Category: Banking Culture

APRA Mortgage Curbs Permanent?

Calls to reduce the current regulatory restrictions, for example on investor and interest only loans, will probably fall on deaf ears. Last year, the Bank of England confirmed that its own version of APRA lending curbs will become a “structural feature” of the British housing market, forcing Australian economists to begin questioning whether APRA’s macro-prudential measures could be permanent. This from the excellent James Mitchell via The Adviser.

A leading mortgage professional has criticised the prudential regulator for not providing a clear time frame for its macro-prudential measures or explaining what it is ultimately looking to achieve.

Speaking to The Adviser on a recent Elite Broker podcast, Intuitive Finance managing director Andrew Mirams said that he can’t see the complexities in the mortgage market easing up “anytime soon”.

Australian banks are still required to limit their investor mortgage growth to 10 per cent, while interest-only loans can only account for 30 per cent of new lending.

“Late last year, [APRA chairman] Wayne Byres came out and said these are all temporary measures,” Mr Mirams said. “But he’s never articulated to anyone about how temporary or what measures might change in the future or what their actual outcome.

“I think a lot of the things they’ve done, they’ve got right. An investor getting a 97 per cent interest-only loan just didn’t make sense. You’re just putting people at risk should the markets move, and we all know markets move at different times.

“But they haven’t articulated what they were trying to achieve, what sort of timeline and what outcomes they are hoping to get. I think that would help all of us manage client expectations. Because all of us will have lots of clients that are getting frustrated with being told ‘no’. And you can’t really give them an outcome of what or when they might be able to move again.”

In October last year, Mr Byres spoke at the Customer Owned Banking Convention in Brisbane, where he indicated that the regulator would like to start scaling back its intervention, provided that banks can continue to lend responsibly.

“We would ideally like to start to step back from the degree of intervention we are exercising today,” Mr Byres said.

“Quantitative benchmarks, such as that on investor lending growth, have served a useful purpose but were always intended as temporary measures. That remains our intent, but for those of you who chafe at the constraint, their removal will require us to be comfortable that the industry’s serviceability standards have been sufficiently improved and — crucially — will be sustained.”

Macro-prudential measures are a relatively new instrument but have becoming increasingly popular across the globe. In addition to Australia, lending curbs are also being used in the UK, New Zealand and Hong Kong.

Last year, the Bank of England confirmed that its own version of APRA lending curbs will become a “structural feature” of the British housing market, forcing Australian economists to begin questioning whether APRA’s macro-prudential measures could be permanent.

AMP Capital chief economist Shane Oliver believes that APRA’s measures, or at least some of them, will become permanent.

“I suspect that, as time goes by, they will likely become a permanent feature because of the control over risky behaviour that they allow over and above that achieved by varying interest rates and because the regulatory framework necessary to administer them will become more entrenched,” Mr Oliver said.

Mr Oliver believes that APRA’s mortgage curbs may be seen as increasingly attractive from a social policy perspective, in that they can “tilt lending away from non-first home owner-occupiers”.

There are other reasons why APRA’s measures are likely to remain.

“Poor affordability and high household debt levels, neither of which are likely to go away quickly,” Mr Oliver said.

ANZ and ASIC reach settlement on suspected third party frauds

ANZ today announced it is filing joint court submissions with the Australian Securities and Investments Commission (ASIC) on an agreed settlement for a number of cases where car finance brokers or dealers engaged in suspected fraud when submitting loan applications on behalf of customers to Esanda between 2013 and 2015.

In a statement of agreed facts, ANZ acknowledged it did not take reasonable steps to verify customers’ financial situation in relation to 12 loan contracts in circumstances where there was reason to doubt the information being provided by third party intermediaries.

The third party intermediaries involved in these cases were: United Financial Services Pty Ltd trading out of the Best Buys Auto car dealerships; Motorcycle Finance and Insurance Pty Ltd; and Combined Motor Traders Pty Ltd.

ANZ detected and reported the suspected fraudulent conduct by these third party intermediaries. ANZ has disaccredited the individuals responsible for submitting the 12 loan contracts and no longer accepts loan applications from them.

Commenting on the agreed settlement, ANZ Group Executive Australia Fred Ohlsson said: “ANZ has worked closely with ASIC on its investigation of this matter. We take our responsible lending obligations seriously and we have since taken steps to strengthen our ability to prevent and detect fraud by third parties.”

Since reporting the issue, ANZ has significantly increased both the supervision and training of asset finance brokers.

ANZ has agreed to pay a $5 million fine as part of the settlement and $390,000 of ASIC’s costs. This is subject to court approval. ASIC acknowledged ANZ’s cooperation throughout the investigation.
ASIC has also reviewed ANZ’s proposed approach to remediating approximately 320 customers who took out car loans through these three intermediaries (between 2013 and 2015), with the total remediation amount expected to be around $5m.

