Category: Social Trends

ASIC Stops More Pay Day Lenders

ASIC annouced today enforcable undertaking with Payday lenders Web Moneyline and Good to Go Loans, to cease using a loan product, called OACC2, following concerns raised by ASIC that the product may not have complied with the small amount credit contract provisions under the National Consumer Credit Protection Act 2009 (National Credit Act).

Both lenders are required to

  • write off all outstanding OACC2 loans including any outstanding debts which have arisen as a result of entering into these loans;
  • notify the relevant credit reporting body that these loans have been settled, in order to correct the affected consumers’ credit records; and
  • not enter into the OACC2 loan product with any new consumers.

Here are the ASIC releases:

Payday lender Web Moneyline has entered into an Enforceable Undertaking with ASIC to cease using a loan product following concerns raised by ASIC that the product may not have complied with the small amount credit contract provisions under the National Consumer Credit Protection Act 2009 (National Credit Act).

ASIC’s investigation identified that the loan product, called OACC2, was provided to consumers on terms which fell outside the definition of a small amount credit contract. However, on the same day consumers entered into an OACC2 loan, almost all of the OACC2 agreements were modified to repay the loan at higher regular repayment amounts over a shorter period of time, which may have exposed consumers to a higher risk of default. Web Moneyline may have charged above the cap on fees and charges had the loans been construed as small amount credit contracts as defined under the National Credit Act.

Under the Enforceable Undertaking , Web Moneyline is required to:

  • write off all outstanding OACC2 loans including any outstanding debts which have arisen as a result of entering into these loans;
  • notify the relevant credit reporting body that these loans have been settled, in order to correct the affected consumers’ credit records; and
  • not enter into the OACC2 loan product with any new consumers.

ASIC Deputy Chairman Peter Kell said, ‘Financially vulnerable consumers can be at particular risk from this sort of activity, and in many cases will have little real understanding of the greater risks of default they are being exposed to. ASIC will take action to protect those consumers from falling victim to unsuitable payday loans.’

All consumers with outstanding debts from OACC2 loans taken out between 21 August 2014 and 26 May 2015 are not required to make any more payments and will shortly receive communication from Web Moneyline confirming that their loan is now finalised.

Consumers who believe they may have entered into a loan contract with Web Moneyline (either in-store or online) that was unsuitable, are encouraged to lodge a complaint with the Financial Ombudsman Service (FOS) on 1800 367 287 or info@fos.org.au.  If you need help lodging a complaint with FOS, you can talk to a free and independent financial counsellor by ringing the National Debt Helpline on1800 007 007 during business hours. ASIC’s MoneySmart website has useful guidance on how payday loans work and alternative credit options.

 

Payday lender Good to Go Loans has entered into an Enforceable Undertaking with ASIC to cease using a loan product following concerns raised by ASIC that the product may not have complied with the small amount credit contract provisions under the National Consumer Credit Protection Act 2009 (National Credit Act).

ASIC’s investigation identified that the loan product, called OACC2, was provided to consumers on terms which fell outside the definition of a small amount credit contract. However, on the same day consumers entered into an OACC2 loan, almost all of the OACC2 agreements were modified to repay the loan at higher regular repayment amounts over a shorter period of time, which may have exposed consumers to a higher risk of default. Good to Go Loans may have charged above the cap on fees and charges had the loans been construed as small amount credit contracts as defined under the National Credit Act.

Under the Enforceable Undertaking, Good to Go Loans is required to:

  • write off all outstanding OACC2 loans including any outstanding debts which have arisen as a result of entering into these loans;
  • notify the relevant credit reporting body that these loans have been settled, in order to correct the affected consumers’ credit records; and
  • not enter into the OACC2 loan product with any new consumers.

ASIC Deputy Chairman Peter Kell said, ‘ASIC will continue to take action to protect financially vulnerable consumers, many of whom are recipients of welfare payments, from falling victim to unsuitable payday loans.’

All consumers with outstanding debts from OACC2 loans taken out between 18 May 2014 and 20 May 2015 are not required to make any more payments and will shortly receive communication from Good to Go Loans confirming that their loan is now finalised.

