Category: Economics and Banking

Mortgage Brokers and the ASIC Review

Interesting piece today from Mortgage Professional Australia.

ASIC’s review of mortgage broker remuneration is in data collection mode currently, though ASIC says it will then follow up on the data, which could lead to another round of consultation. Later in the year, ASIC will prepare its report and deliver it to Government by December 2016. The review could well touch on vertical integration, licensing, and commissions. For example in the UK, there have been a shift towards fee-based advice, rather than commission.

ASIC’S reviews into mortgage broker remuneration, which was announced last year, has become an increasing source of frustration for brokers and for ASIC itself.

Brokers feel there’s a lack of communication on the progress of the review – as we noted in our MPA 16.3 report, ‘Untangling ASIC’  – while ASIC feels the industry has prematurely turned against them.

At ASIC’s 2016 Annual Forum in March, MPA asked deputy chairman Peter Kell about the progress of the review. Kell responded: “There seem to be a lot of people in the sector who believe ASIC – without even really commencing the whole review – has already made its mind up on exactly what it is going to find and what recommendations it is going to make. I assure you this is not the case. This will be a very open and transparent review.”

Finally that transparency is becoming apparent. In mid-March the MFAA and AFG published their full responses to ASIC’s ‘Scoping Discussion Paper’, completing the preliminary phase of ASIC’s review. The scoping paper, which was made available to industry players and individual brokers in February, is essentially a list of 15 questions covering three areas: the home lending market, remuneration structures and consumer outcomes. It closed for submissions on 11 March.

The questions were mainly predictable, asking what ASIC should prioritise in its review; whether other factors should be examined; about existing structures (ie of commission) and trends which could change those structures. Respondents were also given the chance to add extra comments, and ASIC listed the data it planned to request, including ownership structures, product descriptions and customer satisfaction results.

All in all, it is not exactly a riveting read. However, it’s not been the only way ASIC has engaged the industry. Two roundtables held in Sydney and Melbourne brought together brokers, bankers, associations, consumer advocates, the RBA and the ABA (Australian Bankers’ Association) to discuss the same three areas examined in the Scoping Discussion Paper.

Although participants weren’t obliged to make their responses to ASIC publicly available, and ASIC’s roundtables were private, the MFAA and AFG, at the time of writing, had decided to make their full responses public, while the FBAA had earlier in March commented on the progress of the roundtables. The AFG also announced the launch of a consumer campaign to gather opinions from consumers about brokers.

Vertical integration
Those responses that have been published are unnervingly direct. “There is little doubt that those aggregators that are majority-owned by a lender have the potential to be influenced by that lender,” commented AFG, saying “distortion of the market is a risk”. AFG, which is publicly listed and 5% owned by Macquarie Bank, argues that conflict of interest “diminishes as the level of common ownership decreases … Our view is that the threshold level of interest that should be disclosed to consumers is 20%”.

That figure, AFG says, is consistent with the recommendations of the 2001 Corporations Act. AFG suggests that bank-owned aggrega-tors could forego making a profit on their aggregator services in order to expand the distribution of their products, the reason being that “the cost of distributing a product is modest compared to the income that can be gained from the interest margin”.

AFG also claims that vertical integration within banking – particularly the acquisition of non-major banks – can lead to confused consumers, such as “applicants choosing to refinance a loan from Westpac to Bank of Melbourne without being made aware that the Bank of Melbourne is a wholly-owned subsidiary of Westpac”.

AFG acknowledges its support from banks  – “some lenders make payments of sponsorship or contributions to development programs based on metrics such as the volume, quality and conversion of loans written” – while insisting these payments are not passed on to brokers.

Defending commission
Bank-owned aggregators also make a fee-for-service model problematic, claims AFG, “as the parent lender would be in a position to absorb the cost of their brokers, whereas non-aligned brokers would need to charge the consumer a fee”. It cites the Netherlands, where commissions have been banned, as an example. AFG further argues that removing commissions would lead to a salaried workforce “with no incentive to ensure a thorough comparison across lenders or products”, and advises ASIC to examine mobile lenders.

The MFAA also defends commissions in its response: “mortgage broker commissions are structured in a way that ensures the broker provides professional services and assistance for the life of the loan”. The MFAA also calls for parity and quicker payment of commission by lenders, and tells ASIC that, while average commissions have fallen, “in parallel, broker costs, compliance requirements and client engagement per file have all increased”.

When it came to the scope of ASIC’s review, the MFAA argued that commission associated with reverse mortgages, self-managed super funds and commercial lending should be excluded from the review. “The MFAA does not believe that remuneration from these products has a material impact on remuneration in respect to residential mortgage products.”

ASIC should, however, look at non-monetary rewards, the MFAA advises. “The MFAA would like access to non-monetary rewards to be clear and measurable, and that a willingness to participate does not create a bias towards any one industry participant over another.” Bankwest’s Stewart Saunders, commenting during MPA’s recent Non-Major Bank Roundtable discussion, noted that ASIC’s review  “goes beyond a review of commissions as it also looks at the non-financial benefi ts that brokers receive”.

While the MFAA and AFG note the importance of commissions to brokers’ livelihoods, it is consumer outcomes that interest ASIC and that get the most attention in responses. AFG agrees that “commissions can lead to conflicts of interest in many situations” but disputes that this is currently the case, and claims there’s no data to support this (as does the MFAA). Banning commissions would lead to “anti-competitive behaviour from lenders with branch networks”, and a reversal of the driving down of interest rates over recent decades. “Every mortgage customer will pay for reduced competition throughout the life of their loan.”

Calling out unlicensed referrers 
While many brokers would agree with these arguments, ASIC can hardly be surprised that two established industry players would choose to defend commissions. However, when MPA asked Kell what were the key takeaways from consultation with the industry, he highlighted a different issue.

