Social Trends – Page 120 – Digital Finance Analytics (DFA) Blog

Household Finance Confidence Tanks Some More

After the slight twitch of positive sentiment following the election in May, the DFA Household Finance Confidence Index fell again, to a new low of 85.54.

Whilst the RBA rate cut may offer some borrowers the prospect of improved cash flow (when the changes propagate through to the regular repayment), just as many households bemoan the continued cuts in savings rates. So, net, net there is no improvement in financial outcomes, and in fact more are concerned that lower RBA rates signals more trouble ahead.

Across the states, WA showed a significant slide in confidence thanks in part to rising mortgage default and delinquencies, and very high underemployment. Most other states are bunched together, whereas a year or two back, VIC and NSW were streets ahead.

By age, younger households with mortgage debt registered a small improvement, while older households with savings went the other way on lower bank term deposit rates. Many of these will simply hunker down, and spend less, and will not largely benefit from the upcoming tax cuts. Older households resist the temptation to move to higher risk alternative savings vehicles, they too just spend less.

The property segmentation reveals that property inactive and investor households both reported lower levels of confidence, while owner occupied home owners were slightly more positive on the rate cuts news.

All three of our wealth segments remain below neutral on the index, indicating a significant deterioration over the past couple of years. Even those with property and no mortgage remain below the neutral 100 setting.

Within the moving parts of the index, job insecurity increased, with 37.4% reported as less secure than a year back, up 0.64% on the previous month. Around half of households saw no change, though underemployment continues to push higher.

Savings continue to take a battering with more households dipping into them to secure their budgets, and lower returns on bank deposits – especially term deposits. On the other hand, share portfolio holders are fairing a little better – though with higher risks of course. Over 52% are less comfortable than a year ago.

In terms of the debt burden nearly half are less comfortable, despite the rate cuts, while 48% are about the same as a year ago – down 1.46% on last month.

In terms of costs of living, the pain continues, with 91% saying their costs, in real terms are higher than a year ago. Only 1.33% said their costs of living had fallen. Households specifically mentioned higher council rates, fuel costs, electricity, school fees and child care costs.

Income remains under pressure, with 4% saying their incomes had increased in real terms in the past year, compared with 50% saying their real incomes had fallen. 41% said their incomes were about the same.

And overall net worth (assets less loans) rose for 23% of households – thanks to higher share prices mainly, while 47% reported a fall in net worth – thanks to property price falls, and reduced savings. 27% reported no change. As yet any recovery in home prices has not fed through into more positive results.

So, more evidence of the pressure on households, and so far the measures taken by the RBA and the Government have had no net positive impact on household confidence. As noted above, even those with property and no mortgage remain below the neutral 100 setting.

As a reminder this data comes from our rolling 52,000 household surveys, with 1,000 new added each week. This is data up to Monday 8th July.

ASIC consults on proposal to intervene to stop consumer harm in short term credit

ASIC has released a consultation paper (CP 316) on the first proposed use of its new product intervention power. On this inaugural occasion, ASIC is looking to address significant consumer detriment in the short term credit industry.

Under their recommended Option 1: ASIC would use their product intervention power to:(a)make an industry-wide product intervention order by legislative instrument under s1023D(3) of the Corporations Act to prohibit credit providers and their associates from providing short term credit and collateral services except in accordance with a condition which limits the total fees that can be charged; and(b)if a new model, which seeks to circumvent the industry-wide product intervention order, evolves in response to the prohibition, amend the existing order or introduce a new order to address that model. 71

In ASIC’s view, Option 1 is preferable because:(a) the product intervention order will prevent the use of the short term lending model which is causing significant consumer detriment; (b) it will prevent other credit and collateral services providers from adopting this model; (c) it promotes protection for consumers who require small amount credit contracts but who are provided with short term credit (and services agreements) in reliance on the short term credit exemption; and (d) it is a more comprehensive and timely response than the other options.

The product intervention power allows ASIC to intervene where financial and credit products have resulted in or are likely to result in, significant consumer detriment. The new product intervention power is an important addition to ASIC’s regulatory toolkit. It reinforces ASIC’s ability to directly confront, and respond to, harms in the financial sector.

ASIC considers that significant consumer detriment may arise in relation to a particular model designed to provide short term credit at high cost to vulnerable consumers. These consumers include those on low incomes or in financial difficulty.

In its first proposed deployment of this power, ASIC is targeting a model involving a short term credit provider and its associate who charge fees under separate contracts. When combined, these fees can add up to around 990% of the loan amount.