Consumers who believe they may have entered into a loan contract with Good to Go Loans (either in-store or online) that was unsuitable, are encouraged to lodge a complaint with the Financial Ombudsman Service (FOS) on 1800 367 287 or info@fos.org.au.  If you need help lodging a complaint with FOS, you can talk to a free and independent financial counsellor by ringing the National Debt Helpline on 1800 007 007 during business hours. ASIC’s MoneySmart website has useful guidance on how payday loans work and alternative credit options

The Growing Gap Between Employment And Financial Security

The September update of the Digital Finance Analytics Household Finance Security Index, released today, underscores the growing gap between employment, which remains relatively strong, and the Financial Security of households.  We discussed this recently on ABC The Business. The Index fell from 98.6 in August to 97.5 in September.

This is below the 100 neutral setting, and continues the decline since December 2016.  Watch the video, or read the transcript.

The state by state view highlights a fall in NSW, while VIC holds higher, and there was a rise in WA from February 2017 lows. This highlights the fact the households across the national are under different levels of pressure.

Tracking by age bands we find younger households are significantly less confident, compared with those aged 50-60 years.  But across the board, the general trend is lower.

Property ownership remains a large factor, with those renting still below those owning property. We also see an ongoing decline in property investor confidence, thanks to tighter underwriting standards, higher mortgage rates, and the reduction in interest only loans availability.

Looking at the scorecard, there was a 4% fall in households comfortable with their savings, as they are forced to raid them to cover ongoing expenses (and the low returns on deposit balances as the banks seek to build margin).  There was a rise of nearly 3% of households who were uncomfortable with the amount of debt they hold, reflecting higher mortgage rates, especially on investment loans and interest only loans, and concerns about future rate movements. Finally, more households reported their overall net worth has deteriorated as home prices came under pressure.

The disconnect is that while people can, in the main, get some work, their earned income is not rising as fast as costs. We also find more households relying of a larger mix of fragmented part-time jobs, which tend to be less predictable.  As a result, we expect the current trends to continue, as momentum in the housing sector ebbs.  There is no obvious circuit breaker available in the current low interest rate, low growth environment.

By way of background, these results are derived from our household surveys, averaged across Australia. We have 52,000 households in our sample at any one time. We include detailed questions covering various aspects of a household’s financial footprint. The index measures how households are feeling about their financial health. To calculate the index we ask questions which cover a number of different dimensions. We start by asking households how confident they are feeling about their job security, whether their real income has risen or fallen in the past year, their view on their costs of living over the same period, whether they have increased their loans and other outstanding debts including credit cards and whether they are saving more than last year. Finally we ask about their overall change in net worth over the past 12 months – by net worth we mean net assets less outstanding debts.

We will update the results again next month.

UK Government Plans to Increase Social Housing Grants

From Moody’s

Last Wednesday, UK Prime Minister Theresa May announced that housing associations and local authorities will receive an additional £2 billion in grants for social (i.e., public) housing, including social rented homes. She also announced that rent increases will be set at CPI plus 1% starting in fiscal 2021 (which starts 1 April 2020) for five years. These announcements are credit positive for English housing associations because they signal greater support for the social rented sector.

Increased grant funding will reduce external financing needs and provide incentives to focus on social renting activities, which provide more stable cash flow than markets sales. The rent-setting regime provides clarity about housing associations’ operating environment and signals a shift from the previous government policy, which had negative financial effects on the sector.

The amount of grant funding available under the Affordable Homes programme for housing associations and local authorities will increase by £2 billion to £9.1 billion over the length of the program. Housing associations historically have relied on government grants to finance the production of new social homes, but such grants have significantly dwindled since the financial crisis.

The new grant programme aims to fund the construction of an additional 25,000 homes, and we expect the average subsidy per home to more than double to £80,000 from £32,600 in the last allocation round of the programme in 2016 and from £23,500 in the 2014 round. Although the distribution of the grants will depend on yet-to-be-defined criteria that determines which areas are most in need, we expect the 39 English housing associations that we rate to receive £650-£900 million of new grant funding, which would contribute to financing 8,000-11,250 homes.