“One area we have realised that possibly does need some vision or focus is the growth in so-called ‘introducers’ in the mortgage broker space, who seem to have a less formal role in helping to bring customers to brokers and lenders  … There are potentially some conflicts of interest that need to be looked at,” Kell said.

Both the MFAA and AFG have advised ASIC to examine unlicensed referrers and introducers.  “Credit repair agents, mortgage introducers, new property sales (spruikers) and solicitor funding providers often receive a benefit from their involvement in the market,” commented the MFAA, “without regulation or declaration of interest.” The scope should therefore be widened to include all participants who could be compensated for being involved in the property market.

AFG turned the spotlight on lenders, warning that “some larger lenders are seeking to increase originations by focusing on referrals from unlicensed sources”, off ering commissions of up to 60 basis points to “real estate agents, community groups, solicitors, accountants, fi nancial advisers, property developers, wealth creation specialists, builders, charity foundations, clubs and associations”. ASIC should look at how these services are provided and disclosed in the context of the NCCP regulations, AFG argues.

If ASIC does include referral arrangements in its remuneration review, this could of course be a concern to brokers, given many brokers rely on paid referral arrangements with real estate agents, financial planners and accountants. If fees are involved these arrangements are meant to be disclosed; ASIC may encounter yet another level of complexity with brokerages that are owned by real estate agents, just as they are concerned about brokerages owned by banks.

Why don’t we hear more?
When announcing the publication of its scoping paper response and the launch of its consumer campaign, AFG managing director Brett McKeon made a number of thought-provoking comments to Australian Broker magazine. “There is a certain amount of fragmentation within the industry,” McKeon noted. “Some groups don’t have the dollars to invest in representing their members well, and others are owned by banks, which builds conflict at times with these inquiries and how they respond to them.”

Just as McKeon implies, there’s been little noise made by large franchises, banks and aggregators – as opposed to individual brokers – about ASIC’s review, which is surprising given its relevance across the broking community. It’s likely that many industry players are defending commissions ‘behind closed doors’, which, as FBAA CEO Peter White told MPA in our ‘Untangling ASIC’ report, can be more eff ective in getting results.

Nor is it fair to say that banks themselves have been silent on the issue. In our recent Non-Major Bank Roundtable we asked banks what the consequences of the review could be, and almost all were unwavering in their support of commissions (see their responses in the boxout below). That doesn’t mean they’ve necessarily been that supportive when talking to ASIC, but it’ll be encouraging to brokers.

As McKeon notes, the danger for the existing commission model could be whether banks act as a single unit, under the direction of the ABA and the majors. “Some of the smaller banks get 80% or 90% of their business from the third-party channel, so you would hope they would be vocal in their support rather than just be part of an ABA submission which will largely, I think, try and muddy the waters.” AFG has asked the banks to disclose whether they’ve put in a submission on the topic, McKeon added. “It would be interesting to see if we can get any of them to be transparent.”

Conclusion
ASIC’s remuneration review could therefore prove an interesting ‘litmus test’ for the industry, revealing who’s invested in the existing status quo and who would like to see it disrupted. Groups with a foot in both the lender and broker camps, namely the MFAA, will be hoping to avoid any climate of suspicion developing as a result. If other scoping paper responses are published, or if AFG does get disclosures from the banks, this could be averted.

The next stage of the review process, which lasts from March to April, will see ASIC collect data and could therefore be somewhat more mundane for the industry. After April, ASIC says it will follow up on the data, which could lead to another round of consultation, much like with the FSI, and give brokers a better idea of how lenders are approaching commission. From September to December, ASIC will prepare its report and deliver it to government; there’s no timeline determining how the government will act.

What the data reveals could also see ASIC change course, particularly if the fragmented state of customer service feedback in the industry – which was noted in the MFAA’s submission – becomes clear in the data ASIC collects. Given that customer outcomes is what matters most to ASIC, broker groups that have systematised their collection of feedback, and have good net promoter scores, perhaps have the least to fear. Brokers whose feedback is adhoc, or clearly unbalanced, may want to revisit their CRM processes for that period after the loan has settled.

ANZ and Westpac Report Chinese Home Loan Fraud

The AFR is reporting that hundreds of home loans have been backed by fraudulent Chinese income documents, with the help of dodgy mortgage brokers. The banks have informed the police, suspended the brokers concerned, and have changed their review processes.

The banks also make the point that delinquencies are lower on the small proportion of the book which is foreign investor related. The AFR suggests total loans involved are less than $1 billion.

You can hear our comments on the ABC Radio PM Programme.

Recently some banks have stopped lending to foreign investors. This includes Westpac.

This comes on the back of recent media comments on fraudulent changes being made to mortgage applications, and the ASIC review of broker practices and commissions. ASIC recently highlighted one case of broker fraud.

Given that around half of all mortgages are originated via the broker channel, it is no surprise there is focus on brokers conduct.  Our recent post on mortgage brokers discusses this in detail.

Improving Consumer Outcomes and Enhancing Competition In Credit Cards

The Treasurer has released for public consultation the Government’s response to the Senate Economics References Committee Inquiry into matters relating to credit card interest rates.  The Government’s response outlines reforms to provide greater legislative protection to vulnerable consumers, to exert more competitive pressure on credit card issuers and to provide consumers with the information they need to make the best choices about how they use their credit cards.

Background.

There are currently around 16 million credit and charge card accounts in Australia (or 1.8 cards per household). Around two-thirds of outstanding credit card debt (by value) is accruing interest. This proportion has fallen over recent years (from above 70 per cent in 2011). The decline likely reflects that credit cards are an expensive form of credit and their relative price has increased in recent years as interest rates on other forms of credit — such as household mortgages and personal loans — have fallen. Increasing use of debit cards, and the growing availability of discounted balance transfer offers, may also have been important, whilst reforms enacted under the National Consumer Credit Protection Act in 2009 and 2011 may have contributed to improved repayment behaviour.

