Only Loan Problem
7	HOUSEHOLD FINANCES AND RISKS
7.1	Households’ Demand for Property
7.2	Property Active and Inactive Households
7.3	Cross Segment Comparisons
7.4	Property Investors
7.5	How Many Properties Do Investors Have?
7.6	SMSF Property Investors
7.7	First Time Buyers.
7.8	Want to Buys
7.9	Up Traders and Down Traders
7.10	Household Financial Confidence Continues to Fall
7.11	Mortgage Stress Is Still Rising
7.12	But The RBA Is Unperturbed
7.13	Latest Household Debt Figures a Worry
8	THE CURRENT INQUIRIES
8.1	Productivity Commission
8.2	The ACCC Mortgage Pricing Review
8.3	The Royal Commission into Misconduct in Finance Services
8.4	Merge Financial Advice and Mortgage Brokering Regulation
9	AN ALTERNATIVE FINANCIAL NARRATIVE
9.1	Popping The Housing Affordability Myth
9.2	The Chicago Plan
10	FOUR SCENARIOS
11	FINAL OBSERVATIONS
12	ABOUT DFA
13	COPYRIGHT AND TERMS OF USE

Request the free report [85 pages] using the form below. You should get confirmation your message was sent immediately and you will receive an email with the report attached after a short delay.

Note this will NOT automatically send you our ongoing research updates, for that register here.

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APRA to remove investor lending benchmark

The Australian Prudential Regulation Authority (APRA) today announced plans to remove the investor loan growth benchmark and replace it with more permanent measures to strengthen lending standards.

The 10 per cent benchmark on investor loan growth was a temporary measure, introduced in 2014 as part of a range of actions to reduce higher risk lending and improve practices. In recent years, authorised deposit-taking institutions (ADIs) have taken steps to improve the quality of lending, raise standards and increase capital resilience. APRA has written to ADIs today to advise that it is now prepared to remove the investor growth benchmark, where the board of an ADI is able to provide assurance on the strength of their lending standards.

In summary, for the 10 per cent benchmark to no longer apply, Boards will be expected to confirm that:

  • lending has been below the investor loan growth benchmark for at least the past 6 months;
  • lending policies meet APRA’s guidance on serviceability; and
  • lending practices will be strengthened where necessary.

As with previous housing-related measures, this approach has been taken in close consultation with the other members of the Council of Financial Regulators. With risks in the environment remaining heightened, it will be important for ADIs to maintain prudent standards and close any remaining gaps in lending practices.

APRA Chairman Wayne Byres said that while the announcement today reflects improvements that ADIs have made to lending standards, there is more to do to strengthen the assessment of borrower expenses and existing debt commitments, and the oversight of lending outside of policy.

Mr Byres said: “The temporary benchmark on investor loan growth has served its purpose. Lending growth has moderated, standards have been lifted and oversight has improved. However, the environment remains one of heightened risk and there are still some practices that need to be further strengthened. APRA is therefore seeking assurances from ADI Boards that they will maintain a firm grip on the prudence of both policies and practices.”

For ADIs that do not provide the required commitments to APRA, the investor loan growth benchmark will continue to apply.

As part of these measures, APRA also expects ADIs to develop internal portfolio limits on the proportion of new lending at very high debt-to-income levels, and policy limits on maximum debt-to-income levels for individual borrowers. This provides a simple backstop to complement the more complex and detailed serviceability calculation for individual borrowers, and takes into account the total borrowings of an applicant, rather than just the specific loan being applied for.

“In the current environment, APRA supervisors will continue to closely monitor any changes in lending standards. The benchmark on interest-only lending will also continue to apply. APRA will consider the need for further changes to its approach as conditions evolve, in consultation with the other members of the Council of Financial Regulators,” Mr Byres said.

A copy of the letter is available on APRA’s website at: http://www.apra.gov.au/adi/Publications/Documents/Letter-Embedding-Sound-Residential-Mortgage-Lending-Practices-26042018.pdf.

It’s Time to Unify Financial Advice and Mortgage Broking

The Royal Commission into Financial Services Misconduct has now uncovered evidence of poor industry practice from both the lending camp, including from mortgage brokers, and the financial advice camp. In both cases their forensic analysis revealed cases of consumers being put in the wrong products, charged for services they never received and on fee structures which were hardly transparent.

In addition, some advisers and brokers were restricted by the product portfolios available via their organisations, and ties back to the big banks and other large players were often not adequately disclosed.

But here’s the thing. There are two distinct flavours of regulation in play, despite both being within ASIC’s bailiwick. I believe it is time to move to a unified common set of regulatory standards to cover both credit and wealth domains.

Lending and credit are based on ASIC’s regulations for responsible lending, which requires both a lender, and intermediary – like a broker – to ensure the loan is “not unsuitable”.

This looking at the purpose of the loan, making an assessment of the ability of the consumer to repay, and ensuring it is fit for purpose. What warrants as appropriate steps depends on the nature of the transaction and og the individual capabilities of the customers involved, so it is “scalable”. But that said, they are not obliged to act in the best interests of their client, and fee disclosure is at best rudimentary. Trailing commissions for example are not disclosed. The precise meaning and definition of what is suitable is still subject to case law. But overall, this is weak protection, and as we have seen from the Commission has failed to protect many borrowers. There is nothing here about the best or most appropriate product and it does not include any reference to whole of market analysis. Just, at best “Not Unsuitable”.

On the financial advice side of the house, as is being explored by the Commission currently, under the FOFA rules, advisers must work in the best interests of their clients, disclose remuneration, and their relationship with product manufacturers if appropriate.

This is a whole different set of rules, again regulated by ASIC.  Note again, this does not include finding the best product, or providing whole of market advice. So the rules are slightly stronger, but still incomplete.

Now consider this scenario. I am a property investor who is seeking a mortgage as part of a strategy to build wealth. I will need a life insurance policy also. Who do I talk to? A mortgage broker can assist me with finding a mortgage, but cannot help with life insurance. But if I go and talk to a financial adviser unless they are also a mortgage broker, they cannot assist with the mortgage. And if I find an adviser qualified in both regimes, which rules do they work under?

And that’s the point. The regulations, which by the way are an accident of history in that the responsible lending laws evolved from earlier state legislation, get in the way of providing holistic unified advice.   A consumer has both credit AND other wealth management requirements as part of a single issue. Indeed, there are trade-offs, for example between holding more or less investment properties, versus investing in other market related investment products. Indeed, it is feasible to wrap property investments into an overall wealth strategy.

So I suggest that now is the time to create a new unified set of rules to apply to all financial advisers, whether they are advising on credit or wealth products.  They should be crafted around best interests of their clients, and should mean offering whole of market advice. That means creating an advice plan which spans both investments and lending. The plan should be based on a fee for service, and the advisers’ remuneration should not be in any way linked to a commission or revenue flow from the products they suggest.

Indeed, we should break apart the advice element from the product sale, and application. I suggest that individual product application could be completed by the adviser as part of a fee for service, but they should not receive any additional remuneration related to successful product sales.

This also has implications for ASIC, as it would reshape the advice landscape, but potentially could both simplify the regulatory regime, and strengthen the protection for customers, and help facilitate better customer outcomes. Down the track, advisers would require one set of qualifications, and would be become more recognised professionals.

I believe the current chaotic regulatory environments, which were crafted to appease the finance industry, are in appropriate and the time has come to create a single unified set of regulations. This would assist customers, but would also help the industry on its journey towards professionalism.