Trust In Banks May Be Improving, But Its Still Below Average In Australia

The ABA released new research today – The Edelman Intelligence research conducted late last year which tracks community trust and confidence in banks. Whilst progress may being made, the research shows Australian banks are behind the global benchmark in terms of trust.

The ABA, of course accentuates the positive!

Based on the Annual Edelman Trust Barometer study released in January 2017, Australia remains 4 points behind the global average. Hence, while there is more work to be done to increase trust in the sector, Australians acknowledge that the banking industry is a well-regulated industry that is more stable than many of its international counterparts in Europe. Overall, the two percentage point year on year increase in trust from 2016 to 2017 in the Financial Services sector, and the increment in Australians’ trust from the June 2017 study, has demonstrated a positive shift from ‘distrusted’ to ‘neutral’.  This ‘neutral’ trust indicates that the industry sits above trust in business, media and Government, all of which are distrusted.

The ABA says this new report shows a significant improvement in the perceptions of banks since the first research report published six months ago.

Nearly 80 per cent of people believe that their bank is becoming more customer focused, up from 63 per cent, and 86 per cent believe that banks help customers to make decisions in their own interest, up from 74 per cent.

Customers’ level of trust in their own bank and their perception of the industry overall has also improved.

Australian Bankers’ Association Deputy Chief Executive Officer, Diane Tate, said the results were encouraging and showed that the significant efforts made by the banks to respond to customer expectations and rebuild trust with the community is making banking better.

“Although there’s still a long way to go to restore trust and confidence in the industry, it’s encouraging that the impact of these reforms is being recognised by customers and making an impact on the ground,” Ms Tate said.

“The banks recognised that they needed to change and began undertaking the largest program of reforms in decades.

“This new research is a sign that more customers are experiencing the benefits of change in the way banks conduct their business.

“Through the Banking Reform Program – Better Banking, banks have been changing their practices to be more transparent and make it easier for individuals and small business to do their banking,” she said.

The research shows that awareness of each of the reforms has increased, in particular initiatives to improve how banks manage complaints and compensate customers when mistakes are made.

Strengthening the Code of Banking Practice has again been identified as one of the most important initiatives to drive trust. The new Code was lodged late last year with ASIC and currently awaits approval.

Other factors identified by the research as important factors in change were confidence and transparency in banking, while supporting customers experiencing financial difficulty and removing individuals for poor conduct has increased in importance for customers. Other key findings in the research include:

• 55 per cent of people believe their bank is more interested in what’s good for customers, up from 44 per cent.

• The level of importance that Australians place on the reforms remains strong, with half the initiatives scoring 70 per cent or higher.

Edelman surveyed 1,000 Australians in November 2017 following the first round of research conducted in May 2017, which set benchmarks for the industry to assess the impact of its Banking Reform Program.

ACCC Report into Mortgage Pricing Includes ‘Some Surprises’

From The Adviser.

The chairman of the Australian Competition and Consumer Commission has revealed that there will be some “surprises” in the upcoming draft report into how the banks price residential mortgage products.

The inquiry into how the major banks price their mortgage is the first undertaking of the ACCC’s new Financial Sector Competition Unit, which is tasked with undertaking regular inquiries into specific competition issues across the financial sector.

Starting with the $1.2 million inquiry into residential mortgage product pricing, the ACCC is aiming to understand how the banks affected by the major bank levy explain any changes or proposed changes to fees, charges or interest rates in relation to residential mortgage products.

The inquiry relates to prices charged until 30 June 2018.

Speaking to The Adviser in May 2017, ACCC chairman Rod Sims said: “The purpose of this inquiry is to provide customers with greater understanding on how the major banks price their mortgage products and increase transparency around any changes or proposed changes to fees, charges or interest rates in relation to these products.”

In comments made to The Australian Financial Review and confirmed by the ACCC, Mr Sims noted that the commission’s draft report into mortgage pricing will be released in February or March and will contain “some surprises”.

Mr Sims said: “We were asked by the Treasurer to do an inquiry much like we are doing with gas and electricity… to get prices down and the market working as it should,” Mr Sims said.

“We will be bringing out a draft report in February or March which will provide more transparency on how the banks make their interest rate decisions and how the market structure and the level of competition in the banking sector impacts those decisions… that will be quite an important report… there are some surprises.”

While details of these surprises have not been revealed, there have been some suggestions that the banks could be passing on the cost of the government’s new major bank levy and macro-prudential measures to customers. AFG CEO David Bailey last year warned that “history suggests the big banks will undoubtedly pass this new cost on”.