Available data indicate that the debt-servicing burden associated with outstanding credit card balances falls more heavily on households with relatively low levels of income and wealth. Households in the lowest income quintile hold, on average, credit card debt equal to 4 per cent of their annual disposable income, while those in the highest income quintile hold debt equal to around 2 per cent of disposable income. Low income households are also more likely to persistently revolve credit card balances (and, therefore, pay interest) than high income households.

Cards-Proposals-2The ABS’ Household Income and Expenditure surveys show that households in the lowest income quintiles also pay more in interest charges relative to their incomes than higher income households, although overall differences between quintiles are small. Households in the bottom two quintiles by net worth also pay the most in credit card interest relative to their income.

Cards-Proposals-3Although reliable data on the number of consumers that are in credit card distress are not publically available, a range of evidence supports the conclusion that carrying large credit card debt is a significant cause of financial vulnerability and distress for a small but sizeable subset of consumers.

Default rates on credit cards give a sense of the proportion of credit card balances that are in severe distress. Recent estimates from the RBA suggest that total (annualised) losses on the major banks’ credit card loan portfolios are around 2½ per cent.5 Other data suggest that many consumers struggle to make the required repayments on credit cards without necessarily defaulting. A 2010 survey by Citi Australia found that 9 per cent of respondents reported that they had struggled to make minimum repayments on credit cards within the past 12 months, with low-income earners being more likely to report this than high-income earners.

Compared to other types of loans, the number of consumers struggling to or failing to make the required repayment is likely to understate the financial distress associated with credit cards. Card issuers set minimum repayment amounts as a very small proportion of the outstanding balance, so that households making the minimum repayment will only pay off their balance over a very long period and incur very large interest costs. Making the higher repayments required to pay off their outstanding balance may be sufficient to cause financial distress for many consumers.

In giving evidence to the Senate’s inquiry into the issue, the Consumer Action Law Centre (Consumer Action) and the Financial Rights Legal Centre (Financial Rights) stated that credit card debt is the most commonly cited problem by callers to Financial Rights’ financial counselling telephone service. Consistent with this, Consumer Action’s telephone service is reported to receive at least 15 calls per day related to credit card debt, with over 50 per cent of callers having credit card debt exceeding $10,000 and 28 per cent with a debt of over $28,000. Credit cards are also the most common cause of consumer credit disputes received by the Financial Ombudsman Service — of the more than 11,000 consumer credit disputes received in 2014-15, almost half were about credit cards.  In contrast to the number of home loan disputes, which fell by 5 per cent over 2014-15, the number of credit card disputes rose by almost 4 per cent.

Apart from its direct financial impact, high and unmanageable credit card debt can have a significant impact on other indicators of wellbeing. An examination of financial stress amongst New South Wales households by Wesley Mission detailed the impact that financial stress can have on the household and individual, including impacts on physical and mental health, family wellbeing, interfamily relationships, social engagement and community participation. More than one quarter of respondents that identified themselves as having been in financial stress indicated that the experience had resulted in sickness or physical illness (31 per cent), relationship issues (28 per cent) or a diagnosed mental illness (28 per cent). While there are many causes of financial stress, Wesley Mission found that financially stressed households owed, on average, 70 per cent more in credit card debt than households that weren’t financially stressed.

In addition, the inflexibility of credit card interest rates to successive reductions in the official cash rate has prompted concern over the level of competition in the credit card market. Since late 2011, the average interest rate on ‘standard’ credit cards monitored by the RBA has remained around 20 per cent, at a time when the official cash rate has been reduced by a cumulative 2.75 percentage points. The average rate on ‘low rate’ cards (around 13 per cent) has been similarly unresponsive to reductions in the cash rate over the period.

Analysis conducted by the Treasury in 2015 showed that effective spreads earned by credit card providers have increased over the past decade. In particular, spreads increased substantially during the financial crisis and have remained high in the years since then.11 The increase during the financial crisis is consistent with a repricing of unsecured credit risk observed in other credit markets and economies. However, the fact that spreads have since remained very high (and have even increased a little further more recently) suggests limitations in the degree of competition in the credit card market and unsecured lending markets more generally.

Proposals For Consultation.

Credit cards are used by many Australians as a valuable tool for managing their financial affairs. The majority of Australians use their credit cards responsibly. There is, however, a subset of consumers incurring very high credit card interest charges on a persistent basis because of the inappropriate selection and provision of credit cards as well as certain patterns of credit card use. For this subset of consumers, credit cards may impose a substantial burden on financial wellbeing.

The Government finds that these outcomes reflect, among other things, a relative lack of competition on ongoing interest rates in the credit card market (arising partly because of the complexity with which interest is calculated). These outcomes also reflect behavioural biases that encourage card holders to borrow more and repay less than they would otherwise intend leading to higher (than intended) levels of credit card debt.

These views are consistent with the findings of the recent Inquiry into matters relating to credit card interest rates by the Senate Economics References Committee released in December 2015. On 18 December 2015, the Senate Committee released its report entitled Interest Rates and Informed Choice in the Australian Credit Card Market. The Government has carefully considered the recommendations made by the Senate Committee. This consultation paper also constitutes the Government’s response to that Inquiry.

The Government proposes a set of reforms that it considers are proportionate to the magnitude of the identified problems. It has drawn upon lessons and insights from regulatory developments in other jurisdictions as well as available empirical evidence, including relevant insights from behavioural economics. The Government has further drawn on evidence given by stakeholders at the Senate Inquiry hearings and its own consultation with card issuers and consumer representatives.