The additional grants will reduce housing associations’ external financing needs, and should reduce future borrowing, which we currently expect will reach nearly £4 billion during fiscal 2018-20. However, some housing associations may choose to use the freed-up financial capacity to further increase their production of homes for open market sale rather than to stabilise indebtedness.

The grant programme signals a rebalancing of the government’s position in favour of rented social housing. The social letting business provides more stable cash flows for housing authorities than low-cost home ownership programmes, which had been at the centre of the previous housing policy. The lack of grants for building social rented homes and political pressure had encouraged housing associations to subsidise social homes by building units for open market sale that expose housing associations to the cyclicality of the housing market. The share of such sales to turnover has steadily increased over the past five years, reaching 15% in fiscal 2016 for our rated issuers and more than 40% for a small number of housing associations. Hence, this shift in the availability of funding and the direction of policy is credit positive.

It’s ‘crunch time’ for Australian households

From Business Insider.

Australian households are in a vulnerable financial position, especially those who have taken out a mortgage. And in an era of weak incomes growth, soaring energy prices and high levels of indebtedness, with the prospect of higher interest rates on the way, many intend to cut discretionary spending in anticipation of even tighter household budgets.

That’s the finding of the latest AlphaWise survey conducted by Morgan Stanley, which paints an unsettling picture on the outlook for not only Australia’s retail sector, but also the broader economy.

Yes, the weakness in retail sales over the past two months may soon become entrenched. The “crunch time” for Australian households, as Morgan Stanley puts it, has begun.

“In early June, we expressed the view that the Australian consumer faces a domestic cash flow and credit crunch,” the bank wrote in a note released this week.

“Income growth has not recovered, ‘cost of living’ inflation is re-accelerating and ‘macro-prudential’-related tightening of credit conditions is extending from housing into consumer finance.”

In order to test how households may respond to higher interest rates, whether as a result of macroprudential measures to slow investor and interest-only housing credit growth or official moves from the Reserve Bank of Australia (RBA), Morgan Stanley conducted a national survey of 1,836 mortgagors to identify household conditions during late July and early August.

Australia’s 2016 census found that 34.5% of households were currently paying off a mortgage.

Morgan Stanley says the survey was designed to provide insight into the health of the household balance sheet, including their spending intentions as a result of higher mortgage rates.

The news was not good.

“Findings from the AlphaWise survey confirm the stresses in the consumer sector we have been highlighting for some time now,” it says.

“Most households have minimal buffers against a shock to their income, and expect to respond to higher debt servicing costs by drawing down on savings and cutting back on expenditure.

“Other sectors of the economy may be able to offset some of the headline weakness, but the concentrated exposure of the household sector and economy to an extended housing market is posing an increasingly important structural and cyclical risk to consumer spending.”

Of those households surveyed, 54% said they intended to cut back on expenditure in response to higher interest rates, with a further 25% planning to draw down on their savings to cope with higher servicing costs, a pattern that has been seen in Australia’s savings ratio which fell to a post-GFC low in the June quarter.

Somewhat alarmingly, 40% of those surveyed indicated that they did not save at all over the past year, particularly among low-income households.

Source: Morgan Stanley

“Respondents to the survey had extremely small income buffers, with around 40% stating that they did not save over the past year,” Morgan Stanley says.

“This was the case across the income distribution, including 30% of those earning more than $100,000.

“The RBA has referred to such households as living ‘hand-to-mouth’, and they largely attributed the lack of savings to an absence of income growth and a general increase in expenses, with a skew towards necessary rather than discretionary items.”

The bank says that the survey’s findings marry up with its consumer “crunch time” thesis where discretionary spending gets squeezed due to flat wage growth, rising essentials costs and tightening credit conditions.

And, perhaps explaining why consumer sentiment remains at depressed levels, Morgan Stanley says the majority of households expect this trend to continue.

“Only around 13% of respondents expect to be able to save more in the next 12 months,” it says.

“With households increasingly eating into their savings to fund expenditure, any shock to disposable income via further rate rises or lower income would have a disproportionate hit to consumption.”