Mr Bailey said: “The extent to which they are able to pass this levy on will depend on how strong our regulators are with the new supervisory powers also announced on budget night.”

The corporate watchdog has also previously warned that the big banks could be in breach of the ASIC Act over the reasons given for hiking interest rates.

However, some major bank heads, such as NAB chief executive Andrew Thorburn, have said that the major bank tax will “impact millions of everyday Australians” as any tax ”cannot be absorbed”. Likewise, Westpac CEO Brian Hartzer said that “the cost of any new tax is ultimately borne by shareholders, borrowers, depositors and employees.”

The Shape of 2018 – The Property Imperative Weekly 30th Dec 2017

In the final edition of the Property Imperative Weekly for 2017, we look ahead to 2018 and discuss the future trajectory of the property market, the shape of the mortgage industry, the evolution of banking and the likely state of household finances.

Watch the video, or read the transcript.

We start with the state of household finances. The latest data from the RBA shows that the ratio of debt to income deteriorated again (no surprise given the 6%+ growth in mortgage debt, and the ~2% income growth). The ratio of total debt to income is now an astronomical 199.7, and housing debt 137.5. Both are at all-time records, and underscores the deep problem we have with high debt.

We think that households will remain under significant debt pressure next year, and the latest data shows that mortgage lending is still growing at 3 times income growth. We doubt that incomes will rise any time soon, and so 2018 will be a year of rising debt, and as a result, more households will get into difficulty and mortgage stress will continue to climb.  We think Treasury forecasts of rising household incomes are overblown. On the other hand, the costs of living will rise fast.

As a result, two things will happen. The first is that mortgage default rates are likely to rise (at current rock bottom interest rates, defaults should be lower), and if rates rise then default rates will climb further. The second outcome is that households will spend less and hunker down. As the Fed showed this week, the US economy is highly dependent on continued household spending to sustain economic growth – and the same is true here. We think many households will hold back on consumption, spending less on discretionary items and luxuries, and so this will be a brake on economic activity. This will have a strong negative influence on future economic growth, which we already saw throughout the Christmas shopping season.

Mortgage interest rates are likely to rise as international markets follow the US higher, lifting bank funding costs. This is separate from any change to the cash rate. This year the RBA was able to sit on its hands as the banks did their rate rises for them. We hold the view that the cash rate will remain stuck it its current rut for the next few months, because the regulators are acutely aware of the impact on households if they were to lift. They have little left in the tank if economic indicators weaken, and the bias will be upward, later in the year.

Competition for new loans will be strong, as banks need mortgages to support their shareholder returns. The latest credit data from the RBA showed that total mortgages are now at a record $1.71 trillion, and investor lending has fallen to an annual rate of 6.5%, compared with owner occupied lending at 6.3%, so total housing lending grew at 6.4%. Business lending is lower, at 4.7% and personal lending down 1.2%.

But APRA’s data shows that banks are writing less new business, so total Owner Occupied Balances are $1.041 trillion, up 0.56% in the month (so still well above income growth), while Investment Loans reached $551 billion, up 0.1%. So overall portfolio growth is now at 0.4%, and continues to slow. In fact, comparing the RBA and APRA figures we see the non-bank sector is taking up the slack, and of course they do not have the current regulatory constraints.  The portfolio movements of major lenders show significant variation, with ANZ growing share the most, whilst CBA shrunk their portfolio a little.  Westpac and NAB grew their investment loans more than the others.

We think there will be desperate attempts to attract new borrowers, with deeply discounted rates, yet at the same time mortgage underwriting standards will continue to tighten. We already see the impact of this in our most recent surveys. The analysis of our December 2017 results shows some significant shifts in sentiment –  in summary:

  • First, obtaining finance for a mortgage is getting harder – this is especially the case for some property investors, as well as those seeking to buy for the first time; and those seeking to trade up. Clearly the tightening of lending standards is having a dampening effect. As a result, demand for mortgage finance looks set to ease as we go into 2018 and mortgage growth rates therefore will slide below 6%.
  • Next, overall expectations of future price gains have moderated significantly, and property investors are now less expectant of future capital growth in particular. This is significant, as the main driver for investors now is simply access to tax breaks. As a result, we expect home prices to drift lower as demand weakens.
  • Mortgage rates have moved deferentially for different segments, with first time buyers and low LVR refinance households getting good deals, while investors are paying significantly more. This is causing the market to rotate away from property investors.
  • Net rental returns are narrowing, so more investors are underwater, pre-tax. So the question becomes, at what point will they decide to exit the market?