The proposed measures form part of a wider package of reforms that should improve competition and consumer outcomes in the credit card market. A number of aspects of the Financial System Program announced by the Government in October 2015 — including measures to improve the efficiency of the payments system and support access to and sharing of credit data — should also have a material and positive impact on consumer outcomes in the credit card market. There are already signs that reforms enacted in January 2015 to open up the credit card market to a wider pool of potential card issuers are beginning to have a positive impact on competition in the market.

Relatedly, on 19 April 2016 the Government released the final report of the review of the small amount credit contract (SACC) laws. Consistent with its approach to the credit card market, the Government wants to ensure that the SACC regulatory framework balances protecting vulnerable consumers without imposing an undue regulatory burden on industry. The final report made recommendations to increase financial inclusion and reduce the risk that consumers may be unable to meet their basic needs or may default on other necessary commitments. The Government is undertaking further consultation before making any decisions on the recommendations.

The Government recognises the importance of financial literacy in supporting good consumer outcomes in the financial system and is committed to raising the standard of financial literacy across the community. The Government provides funding to the Australian Securities and Investments Commission (ASIC) to lead the National Financial Literacy Strategy and undertake a number of initiatives to bolster financial literacy under the ASIC MoneySmart program.

The package consists of two phases. For Phase 1 (measures 1 to 4), the Government seeks stakeholder feedback with a view to developing and releasing associated exposure draft legislation in the near term. For Phase 2 (measures 5 to 9), the Government plans to shortly commence behavioural testing with consumers to determine efficacy in the Australian market and to ensure they are designed for maximum effect. Testing will be led by the Behavioural Economics Team of the Australian Government. The decision to implement these measures will be subject to the results of consumer testing and the extent to which industry presents solutions of its own accord. The Government intends to commence consumer testing in the near term and will report on the outcomes of that testing and make a final decision on implementation in due course.

Cards-Proposals-1The closing date for submissions is Friday, 17 June 2016.

Proposed Financial Institutions Supervisory Levies For 2016-7

The financial industry levies are set to recover the operational costs of APRA and other specific costs incurred by certain Commonwealth agencies and departments, including the Australian Securities and Investments Commission, the Australian Taxation Office, and the Department of Human Services. ASIC gets a 150% uplift, reflecting the requirement for greater supervision of across financial services.

The Treasury has released a paper, prepared in conjunction with the Australian Prudential Regulation Authority (APRA), seeking submissions on the proposed financial institutions supervisory levies that will apply for the 2016-17 financial year by  Friday, 3 June 2016.

LeveyHere they are itemised by industry segment.

Levey1Australian Securities and Investments Commission component

A component of the levies is collected to partially offset ASIC’s regulatory costs in relation to consumer protection, financial literacy, regulatory and enforcement activities relating to the products and services of APRA regulated institutions as well as the operation of the Superannuation Complaints Tribunal (SCT). In addition, the levies are used to offset the cost of a number of Government initiatives including the over the counter (OTC) derivatives market supervision reforms and ASIC’s MoneySmart programmes.

$70.4 million will be recovered to offset ASIC regulatory costs through the levies in 2016-17. This amount is 150.1 per cent more than in 2015-16 as a consequence of the Government’s decisions to provide funding to the SCT to deal with legacy complaints and improve processes and infrastructure ($5.2 million) and to bolster ASIC to protect Australian consumers ($37.0 million).

As part of the improving outcomes in financial services package, the Government will:

  • invest $61.1 million over four years to enhance ASIC’s data analytics and surveillance capabilities as well as modernise ASIC’s data management systems;
  • provide ASIC with $57.0 million over four years to enable increased surveillance and enforcement in the areas of financial advice, responsible lending, life insurance and breach reporting; and
  • accelerate the implementation of a number of key measures recommended by the Financial System Inquiry.

From 2017-18 onwards, ASIC’s regulatory costs will be recovered from all industry sectors regulated by ASIC. The Government will consult extensively with industry to refine and settle an industry funding model for ASIC.

Australian Taxation Office component

Funding from the levies collected from the superannuation industry includes a component to cover the ATO’s regulatory costs in administering the Superannuation Lost Member Register (LMR) and Unclaimed Superannuation Money (USM) frameworks. In 2016-17, it is estimated that the total cost to the ATO in undertaking these functions will be $17.8 million, with the full amount to be recovered through the levies in line with the requirements of the Government’s Charging Framework.

The majority of this funding supports the ATO’s activities, which include:

  • the implementation of strategies to reunite individuals with lost and unclaimed superannuation money including promotion of the ATO On Line Individuals Portal and targeted SMS/e mail campaigns;
  • working collaboratively with funds to engage members being reunited with their super, including Super Match and providing funds with updated contact information about their lost members;
  • processing of lodgements, statements and other associated account activities;
  • processing of claims and payments, including the recovery of overpayments;reviewing and improving the integrity of data on the LMR and in the USM system; and
  • reviewing and improving data matching techniques, which facilitates the display of lost and unclaimed accounts on the ATO On Line Individuals Portal.

The funding also supports the ongoing upkeep and enhancement of the ATO’s administrative system for USM frameworks and the LMR, and for continued work to improve efficiency and automate processing where applicable.

Department of Human Services component

The Department of Human Services administers the Early Release of Superannuation Benefits on Compassionate Grounds programme (ERSB). The compassionate grounds enable the Regulator (the Chief Executive of Medicare) to consider the early release of a person’s preserved superannuation in specified circumstances.

The volume of ERSB applications has significantly increased since it was made possible to apply online. In 2015-16, the ERSB received 27,688 applications. This was a 44 per cent increase compared with the previous year. In 2016-17, the ERSB is forecast to receive approximately 38,763 applications. This will represent an approximate increase in volume of 40 per cent compared with the previous year.