For those unable or unwilling to draw down further on their savings, the survey found that many planned to cut back discretionary spending levels, especially when it came to holidays and social occasions such as entertainment or eating out.

“The survey suggests Holidays/Vacations and Entertainment/Dining are the categories consumers are most likely to cut back on as interest rates rise,” the bank says.

Providing clout to that view, it also mirrors weakness in the Ai Group’s Performance of Services Index (PSI) for September which revealed that activity levels across Australia’s hospitality sector — measuring accommodation, cafes and restaurants — declined at the fastest pace on record in September.

“Respondents in retail and hospitality are reporting reduced spending by consumers due to a mix of increased household electricity costs, flat income growth, and relatively poor consumer confidence,” the Ai Group said following the release of the PSI report.

Separate data from the Australian Bureau of Statistics (ABS) also found that spending at cafes, restaurants and takeaway food services fell by 1.3% in August, more than twice as fast as the decline in total retail sales over the same period.

Once is an anomaly, twice is a trend.

Throw in a third indicator, suggesting that households intend to cut back spending in these areas, and it’s understandable why many think this could be the start of a prolonged period of consumer weakness.

Morgan Stanley certainly thinks it is, forecasting that household consumption growth — the largest part of the Australian economy at a smidgen under 60% — will decelerate sharply over the next 18 months.

Source: Morgan Stanley

“We forecast the squeeze on overall disposable income will see discretionary consumption volumes slow to just 0.2% in 2018, dragging overall consumption growth down to 1.1% and well below consensus of 2.5%,” it says.

That growth in overall consumption next year would be only half the level Morgan Stanley is currently forecasting for 2017.

Given that pessimistic outlook, it says that official interest rates will remain unchanged at 1.5% throughout next year, making it somewhat of an outlier compared to current consensus.

“Combined with a broader slowdown in the housing cycle, we see the RBA staying on hold at 1.5% right through 2018, in contrast to the market pricing of a tightening cycle commencing [in the second quarter of next year]”.

And, given the risks, it says that government investment may need to ramp up even further in order to reduce recession risks.

“[Against] this backdrop, we see the gathering momentum behind a public investment program as necessary to mitigate recession risks, rather than sufficient to drive overall growth back to, or above, trend.”

The RBA’s latest forecasts have GDP growing at 3.25% by the end of next year before accelerating to 3.5% by the end of 2019. Both figures are well above the 2.75% level that many deem to be Australia’s trend growth level.

If Morgan Stanley is right about the largest and most important part of the Australian economy, those forecasts will be hard to achieve.

In such a scenario, it’s unlikely that wage or inflationary pressures would build to a sufficient level to justify a rate increase from the RBA. Indeed, it would likely spur on renewed talks of rate cuts, particularly should business and government investment start to weaken.

While there are plenty of good signals being generated by the Australian economy for the RBA to be optimistic about, especially when it comes to the labour market, should the household sector weaken further — and there’s more than a few signs that it is — it’s unlikely that the RBA would respond by making it even tougher for household budgets.

Morgan Stanley says the AlphaWise survey has a margin of error of +/-1.92% at a 90% confidence level.

Mortgage holders struggling under rate hikes

From Australian Broker.

A significant percentage of mortgage holders are struggling to cover their monthly repayments while a large proportion has already been slugged with higher interest rates despite the official cash rate remaining steady at 1.5%.

These results come from new research commissioned by mortgage brokers iSelect through Galaxy Research which polled over 1,000 Australian households. The study found that 25% were experiencing difficulty covering their mortgage repayments. In the same vein, the research suggests that 33% have had their interest rates increased in the past year.

“A third of home owners have had their rate increase during the past 12 months and if the RBA was to increase the official cash rate, no doubt most lenders would quickly follow suit. This would mean more and more Aussie homes will have to find ways to cut back in order to afford their increased home loan repayments,” said Laura Crowden, spokesperson for iSelect Home Loans.

She expressed her concern that a quarter of households were already in financial difficulties given that the official rate has been forecast to rise in the coming year.