We see a falling expectation of home price rises in the next 12 months, across all the DFA household segments. Property Investors are clearly re-calibrating their views, and this could have a profound impact on the market. We see a significant slide in the proportion of property investors and portfolio investors who are looking to borrow more. First time buyers remain the most committed to saving for a deposit, helped by new first owner grants, while those who desire to buy, but cannot are saving less. Those seeking to Trade Up are most positive of future capital growth. Foreign buyers will be less active in 2018.

So our view is that demand for property will ease, and the volume of sales will slide through 2018. As a result, the recent price falls will likely continue, and indeed may accelerate. We will be watching for the second order impacts as investors decide to cut their losses and sell, creating more downward pressure. Remember the Bank of England suggested that in a down turn, Investment Property owners are four times more likely to exit compared with owner occupied borrowers.

So risks in the sector will grow, and bank losses may increase.

More broadly, banks will remain in the cross-hairs though 2018 as the Royal Commission picks over results from their notice requiring banks, insurance companies and superannuation funds to detail all cases of misconduct from 2008 onwards. We expect more issues will surface. The new banking code which was floated before Christmas is not bad, but is really still setting a low bar and contains elements which most customers would already expect to see. This is not some radical new plan to improve customer experience, rather more recognition of the gap between bank behaviour and customer expectation. And it does not HAVE to be implemented by the banks anyway.

There is much more work to do. For example, how about proactive suggestions to switch to lower rate loans and better rates on deposits?  What about the preservation of branch and ATM access? What about the full disclosure of all fees relating to potential loans?  And SME’s continue to get a raw deal thanks to lending policy and bank practice (despite the hype).

Then the biggie is mortgage lending policy, where banks current underwriting standards are set to protect the bank from potential loss, rather than customers from over-committing.

We will get to hear about the approach to Open Banking, the Productivity Commission on vertical integration and the ACCC on mortgage pricing, as well as the outcomes from a range of court cases involving poor banking behaviour. APRA will also discuss mortgage risk weights. So 2018 looks like adding more pressure on the banks.

So in summary, we think we will see more of the same, with pressure on households, pressure on banks, and a sliding housing market. Despite this, credit is growing at dangerous levels and regulators will need to tighten further.  We are not sure they will, but then the current issues we face have been created by years of poor policy.

Households can help to manage their financials by building a budget to identify their commitments and cash flows. Prospective mortgage borrowers should run their own numbers at 3% above current rates, and not rely on the banks assessment of their ability to repay – remember banks are primarily concerned with their risk of loss, not household budgets or financial sustainability per se. Regulators have a lot more to do here in our view.

Many will choose to spruke property in 2018 (we are already seeing claims that the Perth market “is turning”), and the construction sector, real estate firms, and banks all have a vested interest in keeping the ball in the air for as long as possible. Governments also do not want to see prices fall on their watch, and many of the states are totally reliant on income from stamp duty.  But we have to look beyond this. If we are very luck, then prices will just drift lower; but it could turn into a rout quite easily, and don’t think the authorities have the ability to calibrate or correct a fall if it goes, they do not.

The bottom line is this. Think of property as a place to live, not an investment play. Do that, and suddenly things can get a whole lot more sensible.

That’s the Property Imperative Weekly to 30th December 2017. We will return in the new year with a fresh weekly set of objective news, analysis and opinion. If you found this useful, do leave a comment, or like the post, and subscribe to receive future updates.  Best wishes for 2018, and many thanks for watching.

The New Banking Code Is Simply The Minimum Customers Expect

Let’s be clear, the floating of the new banking code is not bad, but is really is still setting a low bar and contains elements which most customers would already expect to see. This is not some radical new plan to improve customer experience, rather more recognition of the gap between bank behaviour and customer expectation. And it does not HAVE to be implemented by the banks anyway.

There is much more work to do. For example, how about proactive suggestions to switch to lower rate loans and better rates on deposits?  What about the preservation of branch and ATM access? What about the full disclosure of all fees relating to potential loans?  And SME’s continue to get a raw deal thanks to lending policy and bank practice (despite the hype).

Then the biggie is mortgage lending policy, where banks current underwriting standards are set to protect the bank from potential loss, rather than customers from over-committing.

That said, this piece from the New Daily discusses the code and calls out some of the changes.

The year 2017 saw the big banks introduce a slew of measures, from scrapped ATM fees to new ethical codes, all intended to boost their battered reputation and fend off a royal commission.

In the end these measures were not enough, and in late November Prime Minister Malcolm Turnbull folded to political pressure and called a royal commission.

Nevertheless many of the banks’ voluntary measures will significantly improve consumer experience.

In particular, the new Banking Code of Practice, a list of consumer-centric reforms written by the banks themselves, will make a number of changes that consumers can use to their advantage.

Currently before the Australian Securities and Investment Commission for approval, the new Code is likely to include recommendations by the Australian Banking Association (ABA) that will significantly benefit individual consumers, as well as small businesses and guarantors.