The programme is expected to cost the Government $4.8 million in 2016-17. In line with the Government’s Charging Framework, this amount will be recovered in full through the levies.

SuperStream component

Announced as part of the former Government’s Stronger Super reforms, SuperStream is a collection of measures that are designed to deliver greater efficiency in back-office processing across the superannuation industry. Superannuation funds will benefit from standardised and simplified data and payment administration processes when dealing with employers and other funds and from easier matching and consolidation of superannuation accounts. The costs associated with the implementation of the SuperStream measures are to be collected as part of the levies on superannuation funds. The levies will recover the full cost of the implementation of the SuperStream reforms and are to be imposed as a temporary levy on APRA-regulated superannuation entities from 2012-13 to 2017-18 inclusive.

The costs associated with the implementation of the SuperStream reforms are estimated to be $35.5 million in 2016-17 and $32.0 million in 2017-18.

RBA May Monetary Statement – Inflation Lower For Longer

The RBA has released its latest statement on monetary policy. Essentially, inflation will be lower for longer, and they see home lending still running at around 7% growth whilst competition to lend grows more intense.

The March quarter underlying inflation outcome was around ¼ percentage point lower than expected at the time of the February Statement.

The broad-based nature of the weakness in nontradables inflation and the fact that wage outcomes were lower than expected over 2015 has resulted in a reassessment of the extent of domestic inflationary pressures, leading to downward revisions to the forecasts for inflation and wage growth. Underlying inflation is now expected to remain around 1–2 per cent over 2016 and to pick up to 1½–2½ per cent at the end of the forecast period.

RBA-May-01Given data observed over the past few months, the recovery in wage growth and labour costs underpinning the inflation forecasts has been revised lower.

Within the household sector, they say that household consumption growth increased in the second half of 2015 to around its decade average in year-ended terms, driven by relatively strong growth in New South Wales and Victoria. Factors supporting the pick-up in consumption growth include solid employment growth and low interest rates, as well as the ongoing effects of lower petrol prices and a further increase in household wealth.

With growth in household disposable income remaining below average, the saving ratio has continued to decline.

Retail sales volumes grew at a similar pace in the March quarter as in late 2015, although other timely indicators of household consumption have eased of late. Motor vehicle sales to households have continued to decline in early 2016, though at a slower pace than in late 2015, and households’ perceptions of their own finances have declined of late, although they remain around their longrun average. However, in the past these indicators have had only a modest correlation with quarterly aggregate consumption growth. Liaison suggests that trading conditions in the retail sector have softened in recent months, but remain generally positive.

Conditions in the established housing market have stabilised somewhat over the past two quarters or so. Housing prices increased in the early months of 2016, after easing slightly in the December quarter of 2015. Auction clearance rates are above average in Sydney and Melbourne, although they remain lower than a year ago. The average number of days that a property is on the market is a little higher than the lows of last year, while the eventual discount on vendor asking prices is little changed. Housing turnover rates are below average.

Housing credit growth has eased a little in recent months, after stabilising in the second half of 2015. This follows an earlier period of rising credit growth, driven in large part by investor lending. This moderation has been consistent with the increases in mortgage interest rates implemented by most lenders towards the end of 2015 and the tightening of lending standards.

The pace of housing credit growth has eased in recent months, to around 7 per cent. This follows increases in variable lending rates by most lenders in late 2015 and measures introduced by the Australian Prudential Regulation Authority (APRA) to strengthen lending standards. In particular, loan serviceability criteria have been tightened by lenders, which reduce the amount that some households can borrow. Consistent with these developments, there has been a decline in turnover in the housing market, along with slower growth in the average size of loans. Net housing debt has continued to grow around 11/4 percentage points slower than housing credit due to ongoing rapid growth in deposits in mortgage offset accounts. Recent housing loan approvals data suggest that housing credit will continue to grow at about its current pace.

Prior to the May cash rate reduction, the estimated average outstanding housing interest rate had been little changed since lenders increased interest rates in the second half of 2015. Following the May rate reduction, banks have lowered their standard variable rates by 19–25 basis points.

More broadly, there are signs that competition for both owner-occupier and investor loans is intensifying. New loans are typically benchmarked to standard variable rates, with lenders then offering discounts below these rates. Over recent months, interest rate discounts for new owner-occupier loans have increased and may be offsetting some of the increase in standard variable rates last year.

Discounts for investors on variable-rate housing loans were reduced substantially last year but have increased in recent months. Fixed interest rates for housing loans continue to be priced competitively and, consistent with this, a higher share of mortgages has been taken out with fixed interest rates.

Since the introduction of differential pricing for investor and owner-occupier lending by most major banks in the second half of 2015, growth in investor lending has slowed considerably, while growth in owner-occupier lending has accelerated. As noted previously, a large number of borrowers have contacted their existing lender to change the purpose of their loan, while there has also been a surge in owner-occupier refinancing and a drop in investor refinancing with different lenders.

Conditions in the rental market have continued to soften. Growth in rents has declined and the aggregate rental vacancy rate has increased to around its average since 1990. While the recent increase in the national vacancy rate mainly reflects developments in the Perth rental market, growth in rents has eased in most capital cities.

Dwelling investment has continued to grow strongly, supported by low interest rates and the significant increase in housing prices in recent years. Investment in higher-density housing grew at close to 30 per cent over 2015, accounting for most of dwelling investment growth over that period. More recently, the amount of residential construction work still in the pipeline has continued to rise and points to further strong growth in dwelling investment. The pace of growth is likely to moderate, however, consistent with the decline in building approvals since last year.

 

 

AMP Bank reduces variable rate home loans by 0.2%

AMP Bank has announced it will reduce interest rates  across all variable rate home loans by 20 basis points, effective Monday 23 May  2016.