While ASIC is presently aware of two firms currently using this model – Cigno Pty Ltd and Gold-Silver Standard Finance Pty Ltd – the proposed product intervention order would apply to any firm using this type of business model.

Announcing the consultation ASIC Commissioner Sean Hughes said, ‘Sadly we have already seen too many examples of significant harm affecting particularly vulnerable members of our community through the use of this short term lending model. Consumers and their representatives have brought many instances of the impacts of this type of lending model to us. Given we only recently received this additional power, then it is both timely and vital that we consult on our use of this tool to protect consumers from significant harms which arise from this type of product.’

‘Before we exercise our powers, we must consult with affected and interested parties. This is an opportunity for us to receive comments and further information, including details of any other firms providing similar products, before we make a decision’.

ASIC seeks the public’s input on the proposed intervention order by 30 July 2019. Submissions should be sent to: product.regulation@asic.gov.au.

ASIC anticipates making a decision on whether to make a product intervention order in relation to short term credit during the course of August 2019.

All intervention orders subsequently made must be published on ASIC’s website, and a public notice issued in relation to the intervention.

Download

CP 316 and draft instrument

Background

On 4 April 2019 ASIC published a media release welcoming the approval of new laws to protect financial service consumers (refer: 19-079MR).

ASIC also published a media release on 26 June 2019 confirming that it initiated consultation on the administration of its new product intervention power (refer: 19-157MR).

ASIC was unsuccessful in civil proceedings in the Federal Court in 2014 involving an earlier use of this short term lending model by two entities Teleloans Pty Ltd and Finance & Loans Direct Pty Ltd (refer: 15-165MR).

ASIC’s MoneySmart website has information about payday loans and alternatives and where to find free help with managing debt.

Aussies’ awareness of changes impacting credit health still a work in progress

Research from credit information website, CreditSmart.org.au, has revealed that one year on from the adoption of Comprehensive Credit Reporting (CCR), most Australian consumers are still unaware of the changes that are impacting their credit health, and may not know how it can impact their future credit applications.

The research found that in the last 12 months, only one in four consumers checked their credit report. More worryingly, consumers who are struggling with their credit health said they were just as likely to seek advice from credit repair or debt management services as they would from their lender or free financial counsellor.

“Consumers are still largely unaware of credit reporting, what information is contained in their credit report, and what that means about their borrowing behaviour and overall credit health,” said Mike Laing, CEO of the Australian Retail Credit Association (ARCA), which founded CreditSmart.

“Our research has found that while awareness has actually increased 11% from last year, less than 1 in 3 consumers are aware that credit reporting has changed. Importantly however, awareness is higher among those with a real need to know – with one in two consumers who are planning to make a significant purchase in the next 12 months being aware of the changes,” added Mr Laing.

The rollout of comprehensive credit reporting has accelerated rapidly in Australia since last year, with more data shared than ever before. By September this year, comprehensive credit information for 80% of consumer loan accounts will be available.

“CCR allows lenders to share and view more detailed credit information about consumers to provide a clearer view of a consumers’ credit history. This is a positive move for consumers who have a strong history of making payments on time.” added Mr Laing.

Consumer awareness highest for users of riskier credit products

According to CreditSmart, credit cards make up the majority of accounts currently in the CCR system at around 87%, followed by mortgages at 9%.

Yet, people who hold these mainstream types of accounts are the least aware of the changes to credit reporting and may not be aware of the value it adds to their credit history, if they have a strong record of making payments on time.

It was also found that those consumers with products that are sometimes seen as riskier, such as leases for household goods (61%), cash loans (54%) and payday loans (79%), plus personal loans (55%), are all far more aware of the changes to credit reporting^[1] This could indicate the users of those products have been given more information about the changes, or that they have taken more time to understand the changes.

Consumers using these riskier products also rated their credit health as significantly worse than users of home loans and credit cards.

Interestingly, Buy Now Pay Later (BNPL) users have relatively low awareness of credit reporting changes despite significant numbers rating their credit health as poor.^[2]

Consumer awareness a work in progress

Awareness of credit reporting changes is not the same as understanding the detail behind their credit report, according to Mr Laing.

“It is easy to understand how consumers may become confused about what’s important when it comes to credit reporting and their credit health. There’s a lot of information out there and it’s important to bring it back to a simple, straightforward message.

“We want consumers to be aware of the importance of their credit history to their credit health – and how that history may impact their financial future. The steps are to understand how the credit reporting system has changed, to get your credit report to see your credit history and to manage the credit that you have responsibly” added Mr Laing. For more information on the changes to credit reporting and where to get your free credit reports you should go to www.creditsmart.org.au, which provides clear information on the credit reporting system to assist consumers to optimise their credit health.