The ABA said that included in the Code are key changes aimed at making banking more accessible and increase availability to consumers, alongside higher transparency and increased standards.

We’ve picked out some of the key changes that could benefit the average Aussie punter.

1. Online cancellation of credit cards

Currently credit cards can only be cancelled by a phone call or written request, but only after the balances has been paid or transferred. Direct debits that are not cancelled may reactivate a cancelled credit card. So knowing in advance what direct debits are applicable will prevent this happening.

Consolidating all credit cards into a debt consolidation loan will be simpler if the borrower can provide evidence of credit card cancellation, facilitated by online cancellation.

2. Notification of when payment defaults are reported to credit reporting bodies

With Comprehensive Credit Report becoming compulsory for the big four banks from 1 July 2018 there will be the obligation not only to share credit data with other credit providers, but also report positive credit behaviour.

Keeping track of defaults and exhibiting future positive credit behaviour will be advantageous to borrowers when applying for future loans, by increasing their credit worthiness.

3. Notification of introductory credit card interest free period expiry

Transferring the balance of a credit card to a low interest rate credit card can be a smart way to pay down credit card debt but only if this can be done within the interest free period. After the period expires the credit card interest rate can revert to a much higher rate, leaving the borrower in a similar position prior to transferring to a low interest rate card.

4. Proactively identifying customers who may be experiencing financial difficulty

Financial hardship assistance programs offered by banks will be improved as well as a new commitment for banks to proactively work with their customers in financial difficulty to help prevent a situation worsening.

5. Consumers can request a list of direct debits and recurring payments made on credit card and bank accounts

As mentioned previously a cancelled credit card can be reactivated by direct debits that have not been cancelled. As more and more payments are made by direct debits, customers are becoming further entrenched with their bank, and closing an account or transferring to another bank can become unfeasible if there is not an easier way of knowing direct debits and other payments.

6. Improved fee disclosure and waiving or refunding of some fees

The removal of fees to bank statements for customers who do not have access to electronic statements, and improved disclosure of fees will save consumers money and improve their ability to manage their finances.

Businesses will also benefit with more notice of changes to loans, and simplified loan contracts that are more easily understood.

Small Business and Family Enterprise Ombudsman Kate Carnell said she was concerned the code cannot be properly enforced.

“The committee will not be fully independent and banks won’t be obliged to accept its recommendations,” she said.

“The code stipulates only that banks will comply with ‘reasonable’ requests of the committee. This means effectively that banks will only act on recommendations if they feel like it. If they don’t think the committee is reasonable they have an escape clause.

“It’s like the umpire is appointed by the home team and they don’t have to accept the umpire’s decision.”

At the same time Ms Carnell welcomed the code’s “simplified language” and specific focus on small businesses.

ASIC Highlights Sell-Side Research Conflicts

Sell-side” research is general financial advice prepared and distributed by an AFS licensee to investors to help them make decisions about financial products. ASIC says  such firms must manage the conflicting interests of their issuing and investing clients when preparing investor education research. They have given the industry six months (to 1 July 2018) to make sure their compliance measures conform to the ASIC’s expectations as expressed in the released regulatory guidance.

ASIC has released regulatory guidance on managing conflicts of interest and handling inside information by Australian financial services (AFS) licensees that provide sell-side research.

Research helps investors to make investment decisions. The quality of research can affect the advice received and investment decisions. A licensee who provides research must comply with a number of regulatory obligations. They must:

  • control and manage inside information
  • manage conflicts during the capital raising process, including avoiding,
  • controlling and disclosing these conflictsmanage research teams, including budgeting, research analyst remuneration and coverage decisions

Regulatory Guide 264 Sell-side research (RG 264) looks at the key stages of a capital raising transaction and provides specific guidelines on how an AFS licensee should appropriately manage conflicts of interest during each of these stages , including the preparation and production of investor education reports. RG 264 also provides general guidance for AFS licensees on the identification and handling of inside information by research analysts, and about the structure and funding of sell-side research teams.

The guidance addresses uneven market practice that has developed since the publication of Regulatory Guide 79 Research report providers: Improving the quality of investment research (RG 79) in 2004. It also responds to industry requests for more detailed guidance on sell-side research and supplements guidance in RG 79.

RG 264 takes into account feedback from stakeholders following public consultation earlier this year, see Report 560 Response to Submissions on CP 290 Sell-side research (REP 560).

Commissioner Cathie Armour said, ‘The timely flow of information and objective research analysis is vital to fair and efficient markets. Investors consider sell-side research when making investment decisions. It is critical that sell-side research represents the genuine, professional opinion of analysts.