The AMP Bank standard variable home  loan interest rate for owner occupied loans will reduce to 5.53 per cent per annum (comparison rate 5.70 per cent per annum) and to 5.82 per cent per annum (comparison rate 5.99 per  cent per annum) for investment property loans.

For new owner occupied home loans the  AMP Essential Home Loan variable rate will reduce to 3.88 per cent per annum  (comparison rate 3.90 per cent per annum).

The Professional Package variable  rate for new owner occupied term loans $750,000 and above will drop to 3.95 per  cent per annum (comparison rate 4.31 per cent per annum).

The Basic Package variable rate for  new investor property loans will reduce to 4.37 per cent per annum (comparison rate 4.41 per cent per annum).

The AMP SuperEdge variable rate for  new SMSF residential property loans will reduce to 5.67 per cent per annum (comparison rate 5.93 per cent per annum).

 

Macquarie FY16 Profit Up 29%

Macquarie Group announced a record net profit after tax attributable to ordinary shareholders of $A2,063 million for the full year ended 31 March 2016 (FY16), up 29 per cent on the full year ended 31 March 2015 (FY15) and in line with expectations.

However, profit for the second half of the year (2H16) was $A993 million, up seven per cent on 2H15 albeit down seven per cent on a strong first half (1H16) result. Looking under the hood, there was more pressure in the second half, with revenue growth lower than expected, offset by falls in remuneration and tax. Indications for FY17 suggest they see continued pressure and results will be “broadly in line” with FY16.

MBL-FY16-3Macquarie announced final ordinary dividend of $A2.40 per share (40 per cent franked), up from the 1H16 ordinary dividend of $A1.60 per share (40 per cent franked). The total ordinary dividend payment for the year of $A4.00 per share, is up from $A3.30 in the prior year. This represents an annual ordinary dividend payout ratio of 66 per cent.

While Macquarie continued to build on the strength of its Australian franchise, its international income accounted for 68 per cent of the Group’s total income for FY16. Total international income was $A6,734 million for the year ended 31 March 2016, an increase of four per cent from $A6,461 million in the prior year.

MBL-FY16-2Macquarie’s annuity-style businesses’ (Macquarie Asset Management (MAM), Corporate and Asset Finance (CAF) and Banking and Financial Services (BFS)) which represent more than 70 per cent of the Groups’ performance, each reported record net profit contributions for the year, with combined net profit contribution increasing by $A277 million, or 10 per cent on FY15.

Macquarie’s capital markets facing businesses’ (Macquarie Securities Group (MSG), Macquarie Capital and Commodities and Financial Markets (CFM)) combined net profit contribution decreased by $A34 million, or three per cent on FY15.

Macquarie’s assets under management (AUM) at 31 March 2016 were $A478.6 billion, down two per cent from $A486.3 billion at 31 March 2015, due to a decrease in insurance assets and asset realisations, partially offset by higher asset valuations, additional investments and positive flows.

Net operating income of $A10,135 million for FY16 was up nine per cent, while total operating expenses of $A7,120 million were up six per cent on the prior year.

Key drivers of the change from the prior year were:

  • A 14 per cent increase in combined net interest and trading income to $A4,346 million, up from $A3,819 million in FY15. This resulted from improved trading opportunities in MSG driven by increased market volatility particularly in China in the first half of the year; the impact of the depreciation of the Australian dollar, improved interest income in CAF Lending, growth of the motor vehicle portfolio in CAF; strong volume growth in Australian mortgages, business lending and deposits in BFS; and a strong contribution from the commodities platform in CFM. CFM’s customer flow was underpinned by volatility in global commodity prices and strong client flows in foreign exchange and interest rates markets due to ongoing market volatility. These factors were partially offset by lower income as a result of challenging market conditions and subdued client risk appetite in secondary markets which, in turn, were influenced by a sell-off in US credit markets
  • A three per cent increase in fee and commission income to $A4,862 million, up from $A4,739 million in FY15, primarily resulting from an increase in base fees driven by the impact of the depreciation of the Australian dollar, market movements, raisings and investments and positive prior year flows partially offset by lower fee revenue from insurance assets; an increase in brokerage and commission in MSG due to the impact of the depreciation of the Australian dollar; and an increase in performance fees recognised in MAM
  • A 32 per cent increase in other operating income and charges to $A923 million, from $A699 million in FY15, primarily due to an increase in net operating lease income due to the acquisition of an aircraft portfolio from AWAS Aviation Capital Limited during the year and the impact of the depreciation of the Australian dollar, partially offset by the divestment of the North American railcar operating lease portfolio in January 2015; net gains on sale of investments in MAM, including the partial sale of a holding in MIC, and gains in MacCap on listed and unlisted investments, partially offset by increased impairment charges in MacCap in relation to a number of non-related underperforming principal investments and loans; and the underperformance of certain commodity-related loans in CFM
  • Total operating expenses increased six per cent, driven by a two per cent increase in employment expenses due to the impact of the depreciation of the Australian dollar on offshore expenses, an increase in trading-related activity in MSG; and an increase in investment in technology projects to support business growth particularly in BFS.

Staff numbers were 14,372 at 31 March 2016, up from 14,085 at 31 March 2015.

The income tax expense for FY16 was $A927 million, up three per cent from $A899 million in the prior year. The effective tax rate of 31.0 per cent was down from 35.9 per cent in FY15 reflecting the nature and geographic mix of income, as well as tax uncertainties.

Total customer deposits increased by 9.8 per cent to $A43.6 billion at 31 March 2016 from $A39.7 billion at 31 March 2015. During FY16, $A22.5 billion of new term funding was raised covering a range of sources, tenors, currencies and product types.

Liquidity Coverage Ratio (LCR) requirements came into effect from 1 January 2015, with disclosure required from 1 July 2015. For the quarter ended March 2016 the Bank Group’s average LCR was 173 per cent .

