YBR Acquires SA Mortgage Business

Yellow Brick Road has announced an agreement to acquire South Australia-based mortgage manager, securing previously under represented territory. The purchase will increase scale and importance with key lenders, adds a new lender to YBR panel, and adds additional broker distribution via new third party aggregators. It extends on the ground product sales team beyond Sydney to Victoria and South Australia.

Yellow Brick Road Holdings Limited (ASX:YBR) (“YBR” or the “company”) announces that its wholly-owned subsidiary, Loan Avenue Holdings Pty Ltd, has today entered into an agreement to acquire the business and assets of privately-owned non-bank lender Loan Avenue Pty Ltd (“Loan Avenue”).

Loan Avenue will provide the national company a strong distribution footprint in South Australia, diversifying the mortgage book geographically and diluting reliance on Sydney and Melbourne mortgage markets.

Executive Chairman Mark Bouris said the acquisition of Loan Avenue, an established and profitable business, continues the company’s drive for scale.

“Loan Avenue is a respected B2B brand and has been in operation for ten years with a significant footprint, made up of more than 100 brokers in South Australia and Victoria. This acquisition allows us to quickly build more scale in South Australia, diversify and deepen our distribution network and funding relationships and increase our management capability,” Mr Bouris said.

“Paul and Michelle Collins have done an incredible job founding and building this company into one of South Australia’s top three non-bank lenders. They are highly regarded within South Australia by their funders and distributors and bring a wealth of experience to YBR.”

“Loan Avenue brings us some other talented product managers and credit experts with stronger delegated lending authorities, boosting our credit capacity. Importantly, this acquisition strengthens our relationship with existing funders and gives us access to an additional funder.”

Loan Avenue’s mortgage product compatibility with YBR’s own mortgage manager (YBR Group Lending, formerly RESI Mortgage Corporation acquired in FY2014) affords simple integration minus the complexity that often comes with a scale acquisition.

Loan Avenue founders and vendors Paul and Michelle Collins have agreed to stay on following the acquisition to assist in maintaining and driving existing aggregator and broker relationships as well as supporting integration.

Paul Collins said “We are delighted to join such a fast growing and diversified group as YBR. Our focus will be to enhance our broker relationships and drive further product initiatives with YBR, whilst maintaining the high service levels for which we are renowned.”

The maximum aggregate consideration agreed to be paid for Loan Avenue is $4.100 million, made up as follows:

  • $2.6 million payable in cash on completion;
  • The issue on completion of 2,596,153 fully paid ordinary shares in YBR (“YBR Shares”) at an agreed issue price of $0.26 each, representing $0.675 million in value;
  • Deferred cash consideration of $0.450 million, payable in 3 instalments over the first 12 months after completion; and
  • Subject to satisfying certain earn-out conditions during the period ending on the first anniversary of completion, an additional amount of up to $0.300 million in cash and up to $0.075 million in YBR Shares (to be issued at the same agreed issue price of $0.26 each), payable as soon as Loan Avenue’s relevant performance against the earn-out conditions is agreed or determined.

All YBR Shares to be issued will be subject to a voluntary 12 months’ escrow period from the dates of their issue. No shareholder approval is required for the issue of the YBR Shares.

The acquisition of Loan Avenue remains subject to a number of conditions precedent and, assuming the conditions are satisfied, completion of the acquisition is expected to occur on 31 May 2016.

The cash components of the acquisition will be funded out of the company’s existing cash reserves and undrawn portions of its CBA facility.

 

More Australian Banks Throttle Back Foreign Lending

From Australian Broker.

More Australian lenders have taken a hard-line approach to foreign lending, stopping lending to foreign borrowers or excluding foreign-sourced income from mortgage applications amid growing concerns about fraud.

Citigroup wrote to mortgage brokers yesterday with a blacklist of foreign currencies it will no longer accept as payment for Australian real estate from overseas borrowers, the Australian Financial Review (AFR) reported.

The letter, sent by Citi’s head of mortgage distribution, Matt Wood, contained a list of 12 currencies that it will accept and warned that all others are “not negotiable”.

In a statement provided to Australian Broker, a spokesperson for Citi confirmed at least five currencies have been excluded from mortgage applications.

“We want to continue to ensure we have a robust and healthy residential loan book catering to foreign buyers. In light of recent industry concerns regarding foreign residential loan applications relying on offshore income we have excluded certain currencies to ensure we don’t attract any increases in unwanted loan applications.