“Despite having access to low interest rates, record house prices have forced many families to significantly extend themselves with almost 40% of households making their payments without having a surplus left over,” she said.

“As such it is not surprising that many Aussie home owners are already struggling to make their monthly repayments even while interest rates are low.”

The research found if interest rates were to rise by 1%, more than 780,000 mortgage holders would struggle to make repayments. This includes 632,000 households which would have to cut back costs to cover repayments and 150,000 which would be forced into further debt.

“We know from speaking to our customers that many Aussies are really feeling the pinch of rising cost of living pressures on their stretched household budget, especially as energy bills continue to skyrocket across much of the country,” Crowden said.

The research also found that a large percentage of mortgage holders were paying too much despite the low cash rate. In fact, 54% were paying an interest rate of 4% or more while 13% were paying over 5%.

Rising Household Debt: What It Means for Growth and Stability

From The IMFBlog.

Whilst increased household debt gives an economy a boost in the short term, the IMF has found it creates greater risk 3-5 years later, lifting the potential for a financial crisis, as household struggle to repay.  Given the ultra-high debt levels in Australia, this is an important observation.

Debt greases the wheels of the economy. It allows individuals to make big investments today–like buying a house or going to college – by pledging some of their future earnings.

That’s all fine in theory. But as the global financial crisis showed, rapid growth in household debt – especially mortgages – can be dangerous.

A new IMF study takes a close look at the likely consequences of growth in household debt for different types of economies, as well as steps that policy makers can take to mitigate these consequences and to keep debt within reasonable limits. The overall message: there is a tradeoff between the short-term benefits and the medium-term costs of rising debt, but there is plenty that policymakers can do to ease this tradeoff, according to Chapter Two of the IMF’s October 2017 Global Financial Stability Report.

Given the widespread misery the crisis caused, you might think people have become skittish about borrowing more. Surprisingly, that’s not the case. Since 2008, household debt as a proportion of gross domestic product has grown significantly in a sample of 80 countries. Among advanced economies, the median debt ratio rose to 63 percent last year from 52 percent in 2008. Among emerging economies, it increased to 21 percent from 15 percent.

Reversal of fortune

In the short term, an increase in the ratio of household debt is likely to boost economic growth and employment, our study finds. But in three to five years, those effects are reversed; growth is slower than it would have been otherwise, and the odds of a financial crisis increase. These effects are stronger at the higher levels of debt typical of advanced economies, and weaker at lower levels prevailing in emerging markets.

What’s the reason for the tradeoff? At first, households take on more debt to buy things like new homes and cars. That gives the economy a short-term boost as automakers and home builders hire more workers. But later, highly indebted households may need to cut back on spending to repay their loans. That’s a drag on growth. And as the 2008 crisis demonstrated, a sudden economic shock – such as a decline in home prices–can trigger a spiral of credit defaults that shakes the foundations of the financial system.

More specifically, our study found that a 5 percentage-point increase in the ratio of household debt to GDP over a three-year period forecasts a 1.25 percentage-point decline in inflation-adjusted growth three years in the future. Higher debt is associated with significantly higher unemployment up to four years ahead. And a 1 percentage point increase in debt raises the odds of a future banking crisis by about 1 percentage point. That’s a significant increase, when you consider that the probability of a crisis is 3.5 percent, even without any increase in debt.

The good news is that policy makers have ways to reduce risks. Countries with less external debt and floating exchange rates, and which are financially more developed, are better placed to weather the consequences.

Mitigating risks

Better financial-sector regulations and lower income inequality also help. But this is not the end of the story. Countries can also mitigate the risks by taking measures that moderate the growth of household debt, such as modifying the down payment required to purchase a house or the fraction of a household income that can be devoted to debt repayments. So, good policies, institutions, and regulations make a difference – even in countries with high ratios of household debt to GDP. And countries with poor policies are more vulnerable – even if their initial levels of household debt are low.

Australian household electricity prices may be 25% higher than official reports

From The Conversation.

The International Energy Agency (IEA) may be underestimating Australian household energy bills by 25% because of a lack of accurate data from the federal government.