Macquarie Group remains very well capitalised with APRA Basel III Group capital of $A17.2 billion and Group surplus of $A3.9 billion at 31 March 2016. The Bank Group APRA Basel III Common Equity Tier 1 capital ratio was 10.7 per cent at 31 March 2016, up from 9.7 per cent at 31 March 2015.

MBL-FY16-1Macquarie intends to purchase shares, to satisfy the MEREP requirements of approx. $A440 million, subject to the New Arrangements noted below. The buying period for the MEREP will commence on 17 May 2016 and is expected to be completed by 8 July 2016. No discount will apply for the 2H16 DRP and the shares are to be acquired on-market.

APRA announced on 29 March 2016 that it has deferred finalising the capital components of the Level 3 framework for Conglomerates. APRA has advised it will consult on any new Level 3 capital requirements, but does not anticipate doing so earlier than mid-2017, with implementation being no earlier than 2019. An update will be provided following the publication of any proposed rules.

The Basel Committee has recently proposed a number of changes to the calculation of risk weighted assets, most of which are under consultation. Any impact on capital is dependent on upon the final form of these proposals and local implementation by APRA.

APRA have released a discussion paper on the Net Stable Funding Ratio (NSFR) which is yet to be incorporated into local standards. While the impact remains uncertain, Macquarie expects to meet the overall requirements of the NSFR.

Macquarie Asset Management delivered a net profit contribution of $A1,644 million, up 13 per cent on the prior year. MAM’s base fee income of $A1,569 million for FY16 increased 14 per cent from $A1,372 million in the prior year, mainly driven by the impact of the Australian dollar and market movements, raisings and investments in Macquarie Infrastructure and Real Assets (MIRA) and positive prior year fund flows in Macquarie Investment Management (MIM). These were partially offset by lower fee revenue from insurance assets. Performance fee income of $A693 million for FY16 increased four per cent from $A667 million in the prior year, including performance fees from various MIRA listed and unlisted funds, MIM Listed Equities, Delaware and hedge funds, as well as performance fee income from MIRA co-investors in respect of a UK asset.

Corporate and Asset Finance delivered a net profit contribution of $A1,130 million, up two per cent on the prior year. The improved result was largely driven by the impact of the depreciation of the Australian dollar and the acquisition of an aircraft portfolio from AWAS Aviation Capital Limited during the year and increased lending activity. These increases were partially offset by the non-recurrence of gains in the prior year on the restructure of a railcar logistics operating lease facility, the disposal of the North American railcar operating lease portfolio and the sale of the Macquarie Equipment Finance US Operations. CAF’s asset and loan portfolio increased 37 per cent from $A28.8 billion at 31 March 2015 to $A39.4 billion at 31 March 2016, due to acquisitions which continue to transition as well as organic growth.

Banking and Financial Services delivered a net profit contribution of $A350 million, up 23 per cent on the prior year. During the year, BFS benefited from increased income as a result of strong volume growth in Australian mortgages, business lending, deposits and the Wrap platform, partially offset by increased costs associated with the investment in technology projects to support growth in the business, including the Core Banking program. The Australian mortgage portfolio increased to $A28.5 billion, up 16 per cent on 31 March 2015, representing approximately two per cent of the Australian market. Macquarie funds on platform closed at $A58.4 billion on 31 March 2016, an increase of 22 per cent on 31 March 2015.

Macquarie Securities Group delivered a net profit contribution of $A268 million, significantly up from $A64 million in the prior year. In the first half of the year, MSG benefited from favourable market and trading conditions in Australia and Asia, driving strong growth in trading revenues. In the second half of the year, market concerns including increasing US interest rates, continued falls in commodity prices, and a Chinese-led slowdown in global growth negatively impacted levels of client activity and trading opportunities within markets.

Macquarie Capital delivered a profit contribution of $A451 million, up five per cent on the prior year, predominately due to a higher net contribution from principal assets, partially offset by increased operating expenses. Impairment charges recognised in the current year relate to a number of non-related underperforming principal investments across a range of sectors and regions. During FY16, Macquarie Capital advised on 395 transactions valued at $A176 billion including acting as joint lead manager and joint underwriter on NAB’s $A5.5 billion accelerated renounceable entitlement offer; joint bookrunner and placing agent for the $US4.3 billion H-share placement of Haitong Securities Co. Ltd; developer, equity sponsor and financial adviser on KentuckyWired; and adviser to NAB on the demerger of 75 per cent of Clydesdale & Yorkshire Banking Group, and Joint Global Co-ordinator on the simultaneous £400 million London IPO of the remaining 25 per cent on the main market of the London Stock Exchange and Australian Securities Exchange.

Commodities and Financial Markets delivered a net profit contribution of $A576 million, down 31 per cent on the prior year, driven by a decline in trading activity in the fourth quarter. The result reflected the impact of the depreciation of the Australian dollar, a strong contribution from the commodities platform, challenging credit market conditions particularly in the northern hemisphere and non-recurrence of fee income from the Freeport LNG Terminal transaction recognised in the prior year. Energy Markets was a significant contributor to CFM’s overall result with revenues generated across the global energy platform, particularly from Global Oil and North American Gas and Power, as continued volatility in global commodity prices underpinned increased customer activity. Further provisions for impairment were taken on certain underperforming commodity-related loans in the Metals and Energy Capital portfolio.

The False Promise of Helicopter Money

From FitchRatings.

One of the most prominent questions concerning the global economy today is whether monetary policy is approaching the limit of its effectiveness. Inflation remains well below target in the eurozone and Japan, despite aggressive quantitative easing (QE) and negative policy interest rates, and both the euro and yen have appreciated against the US dollar since the start of the year.