“These currencies include the Chinese RMB, Indian Rupee (INR), Indonesian Rupiah (IDR), Malaysian Ringit (MYR) and Taiwan Dollar (TWD).”

Citi’s decision comes after Westpac and ANZ announced they will be investigating mortgages that have been backed by questionable foreign-income documentation, which forced them to stop approving such loans last month.

Bendigo and Adelaide Bank has also since warned its network of brokers to halt lending to foreign borrowers and exclude foreign-sourced income. In a statement provided to Australian Broker, a spokesperson said the non-major has received a “marked increase” in foreign applications.

“Bendigo and Adelaide Bank has always had a policy which allowed funding of expat Australian borrowers and, in certain circumstances foreigners to purchase property in Australia.

“This financial year, in the eight months to end of February 2016, this amounted to new lending advanced of less than $60m.

“In March and April following policy adjustments at other banks, we have seen a marked increase in enquiry and applications, exceeding our risk appetite.  As a result we are reviewing our current position in the market.”

The chief executive of Mortgage Choice, John Flavell, told Australian Broker he expects more lenders to announce similar bans or restrictions.

“Given the recent developments, I am not surprised to see many of Australia’s lenders taking a hard line approach to foreign income lending.

“These policy changes will make it harder for foreign investors to purchase property in Australia using foreign income. Over the coming days and weeks, I expect to see more lenders tightening their policy in this area.”

NZ Housing and dairy risks to financial stability

New Zealand’s financial system is resilient and continues to function effectively, but risks to the financial stability outlook have increased further in the past six months, Reserve Bank Governor, Graeme Wheeler, said today when releasing the NZ Reserve Bank’s May Financial Stability Report.

“Although New Zealand’s economic growth remains solid, the outlook for the global economy has deteriorated.  Despite highly accommodative monetary policies and low oil prices, growth is slowing in a number of trading partner economies.

“Dairy prices remain low with global dairy supply continuing to increase.  Many farmers now face a third season of negative cash flow with heavy demand for working capital.

“Imbalances in the housing market are increasing with house price inflation lifting again in Auckland, after cooling in late 2015 and early 2016 following new restrictions in investor loan-to-value ratios and government measures introduced in October.

“House prices have also begun increasing strongly in a number of regions across New Zealand, although house prices outside Auckland are generally much lower relative to incomes.

“The Bank remains concerned that a future sharp slowdown could challenge financial stability given the large exposure of the banking system to the Auckland housing market.  Further efforts to reduce the imbalance between housing demand and supply in Auckland remain essential.  This includes measures such as decreasing impediments to densification and greenfield development and addressing infrastructure and other constraints to increased housing supply.”

Deputy Governor, Grant Spencer, said: “In the banking system capital and liquidity buffers are strong and profitability is high.

“However, the system faces challenges.  Internationally, credit spreads have widened, placing upward pressure on the cost of funds for New Zealand banks.

“The level of problem loans in the dairy sector is expected to increase significantly over the coming year, although we expect that dairy losses will be absorbed mainly through reduced earnings.

“While the moderation in house price inflation has been transitory, the LVR restrictions have substantially reduced the proportion of risky housing loans on bank balance sheets.  This is providing an ongoing improvement to financial system resilience.

“The Reserve Bank is closely monitoring developments to assess whether further financial policy measures would be appropriate.

“The Reserve Bank continues to make progress on key regulatory initiatives.  Consultation papers on proposed changes to the outsourcing policy for banks and on changes to bank disclosure requirements will soon be released.  A consultation paper has also recently been released on crisis management powers for financial market infrastructures.”

The impact of P2P lending on conventional banks

A working paper from staff at the Bank of England  “Peer-to-peer lending and financial innovation in the United Kingdom” looks at the P2P lending market in the UK. As well as looking at the geographic dispersion of lenders and borrowers, they also make some observations about the future impact of P2P on traditional banks. First, they expect to see a fall in the interest rate charged on unsecured personal loans, which will put pressure on bank profitability in this product line, and second, P2P platforms offer a model for banks as they shift their distribution channels from bricks-and-mortar branches to internet and mobile services.