‘Wholesale investors want early information and analyst insights on companies undertaking capital raising. Firms that manage this process must manage the conflicting interests of their issuing and investing clients when preparing investor education research. It is important thatthis deal-related research does not undermine the prospectus disclosure or continuous disclosure requirements. RG 264 will help industry strike the right balance between these competing considerations’.

While RG 264 does not extend the regulatory framework in RG 79, ASIC will give industry six months to 1 July 2018 to make sure their compliance measures conform to the expectations set out in the this guide.

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Background

In June 2017, ASIC released Consultation Paper 290 Sell-side research (CP 290) which proposed to provide further guidance on managing conflicts of interest and inside information involving sell-side research.

The consultation followed the release of Report 486 Sell-side research and corporate advisory: Confidential information and conflicts (REP 486) in August 2016. REP 486 set out observations from our review of how material non-public information and conflicts of interest are handled in the context of sell-side research and corporate advisory activities.

ASIC’s review showed that AFS licensees involved in providing research would benefit from detailed guidance on managing material, non-public information and conflicts of interest.

Sell-side research is general financial advice prepared and distributed by an AFS licensee to investors to help them make decisions about financial products.

A Year In A Week – The Property Imperative 23 Dec 2017

In This Week’s Edition of the Property Imperative we look back over 2017, the year in which the property market turned, focus on the risks to households increased, and banks came under the spotlight as never before.

Welcome the penultimate edition of our weekly property and finance digest for 2017.

We start with the latest Government budget statement, which came out this week.  There was a modest improvement in the fiscal outlook, largely reflecting a boost in tax collections, including from higher corporate profits in the mining sector. But there was also a consumer shaped hole, driven by low wages, lower consumption and lower levels of consumer confidence. Yet, in the outlook, wages are predicted to rise back to 3%, and this supporting above trend GDP growth. This all seems over optimistic to me.

In any case, according to the IMF, GDP is a poor measure of economic progress, with its origins rooted firmly in production and manufacturing. In fact, GDP misrepresents productivity and they say companies that are making huge profits from mining big data have a responsibility to share their data with governments.

The mortgage industry has seen growth in lending at around 6% though the year, initially led by investors piling into the market, but then following the belated regulatory intervention to slow higher risk interest only lending, momentum has switched to first time buyers, at a time when some foreign buyers are less able to access the market. A third of customers with interest-only mortgages may not properly understand the type of loan they have taken out, which could put many in “substantial” stress when the time comes to pay their debt, UBS analysts have warned. We have also seen a change in mix, as smaller lenders and non-banks (who are not under the same regulatory pressure) have increased their share. AFG’s latest Competition index which came out yesterday, showed that Australia’s major lenders have taken a hit with their market share now down to a post-GFC low of 62.57% of the mortgage market.

Household finances have been under pressure this year, with income growth, one third the rate of mortgage growth, so the various debt ratios are off the dial – as a nation we have more indebted households than almost anywhere else.  This is a long term issue, created by a combination of Government Policy, RBA interest rate settings, the financialisation of property, and the rabid growth of property investors – who hold 35% of mortgages (twice the proportion of the UK). The combination of rising costs of living, and out of cycle rate rises, have put pressure on many households as never before – and we have tracked the rise of mortgage stress through the year to an all-time high.

The latest MLC Wealth Sentiment Survey contained further evidence of the pressure on households and their finances. Being able to save has been a challenge for a number of Australians – almost 1 in 5 of us have been unable to save any of our income in recent years, and for more than 1 in 4 of us only 1-5%. Expectations for future income growth are very conservative – nearly 1 in 3 Australians expect no change in income over the next few years and 15% expect it to fall. Our savings expectations for the future are also very conservative – with more than 1 in 5 Australians believing their savings will fall. The “great Australian dream” of home ownership is still a reality for many, but for some it’s just a dream – fewer than 1 in 10 Australians said they didn’t want to own their own home, but 1 in 4 said home ownership was something they aspired to but did not think it would happen.

Of course the RBA continues on one hand to warm of risks to households, as in the minutes published this week, yet also persists with its line that households can cope, with the massive debt burden, as its skewed towards more wealthy groups. They keep referring to the HILDA survey, which is 3 years old now, as a basis for this assertion. They should take note of a Bank of England Working paper which looked at UK mortgage data in detail, and concluded the surveys tend to understand the true mortgage risks in the market – partly because of the methodology used.  They concluded “These results should make policy makers less sanguine about the developments in the UK mortgage market in recent years, which are traditionally analysed using these surveys”.