The problem with the debate is that it has focused solely on the effectiveness of policies, without considering the need for prudence.The credibility and independence of monetary authorities are essential to the effectiveness of their policies. And yet some of the proposals being fielded call for central banks to stray further into uncharted territory, expanding and extending their deviation from careful balancesheet management. This could inflict reputational damage that may be difficult to rectify, with real financial and economic consequences.

The direct impact of unconventional monetary policy is apparent and largely as expected (with the exception of the recent appreciation of the euro and yen). Liquidity in banking systems is ample, and borrowing costs have declined, even turning negative for some governments. But the expected second-order effects – increased economic activity and inflation – have not materialized. As a result, despite the fact that headline inflation is being dragged down by low commodity prices, a near-consensus has emerged that additional easing is required.

Options Point to Central Banks, This Time with Helicopters

Monetary policy is not the only option for further easing, but it is the most likely. Structural reforms to support growth typically have long gestation periods, and the economic dislocations that accompany them reduce their political appeal. Further fiscal easing is at least partly constrained by record-high levels of government debt, which will take many years to bring down.

When it comes to monetary policy, however, the options are similarly limited. Even monetary policymakers acknowledge that QE is subject to diminishing returns, while adverse effects on the banking system limit the scope for setting policy rates too deeply negative. As a result, an old idea, first proposed by Milton Friedman in 1969, is making a comeback: “helicopter money.” Advocates envisage central banks creating money and distributing it directly to those who would spend it, resulting in immediate increases in demand and inflation.

Because households might choose to save some of the money, contemporary suggestions center on helicopter money being transferred to governments, to invest in infrastructure projects or other demand-enhancing initiatives. Variations call for central banks to buy perpetual government bonds that pay no interest or to convert existing bond holdings into something similar.

Seigniorage and Sound Central Bank Finances Are Co-dependent

Such proposals are troubling for many reasons. The direct funding by central banks of fiscal deficits or purchases of government debt would result in the monetization of fiscal policy. Monetization unambiguously weakens central banks’ balance sheets by adding assets that carry no real value (claims on government that will never be repaid), offset by liabilities (newly created money) generated to acquire them.

Advocates of helicopter money rely on two claims. Some believe that policy can be calibrated to stop short of inflicting meaningful harm, usually because the resulting improvement in economic conditions will obviate the need for continued stimulus. For others, central banks’ balance sheets are not a constraint, because the exclusive ability to create additional unlimited and cost-free liabilities guarantees longterm profitability.

There are problems with both claims. Relying on a calibrated approach counts on stimulus being withdrawn before any evidence of concern over the central bank’s finances appears. But there is no certainty that monetized fiscal spending will spark an economic recovery. Nor can it be known beforehand that expansionary fiscal policy would be curtailed if economic prospects do not improve. In fact, in the absence of negative public or market commentary on central-bank finances, the fiscal authorities may be tempted to expand their use of cost-free funding in what looks from their perspective very much like the proverbial “free lunch.”

There are also serious reasons to doubt the claim that seigniorage – the profit to central banks from having zero-cost liabilities (and at least some income-generating assets) – would guarantee profitability in the long term. Never in the post-Gold Standard era has there been greater focus on the limits of monetary policy. This focus could easily turn to the health of central banks’ balance sheets if they continue to expand. The concept of seigniorage is poorly understood outside a relatively small community; it should not be used as the first line of defense.

None of this comes as news to central banks, which attach the utmost importance to their reputation for having robust finances, carefully managing risk, and ensuring the soundness of money. Indeed, the financial prudence that underpins policy credibility and confidence in central banks is ultimately what makes seigniorage possible. Only institutions that are perceived as financially viable can expect their liabilities to be held by others as assets; central banks are no exception.

At stake is the value of money. Helicopter money, would transfer risk from the balance sheet of governments to those of central banks, blurring the lines between policies, institutions, and their relative autonomy. Its appeal lies in being able to exploit the unique financial structures of central banks. But there are limits beyond which confidence in the financial integrity of central banks – and consequently the soundness of money – will be undermined.

Those limits are of course impossible to identify in advance. But at a time of heightened sensitivity to the implementation and effectiveness of monetary policy, it would be a mistake to embark on a path that jeopardizes central banks’ very viability.

ANZ Trims Home Loan Rates by 0.19%

ANZ today announced it will decrease interest rates across a range of variable lending products for home owners and small businesses, while increasing the rate on its 4-month Term Deposit by 1.00%pa.

All Standard Variable Rate indices for Residential Home Loan products to decrease by 0.19%pa. For Owner Occupiers this reduces the Index Rate to 5.37%pa.

All Business lending variable rate indices will decrease by 0.25%pa.

Deposit rates for 4-month Advanced Notice Term Deposit to increase by 1.00%pa to 3.00%pa.

Introduction of a special highly competitive 2-year Fixed Rate Home Loan for Owner Occupiers of 3.75%pa.

ANZ Group Executive Australia Fred Ohlsson said: “Today’s decision strikes a balance between ensuring our home loan customers continue to get a competitive deal and continuing to support our small business and deposit customers. “The background is that wholesale funding costs have again been rising in recent months. While we’ve absorbed this for some time and taken steps to reduce costs in our own business, higher funding costs mean we are only in a position to pass on a portion of the reduction in the cash rate to our customers.

“Our rates remain low by historical standards and our standard variable residential rates remain competitive having maintained the lowest standard variable rate for almost three years. For customers wanting to lock-in low rates, we’ve introduced a highly competitive 2-year Fixed Rate home loan of 3.75%pa.

“However, we also know that falling interest rates impact many customers that rely on their savings. This is why we’ve also taken the decision to lift our popular four-month Term Deposit rate by a full 1%pa,” Mr Ohlsson said.