Revised Banking Code Of Conduct A Small Win, But…

The ABA made a big splash when relaunching the revised Banking Code of Conduct which starts today, and yes it is a small win for consumers and SME’s. However, we must ask this: since when are such financial service basic hygiene issues as not charging for no service, advising before charging, considering credit card repayment capacity, speaking in plain English and offering suitable low-fee products, seen as so revolutionary?

Frankly put, these are issues which an industry which truly focused on the well-being of its customers would have long ago addressed. They did not, and were dragged towards better outcomes by the Royal Commission and public pressure.

So, yes, important baby steps, but still a massive leap is required to the desired level of customer-centricity. There is nothing bold or innovative here.

Australia’s banks will comply with a strong new code of practice that significantly increases and enshrines customer protections and introduces tough new penalties for breaches from tomorrow.

The ASIC-approved Banking Code of Practice represents the most significant increase to customer protections under a code in the industry’s history.

From 1 July, under the new Banking Code of Practice, banks will no longer:
– Offer unsolicited credit card limit increases
– Charge commissions on Lenders Mortgage Insurance
– Sell insurance with credit cards and personal loans at the point of sale.
Under the code banks must:
– Offer low-fee or no-fee accounts to low income customers
– Have a 3 day grace period on all guarantees to give guarantors enough time to make sure it’s the right option for them
– Actively promote low-fee or no-fee accounts to low income customers
– Provide reminders when introductory offers on credit cards end
– Simpler and fairer loan contracts for small business using plain English that avoids legal jargon
– Provide customers a list of direct debits and recurring payments to make it easier to switch banks.
Australian Banking Association Chief Executive Officer Anna Bligh said customers can expect to see a change to banking products and services immediately.

“We’ve completely rewritten the rule book for Australia’s banks. The Banking Code of Practice has strong protections for customers, serious consequences for breaches and strong independent enforcement,” Ms Bligh said.

“Banks understand they need to change their behaviour and this new rule book represents an important step in earning back the trust of the Australian public.

“The new Code will form part of every customer’s relationship with their bank and will be strongly enforced both by an independent body, the Banking Code Compliance Committee, and the Australian Financial Complaints Authority.

“Whether it’s through your credit card, home loan, small business loan or just day to day banking, Australian customers will see tangible benefits from this new Code,” she said

Financial Counselling Australia Chief Executive Officer Fiona Guthrie said the new Code was a major step up in the protections for customers, particularly the most vulnerable, and was an important milestone in restoring community trust in Australia’s banks.

“Codes like this really can make a difference because they go beyond black letter law and instead reflect the standards that an industry voluntarily commits to,” Ms Guthrie said.

“The banking industry released its first version of the banking code over 25 years ago and it is really pleasing to see that each version – and this is the fourth major revision – contains advances in consumer protection.

“Financial counsellors in particular welcome provisions around family violence, stronger protections for guarantors, better promotion of free or low fee accounts and more proactive approaches to people experiencing financial hardship,” she said.

Banks have trained more than 130,000 staff on the new requirements in the code so it can begin operating from tomorrow (1st July 2019). Information about the Code has been translated into Mandarin (simplified Chinese), Arabic, Vietnamese, Tagalog/Filipino, Hindi, Spanish and Punjabi.

The Financial Services Royal Commission asked for further changes to the Code which will be implemented by March 2020.

For more information on the new Banking Code of Practice visit ausbanking.org.au/code.

Australians particularly at risk of financial deception

Amid the ongoing discussion around who should bear the responsibility for assisting vulnerable customers, recent data has revealed further need for targeted care and education, as Australians are falling prey to bank fraud and other financial scams at an alarming rate, via Australian Broker.

According to the KPMG Global Banking Fraud Survey, 61% of banks worldwide have reported an increase in fraud – both in value and volume – over the past three years, with Australia being among the countries hit the hardest.

“We are seeing a disproportionately high volume of scam attempts on Australians – there were 177,000 scam reports here last year, costing almost half a billion dollars. This compared to around 85,000 scam reports in the US and UK, with far bigger populations,” said Natalie Faulkner, KPMG global fraud lead.

KPMG’s survey found customer awareness is key for detecting fraud and reducing losses, and the firm called for more to be done to educate consumers. While branch staff in banks are a major point of contact, brokers – who now help six in 10 home owners to secure a mortgage – are naturally on the front line of this work.