The Paris-based IEA produces official quarterly energy statistics for the 30 member nations of the Organisation for Economic Cooperation and Development (OECD), on which policymakers and researchers rely heavily. But to provide this service, the IEA relies on member countries to provide it with good-quality data.

Last month, the agency published its annual summary report, Key World Statistics, which reported that Australian households have the 11th most expensive electricity prices in the OECD.

But other studies – notably the Thwaites report into Victorian energy prices – have reported that households are typically paying significantly more than the official estimates. In fact, if South Australia were a country it would have the highest energy prices in the OECD, and typical households in New South Wales, Queensland or Victoria would be in the top five.

A spokesperson for the federal Department of Environment and Energy, the agency responsible for providing electricity price data to the IEA, told The Conversation:

Household electricity prices data for Australia are sourced from the Australian Energy Market Commission annual Residential electricity price trends report. The national average price is used, with GST added. It is a weighted average based on the number of household connections in each jurisdiction.

The Australian energy statistics are the basis for the Australia data reported by the IEA in their Key world energy statistics. The Department of the Environment and Energy submits the data to the IEA each September. Some adjustments are made to the AES data to conform with IEA reporting requirements.

But it is clear that the electricity price data for Australia published by the IEA is at least occasionally of poor quality.

The Australian household electricity series in the IEA’s authoritative Energy Prices and Taxes quarterly statistical report stopped in 2004, and only resumed again again in 2012.

Between 2012 and 2016, the IEA’s reported residential price series data for Australia showed no change in prices.

Yet the Australian Bureau of Statistics’ electricity price index, which is based on customer surveys, showed a roughly 20% increase in the All Australia electricity price index over this period.

Australia is also the only OECD nation not to report electricity prices paid by industry.

Current prices

This year’s reported household average electricity prices are almost certainly wrong too. The IEA reports that household electricity prices in Australia for the first quarter of 2017 were US20.2c per kWh.

At a market exchange rate of US79c to the Australian dollar, this puts Australian household electricity prices at AU28c per kWh. Adjusted for the purchasing power of each currency, the comparable price is AU29c per kWh.

By contrast, the independent review of the Victorian energy sector chaired by John Thwaites surveyed the real energy prices paid by customers, as evidenced by their bills. In a sample of 686 Victorian households, those with energy consumption close to the median value were paying an average of AU35c per kWh in the first quarter of 2017. This is 25% more than the IEA’s official estimate. At least part of this difference is explained by the AEMC’s assumption that all customers in a competitive retail market are supplied on their retailers’ cheapest offers. But this is not the case in reality.

Surveying real electricity and gas bills drastically reduces the range of assumptions that need to be made to estimate the price paid by a representative customer. Indeed, as long as the sample of bills is representative of the population, a survey based on actual bills produces a reliable estimate of representative prices in retail markets characterised by high levels of price dispersion, as Australia’s retail electricity markets are.

Pointing to a reliable estimate of Victoria’s representative residential price is, of course, not enough to prove that the IEA’s estimate is wrong. It could just as easily mean that Victorians are paying way more than the national average for their electricity.

But the idea that Victorians are paying more than average does not stack up when we look at the state-by-state data, which suggests that Victoria is actually somewhere in the middle. Judging by the prices charged by the three largest retailers in each state and territory, Victorian householders are paying about the same as those in New South Wales and Queensland, less than those in South Australia, and more than those in Tasmania, the Northern Territory, Western Australia and the Australian Capital Territory.

Residential electricity prices. Author provided

The IEA can not reasonably be blamed for the inadequate residential data for Australia that they report, and the nonexistent data on electricity prices paid by Australia’s industrial customers. The IEA does not do its own calculation of prices in each country, but rather it relies on price estimates from official sources in those countries.

An obvious question that arises from this is where Australia really ranks internationally if we used prices that reflect what households are actually paying.

This is contentious, not least because prices in New South Wales, Queensland and South Australia increased – typically around 15% or more – from July this year. We do not know how prices have changed in other OECD member countries since the IEA’s recent publication (which covered prices for the first quarter of 2017). But we do know that prices in Australia have been far more volatile than in any other OECD country.