The latest report from S&P Global Ratings covering securised mortgage pools in Australia to end Oct 2017, showed 30-day delinquency fell to 1.04% in October from 1.08% in September. They attribute part of the decline to a rise in outstanding loan balances during the month, and many older loans in the portfolios (which may not be representative of all mortgages, thanks to the selection criteria for securitised pools). But 90+ defaults remain elevated – at a time when interest rates are rock bottom.

Banks are under the gun, as Government have turned up the pressure this year. There are a range of inquiries in train, from the wide-ranging Banking Royal Commission (which the Government long resisted, but then capitulated), and a notice requiring banks, insurance companies and superannuation funds to detail all cases of misconduct from 2008 onwards has also been issued. The scope includes mortgage brokers and financial advisers. Also the ACCC is looking at mortgage pricing, The Productivity Commission is looking at vertical integration, and we have the BEAR regime which is looking at Banking Executive Behaviour.  This week we also got sight of the Enhanced Financial Services Product Design Obligations, and of course the major banks copped the bank tax. There are also a number of cases before the Courts. This week, NAB said it had refunded $1.7 million for overcharging interest on home loans and CommInsure paid $300,000 following ASIC concerns over misleading life insurance advertising

This tightening across the board is a reaction to earlier period of market deregulation, privatisation and sector growth. But at its heart, the issue is a cultural one, where banks are primary focussing on shareholder returns (as a company that is their job), but at the expense of their customers.  Even now, the decks are stacked against customers, and the newly revised banking code of conduct won’t do much.  We think the Open Banking Initiative will eventually help to lift competition, and force prices lower. But, after many years of easy money, banks are having to work a lot harder, and with much more lead in the saddle bag. Meantime, it is costing Australia INC. dear.

More significantly, the revised Basel rules, though watered down, still tilts the playing field towards mortgage lending, and makes productive lending to business less attractive.  Also there is more to do on bank stress testing according to the Basel Committee. The regulation framework is in our view faulty.

One question worth considering, as the USA and other Central Banks lift their base cash rates, is whether there is really a “lower neutral rate” now. Some, in a BIS working paper have argued that Central Banker’s monetary policy have driven real interest rates lower, rather than demographics. But another working paper, this time from the Bank of England, comes down on the other side of the argument.  The paper “Demographic trends and the real interest rate” says two-thirds of the fall in rates is attributable to demographic changes (in which case Central Bankers are responding, not leading rates lower). In fact, pressure towards even lower rates will continue to increase. This is a fundamentally important question to answer. We suspect the role of Central Bankers in driving rates is less significant than many suspect, and structural changes are afoot.

Rates in Australia have stayed low this year, at 1.5%, despite the RBA saying this is below the neutral setting, and we expect the bank to move later in 2018, upwards. The rate of rise is now expected to be lower than a year ago, but the international pressure will be up. In addition, the US tax reforms will likely switch more investment to the US, and so banks, who rely on international funding, will likely have to pay more. So we still expect real rates to go higher ahead, creating more pressure on households. Also, of course as rates rise, the costs of Governments running deficits rises, something which will be a drag on the budget later.

Home prices continued to rise through 2017 in the eastern states, while in NT and WA they fell. Recent corrections in Sydney may be an indication of what is ahead in the Melbourne market too. Demand remains strong, but lending standards have been tightened, and investors are getting more concerned about future capital appreciation. This year building approvals were still pretty strong, in line with firm population growth. As an aside, an OECD report this week said that Australian property may well be a target for money laundering, and more needs to be done to address this issue.  Auction volumes continue to slide, and we have seen a significant fall in recent weeks.

So, this year we have seen changes in the financial services landscape, the property market is on the turn, and household’s debt levels are rising, creating financial stress for many. As a result, we expect many to spend less this Christmas.

Next time we will discuss the likely trajectory through 2018, but we wanted to wish all our followers a peaceful and restful holiday season. We have really appreciated all the interest in our work – through the year we have more than doubled our readership, thanks to you.

Many thanks for watching. Check back next week for our views on what 2018 may bring.

Enhanced Financial Services Product Design Obligations Announced

The Treasury has released draft legislation for review  which focusses on the design and distribution obligations in relation to certain financial products. We think is is potentially a big deal, and will put more compliance pressure on Financial Services providers. It is a response to the FSI recommendations. Consultation is open until 9 February 2018. It includes investment products and well as credit products such as consumer leases, mortgages, and guarantees.

It sets out:

  • the new obligations;
  • the products in relation to which the obligations apply;
  • ASIC’s powers to enforce the obligations; and
  • the consequences of failing to comply with the obligations.

Here is a brief summary of the 57 page document.

The new design and distribution regime generally applies to a financial product if it requires disclosure in the form of a PDS. However, some financial products requiring a PDS are not subject to the new design and distribution regime: MySuper products and margin lending facilities. These products are currently subject to product-specific regulations that negate the need to apply the new regime.