“Education should be multifaceted to reach different audiences. For example, many scam victims tend to be the elderly or socially isolated, so education should not just be through digital channels but also through television, traditional media and even face-to-face sessions with vulnerable customer groups,” said Faulkner.

The data also revealed that cyber-related fraud is the most significant challenge faced worldwide, a reflection of the growth in digital banking.

“This is set in the context of a changing global banking landscape, where branch networks are shrinking, volumes of digital payments are increasing and there is less customer face time,” explained Faulkner.

Open banking – which will be implemented next week – was mentioned as an emerging challenge in fraud risk, as it will see banks allowing third parties to access their customer data.

However, Faulkner noted, “On a positive note, having more transparency across accounts will enable the banks to know their customer more holistically and trace funds in fraud detection.”

Monthly average losses to NBN scams almost triple in 2019

Australians are losing more money to NBN scams, with reported losses in 2019 already higher than the total of last year’s losses, according to the ACCC.

Consumers lost an average of more than $110,000 each month between January and May this year, compared with around $38,500 in monthly average losses throughout 2018 – an increase of nearly 300 per cent.

“People aged over 65 are particularly vulnerable, making the most reports and losing more than $330,000 this year. That’s more than 60 per cent of the current losses,” ACCC Acting Chair Delia Rickard said.

“Scammers are increasingly using trusted brands like ‘NBN’ to trick unsuspecting consumers into parting with their money or personal information.”

Common types of NBN scams include:

Someone pretending to be from NBN Co or an internet provider calls a victim and claims there is a problem with their phone or internet connection, which requires remote access to fix. The scammer can then install malware or steal valuable personal information, including banking details.
Scammers pretending to be the NBN attempting to sell NBN services, often at a discount, or equipment to you over the phone.
Scammers may also call or visit people at their homes to sign them up to the NBN, get them a better deal or test the speed of their connection. They may ask people to provide personal details such as their name, address, date of birth, and Medicare number or ask for payment through gift cards.
Scammers calling you during a blackout offering you the ability to stay connected during a blackout for an extra fee.

It is important to remember NBN Co is a wholesale-only company and does not sell services directly to consumers.

“We will never make unsolicited calls or door knock to sell broadband services to the public. People need to contact their preferred phone and internet service provider to make the switch,” NBN Co Chief Security Officer Darren Kane said.

“We will never request remote access to a resident’s computer and we will never make unsolicited requests for payment or financial information.”

“If someone claiming to work ‘for the NBN’ tries to sell you an internet or phone service and you are unsure, ask for their details, hang up, and call your service provider to check if they’re legitimate. Do a Google search or check the phone book to get your service provider’s number, don’t use contact details provided by the sales person,” Ms Rickard said.

“Never give an unsolicited caller remote access to your computer, and never give out your personal, credit card or online account details to anyone you don’t know – in person or over the phone – unless you made the contact.”

“It’s also important to know that NBN does not make automated calls to tell you that you will be disconnected. If you get a call like this just hang up.”

“If you think a scammer has gained access to your personal information, such as bank account details, contact your financial institution immediately.”

Inducing Consumer Paralysis

Do you think you are paying more than you should for energy, banking, insurance, internet and phone services? You are not alone, and you are probably right. From The Conversation.

Companies offer a growing number of deals that supposedly enable you to choose what is best for you. Every basic economics textbook tells us greater choice should deliver cheaper prices. But in reality this isn’t necessarily the case.

So what’s going on?

A big part of the answer is that businesses are taking advantage of the behavioural phenomenon of “consumer paralysis” to maximise profits.

They provide us with many plans and deals to make us feel like we are in control, but too many choices actually leads most of us to make a bad (or no) choice.

Energy pricing

Let’s consider how this works in the context of Australia’s electricity market.

In most areas of the country, residential customers have at least half a dozen retailers to choose from.

Market share by generation capacity by region, January 2018. ACCC, Retail Electricity Pricing Inquiry Final Report

Nonetheless, according to the Australian Consumer and Competition Commission, electricity prices and profit margins are among the highest in the world, and rising. The consumer watchdog calculates that in the decade to 2018 the average residential electricity bill increased by 55% (or 35% in real terms) – and only a very small part of that had to do with alleged culprits such as renewable energy.

Australia’s biggest electricity company, AGL, made a net profit of A$1.6 billion in 2018 – 194% more than the year before.

Depending on where you live, AGL offers up to 11 energy plans to residential customers. There’s the “Savers” plan, “Savers Online”, “Everyday”, “Freedom”, “Standing Offer”, “Essentials”, “Essentials Plus”, and so on.