Assuming that other countries’ prices are roughly the same as they were in the first quarter of 2017, our estimate using the IEA’s data is that the typical household in South Australia is paying more than the typical household in any other OECD country. The typical household in New South Wales, Queensland or Victoria is paying a price that ranks in the top five.

It should also be remembered that these prices are after excise and sale tax. Taxes on electricity supply in Australia are low by OECD standards – so if we use pre-tax prices, Australian households move even higher up the list.

There are serious question marks over Australia’s official electricity price reporting. Policy makers, consumers and the public have a right to expect better.

Author: Bruce Mountain, Director, Carbon and Energy Markets., Victoria University 

How can we prevent financial abuse of the elderly?

From The Conversation.

Throughout Australia older people are losing their savings, property and homes through financial abuse, usually at the hands of persons close to them such as an adult child or grandchild.

A sense of entitlement, ‘Inheritance impatience’ or opportunism can encourage people to ‘help themselves’ to an older person’s assets.

Elder abuse is not a new problem. It has been occurring in Australia and elsewhere for generations – but its only now that serious steps are being taken to address it.

While the extent of elder abuse in Australia is unknown, conservative estimates suggest at least 9% of older Australians suffer from financial abuse. However, we know that because of the hidden nature of the problem, the majority of cases go unreported.

Sadly, a majority of elder financial abuse occurs within families, and is defined as the illegal or improper use of a person’s finances or property by another person with whom they have a relationship implying trust.

Government taking long overdue action

On October 1 this year the Commonwealth Attorney General announced a suite of measures to address elder abuse. These will include initiating a new peak body focused on elder abuse, an online knowledge hub, and education materials to better support older Australians.

But, as Michael Riley, CEO of the elder advocacy group Greysafe, notes: “We know the problems, we now need an action plan and timelines put in place to come up with solutions.”

Financial elder abuse can take many forms but common examples include misappropriation of the older person’s money; misuse of enduring powers of attorney; inappropriate dealing with an older persons property through a guarantee or an unauthorised mortgage; and failed assets for care arrangements.

The opportunities for elder financial abuse are exacerbated by the de-personalisation of banking services. An increase in electronic services means that older people are more vulnerable to such exploitation than in the past.

Although criminal law addresses matters such as theft and fraud, low conviction rates indicate the difficulty of bringing an elder abuse matter before a court. Furthermore, many older people do not want to pursue relatives in criminal proceedings – despite the experience they wish to maintain family relationships.

How banks can help

Part of the solution may rest with banks and financial institutions which are often at the front line when instances of elder financial abuse arise.

There has been some reluctance on the part of banks and financial institutions to address elder abuse citing concerns regarding inter alia privacy obligations, legal liability, and the absence of a consistent reporting framework.

To date, some bank staff receive training to deal with elder abuse detection and banks follow the industry guideline, Protecting Vulnerable Customers from Potential Financial Abuse. Banks have the capacity to identify suspect in-bank and electronic transactions.

While there is limited material publicly available regarding instances where banks have uncovered abuse, in the few reported cases where significant physical abuse and neglect have been the subject of legal consideration, misappropriation of the older person’s funds has been a common factor.

In the absence of a broad national reporting framework, at present there is no cohesive strategy as to how to deal with the elder financial abuse. Furthermore, there are no whistleblower protections for bank employees who may be exposed to legal action from families in the event that financial abuse is not proven. This can make bank employees reluctant to report suspected abuse.

To address this, the Australian Law Reform Commission (ALRC) recommended that the Code of Banking Practice should ensure that banks be obliged to take ‘reasonable steps’ to prevent the financial abuse of vulnerable customers.

Such steps include training staff to detect (through software or other means) and appropriately respond to abuse; ensuring ‘Authority to Operate’ forms are not obtained fraudulently and providing a framework for reporting abuse.

Federal Government must work with banks

Addressing elder financial abuse must be a centrepiece of the federal government’s overall elder abuse strategy. The test will be how, and to what extent, the banks will collaborate with government, relevant agencies, and each other.