Although there is P2P lending to fund businesses and real estate, we think consumer credit is the area where banks will face most competition from online platforms. In part, this is because it is the asset class in which P2P emerged and is most mature. For example, one striking fact to emerge from Nesta’s survey of the industry is the difference in the credit profile of individual and business borrowers on P2P platforms.

In the P2P market for personal loans, 59% of respondents sought funding from banks at the same time they applied for a P2P loan, and 54% were granted it but chose to fund themselves via the platforms. By contrast, in the market for P2P business loans, 79% sought funding from banks but only 22% were granted it. One interpretation of these results is that, while banks and P2P platforms are operating with different credit risk and lending models when it comes to business loans, P2P platforms are actually competing away some customers from banks in the unsecured personal loans market.

Looking ahead, unsecured personal loans are the market where P2P platforms are likely to continue to make inroads against banks. In contrast to the retail mortgage and deposit market, no British bank has a dominant position in consumer credit. In addition, British banks’ unsecured lending is typically a small component of their overall balance sheet.

The results of this competition could be good for consumers, increasing the availability of unsecured personal credit while lowering its price. This would amplify recent trends. Last year, UK banks increased their issuance of unsecured personal loans, and quoted interest rates on these fell sharply. However, we caution that P2P platforms still trail banks by some distance in terms of their share of the unsecured personal loans market. For example, in Q4 2014, the net lending flow to individuals through P2P platforms was just over £70 million, while those from UK banks and building societies topped £2 billion.

A second, longer term, less direct but still important impact we expect P2P lenders will have on banks is in how they interact with consumers. Over the last two decades, banks have taken steps to move their customers online to reduce costs from operating physical branches. By some estimates, 30 to 40 percent of retail banks costs in the UK come from running physical branches, even though footfall in them has been falling at 10 percent per annum in recent years, possibly because younger generations are more comfortable doing business just online. This means banks are likely to accelerate the transition of their customers from brick and mortar branches to Internet browsers. As this happens, we anticipate banks will look to P2P platforms for inspiration in how to redesign their websites, as these are often noted for being slick and speedy because, for example, they incorporate videos, pictures and communication channels for investors to interact with borrowers.

Note: Staff Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. Any views expressed are solely those of the author(s) and so cannot be taken to represent those of the Bank of England or to state Bank of England policy. This paper should therefore not be reported as representing the views of the Bank of England or members of the Monetary Policy Committee, Financial Policy Committee or Prudential Regulation Authority Board.

 

RBA FOI on Negative Gearing and Investment Properties

Under a freedom of information request, the RBA has just released some material which casts light on their perspective on investment property and negative gearing from the Financial System Inquiry.

There are a few interesting points.

  • Whilst tax reform is an issue for Government, the RBA has noted that concessional rates of taxation of capital gains might encourage leverage speculation, especially in combination with negative gearing provisions.
  • Risks have been building in investor housing (no coincidence, this is happening at a time when some other asset classes have seen modest/volatile returns).
  • Negative gearing and capital gains concessions could together encourage “leveraged and speculative investment in housing” – including bidding up house prices, risks to financial stability if prices were to fall, and a rise in interest only loans (which do not repay capital so do not build an equity buffer).
  • If changes were made to these policies, it might increase rents, and if the arrangements were not grandfathered, could lead to the large-scale sale of negatively geared properties.

Note: Labor’s proposals, of course include grandfathering.

 

Bendigo Pockets Some Of The Rate Cut

Bendigo Bank has announced it will decrease its residential variable interest rate by 0.20% p.a. to 5.48% p.a.

The Bank has also reduced the Bendigo investment variable rate by 0.15% p.a. to 5.76% p.a.

Bendigo and Adelaide Bank Managing Director Mike Hirst said the adjustment aims to find a fair balance for all of the Bank’s key stakeholders.

“When setting interest rates our Bank needs to consider many factors and carefully take into account the needs of our stakeholders including borrowers and depositors, shareholders, staff, partners and the broader community,” Mr Hirst said.

These historically low interest rates will also impact deposit holders. Mr Hirst noted the challenges the decrease will generate for those looking to earn money through investment in deposits.

“These customers remain front of mind for our Bank, and the rate reduction announced today seeks to strike the right balance between the needs of borrowers and depositors,” he said.

Customers on a residential variable interest rate with a $400,000 loan will see their repayments decrease by $50 a month (principal and interest home loan over 30 years).

The adjustment is effective 30 May 2016 for new and existing loans.

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.