Each plan, in turn, has four to eight tariff type options: “Flexible Price”, “Time of Use Interval”, “5 Day Time of Use”, “Single Rate”, “Two rate: single rate with controlled load”, “Single Rate Demand Opt-in”, and so on.

That adds up to literally dozens of price plans from just one retailer. Other companies are hardly better. For a customer in inner Sydney, there are more than 350 retail plans to choose from.

All this “choice” gives the appearance of a competitive market, but its effect is the opposite. It give retailers wriggle room to charge more, not less.

Experiments in choice behaviour

Many experiments over the past three decades have demonstrated the ubiquity of too much choice leading to consumer paralysis.

One classic experiment was run by psychologists Sheena Iyengar and Mark Lepper in a San Francisco supermarket in 1999. Customers visiting the store were given a chance to sample jams. Half the time they were allowed to taste up to six jams; the other half they could taste up to 24 jams.

Traditional economics says a consumer is much more likely to find a jam they really like with a sample of 24 rather than six. So offering 24 jams should lead to more jam purchases.

Yet exactly the opposite was found. Of the consumers who chose to taste jams, only 3% of those who could sample 24 jams ended up buying jam, whereas 30% (or 10 times more) of those who could sample just six jams ended up buying.

More choices provided, more paralysis.

More recently, in 2012, Iyengar’s Columbia University colleague Eric Johnson and others reported on an experiment with much greater consequences.

They asked people to choose health insurance coverage from a set of four or eight options. The options varied on monthly premiums and deductibles. When given four options, 42% of subjects chose the best value option. On average their choices cost about $200 more than the best option on offer.

When given eight options, only 21% chose the best option – no better than simply making a random choice.

Reinforcing psychological biases

Given the massive number of products and plans available in the energy, banking, insurance, internet and mobile phone sectors, the time and effort needed to choose the best deal leaves us feeling overwhelmed and overloaded. In response, we rely on shortcuts (rules of thumb) to save both time (and our sanity).

But these shortcuts can also cause biases that result in further paralysis, including:

Present bias – we put much greater weight on the present than the future. Since the cost of making decisions happens in the present (like the time and effort to compare options and switch services) while the benefits happen later (like saving money), we minimise the time we spend making decisions
Status quo bias – we tend to stick with a chosen option or default, even when a much better option may be available
Loss aversion – we place much greater weight on losses and often overestimate the chance of a bad outcome.

There is considerable evidence pointing to how these biases lead to consumer paralysis in the retail banking and energy sectors.

In 2017, Britain’s energy regulator, Ofgem, ran a randomised control trial involving more than 130,000 electricity customers. Participants received personalised letters either from Ofgem or their current provider offering substantially better electricity deals.

The result: compared with the control group in which only 1% switched tariffs within the next month, 3.4% of those who received an offer from their electricity provider switched to a better deal. Even when presented with notable savings, more than 96% stuck with the status quo.

Results of Ofgem’s Cheaper Market Offers Letter (CMOL) trial. Ofgem

Other Ofgem research shows that among those who have not switched energy plans, 51% consider it a hassle they don’t have time for, and 48% worry that things would go wrong.

Yvette Hartfree and her colleagues at the University of Bristol’s Personal Finance Research Centre have noted similar fears among bank customers: “The biggest concern for those considering switching is that something will go wrong at some point in the process of switching.”

Taking action

We should not be surprised that energy companies and others use an avalanche of choice to confuse us. It is a brilliant business strategy: it seems more competitive from a traditional assessment, yet actually reduces competition.

So what can you do?

On your own, you will need to make a conscious effort to overcome paralysis. You need to devote the time to carefully compare offers.

Fortunately, you can find tools that can help, such as the Australian government’s energy comparison website. However, be wary of commercial “switching services” and websites that provide comparisons. These operations are often being paid by retailers. Their motives are not necessarily to direct you to the best deal.

What can we do collectively?

One option is government action to ensure switching services are trustworthy. At a minimum, there should be guidelines that switching services not take payments from retailers, and only charge you when you actually save money.

Another option is to form “consumer unions”, which can bargain collectively to get members better deals. The potential of community groups to leverage bulk-buying arrangements has been demonstrated in other contexts. In Victoria’s Gippsland region, for example, local organisations have banded together to offer discounts on renewable energy technology.

There’s no reason something similar could not be done to overcome the choice problems induced by big energy retailers and the like.

Author: Robert Slonim, Professor of Economics, University of Sydney