The new design and distribution regime also applies to financial products that require disclosure to investors under Part 6D.2 of the Corporations Act. The section defines ‘securities’ for the purposes of Chapter 6D of the Corporations Act as meaning: a share in a body; a debenture of a body (except a simple corporate bond depository interest issued under a two-part simple corporate bonds prospectus); or a legal or equitable right or interest in such a share or debenture. Again, there are some exceptions.

The obligations require issuers of such products to:

  • determine what the appropriate target market for their product is
  • take reasonable steps to ensure that products are only marketed and distributed to people in the target market, and that appropriate records are kept to demonstrate this
  • and gives ASIC powers to “intervene” if a financial or credit product has resulted in or will, or is likely to, result in significant detriment to retail clients or consumers. There are two main limitations on the types of financial products that can be subject to the intervention power under the Corporations Act. First, the power generally only applies in an ‘issue situation’. Second, the power only applies where a product may be made available to ‘retail clients’.

Background

As part of the Government’s response to the Financial System Inquiry (FSI), Improving Australia’s Financial System 2015, the Government accepted the FSI’s recommendations to introduce:

  • design and distribution obligations for financial products to ensure that products are targeted at the right people (FSI recommendation 21); and
  • a temporary product intervention power for the Australian Securities and Investments Commission when there is a risk of significant consumer detriment (FSI recommendation 22).

This consultation seeks stakeholder views on the exposure draft of the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018 which implements these measures.

 

 

ABA Floats New Banking Code

The ABA says that after hundreds of hours of development and more than 50 meetings with banks and key stakeholders over the past nine months, the new Banking Code of Practice has been sent to ASIC for approval.

The Australian Bankers’ Association CEO, Anna Bligh, said this is a huge step for the industry which has voluntarily introduced a new simplified, customer focused code.

“Banks are committed to change and the new Code is stronger, broader and written in simple to understand language. It has been completely rewritten to better meet community expectations and service the needs of customers,” she said.

“The industry has achieved the ambitious task of developing a new Code only nine months after receiving the final report from independent reviewer Mr Phil Khoury.

“The new Code has been broken into ten key parts, with four brand new sections including one dedicated to small businesses and another related to making banking more available for customers and easier to access.

“The remaining six sections represent a complete restructure of important parts of the current Code,” Ms Bligh said.

Some of the changes that Australians can expect in the new Code are more transparency around products and services, and a more prominent commitment to ethical behaviour.

This includes a new deferred sales model for consumer credit insurance on credit cards, small business contracts written in plain English, and the right to close a credit card account online. In addition, customers will be notified before their introductory credit card interest free period expires, the banks will introduce ways to proactively identify customers who may be experiencing financial difficulty and implement better safety nets for guarantors.

“The new code means we are making banking easier, by making changes to processes, providing customers with more info and introducing higher standards for how banks serve their customers.

“This new set of rules and behaviours will go a long way in addressing the expectations that Australians have of their banks.

“Banks most certainly do not underestimate the challenge ahead of them and will continue to make the necessary changes and improvements that their customers expect.

The fact that the industry has accepted 96 of the 99 recommendations in some form is proof that banks are serious about change, and are currently undergoing the greatest level of reform seen in the sector in more than 20 years.

“Banks value their customers and the new Code is one more step towards providing better banking for all Australians,” Ms Bligh said.

The Code is the first industry code to be sent to ASIC for approval and was part of major industry initiatives announced in April 2016 to raise banking standards.

WHAT’S IN THE NEW CODE FOR YOU?

For individuals

  • Customers will be informed when a bank reports any payment default on a loan to a credit reporting body, making it easier for customers to manage their finances.
  • On request, customers will be provided with a list of direct debits and recurring payments made on accounts. This can go back as far as 13 months and can assist customers with managing their accounts, avoiding dishonour fees and with switching.
  • Improved transparency around fee disclosure by telling customers, where practical, about transaction service fees immediately before they incur the fee, helping customers better manage their costs.
  • Waiving or refunding statement fees for customers who do not have access to electronic statements.

For small businesses

  • Small business customers will be provided with a longer notice period about changes to loan conditions or a bank’s decision on whether it will continue to provide the loan facility, which will help businesses with future planning.
  • Simplified loan contracts that are written in plain English and are easier to understand.
  • Improved communication and greater transparency by banks in the use of external property valuers, investigative accountants and insolvency practitioners.

For guarantors

  • Ensuring that guarantors are making an informed decision after taking time to consider the guarantee documents. Guarantors, who have not received legal advice, will be required to wait three days before signing, which may help customers avoid financial abuse.
  • Guarantors will be notified of changes to the borrower’s circumstances, including if they are experiencing financial difficulty.