As it stands, the requirement to take ‘reasonable steps’ lacks definition; it could encompass significant reform or the bare minimum. Furthermore, a comprehensive internal reporting framework within the banks is essential. If this national initiative is to succeed – mandatory reporting by banks of suspected abuse should be seriously considered.

Finally, public education campaigns targeting older people themselves, persons entering into power of attorney arrangements, and bank staff is the key to preventing such conduct in the first place.

Elder financial abuse has the potential to devastate individuals at the most vulnerable point in their lives – as well as have a detrimental impact on society as a whole.

While the federal government efforts to address elder abuse are to be applauded – we must ensure the opportunity is fully utilized and includes proper regulations within the banking sector.

Authors: Eileen Webb, Associate Professor, Curtin Law School, Curtin University; Teresa Somes, Macquarie University

Top 10 Mortgage Stress Count Down – September 2017

Mortgage stress rose again in September according to Digital Finance Analytics analysis, crossing the 900,000 household rubicon for the first time. The latest RBA data shows household debt to income rose again in June, to 193.7, further confirmation of Australia’s debt problem.

Across the nation, more than 905,000 households are estimated to be now in mortgage stress (last month 860,000) and more than 18,000 of these in severe stress. This equates to 28.9% of households. A rising number of more affluent households are being impacted as the contagion of mortgage stress continues to spread beyond the traditional mortgage belts. We estimate that more than 49,000 households risk default in the next 12 months, up 3,000 from last month.

Watch the video to learn more, and count down the latest top 10 post codes. We had some new regions “promoted” into the list this time.

The main drivers of stress are rising mortgage rates and living costs whilst real incomes continue to fall and underemployment remains high.  Some households are now making larger mortgage repayments following out of cycle interest rate rises, and are simultaneously facing higher power prices, council rates and childcare costs. This remains a deadly combination and is touching households across the country, not just in the mortgage belts.

Our analysis uses the DFA core market model which combines information from our 52,000 household surveys, public data from the RBA, ABS and APRA; and private data from lenders and aggregators. The data is current to end September 2017. We analyse household cash flow based on real incomes, outgoings and mortgage repayments, rather than using an arbitrary 30% of income.

Households are defined as “stressed” when net income (or cashflow) does not cover ongoing costs. Households in mild stress have little leeway in their cash flows, whereas those in severe stress are unable to meet repayments from current income. In both cases, households manage this deficit by cutting back on spending, putting more on credit cards and seeking to refinance, restructure or sell their home.  Those in severe stress are more likely to be seeking hardship assistance and are often forced to sell. The debt-to-income (DTI) ratios in severely stressed households are on average eleven times their current annual incomes and this is high on any measure. The combined statistics suggest there are continuing concerns about underwriting standards.

We revised our expectation of potential interest rate rises, given the stronger data on the global economy. Probability of default extends our mortgage stress analysis by overlaying economic indicators such as employment, future wage growth and cpi changes.

Martin North, Principal of Digital Finance Analytics said that “continued pressure from low wage and rising costs means those with bigger mortgages are especially under the gun. These stressed households are less likely to spend at the shops, which will act as a further drag anchor on future growth. The number of households impacted are economically significant, especially as household debt continues to climb to new record levels”. The latest household debt to income ratio is now at a record 193.7.[1]

Gill North, joint Principal of Digital Finance Analytics and a Professorial Research Fellow in the law school at Deakin University, citing her recent research, suggests the Australian house party has been glorious – but the hangover may be severe and more should be done to mitigate future risks and harm to highly indebted households and the nation.[2]

She notes that at the beginning of 2016 the RBA and APRA stood largely aloof from concerns around levels of household debt and the major risk was complacency. While the RBA and APRA have been more vocal since and have taken steps to tighten lending standards, she calls for additional measures and highlights the continuing vulnerability of many households without financial buffers for adverse contingencies.[3]

Regional analysis shows that NSW has 238,703 households in stress (238,755 last month), VIC 243,752 (236,544 last month), QLD 168,051 (146,497 last month) and WA 124,754 (118,860 last month). The probability of default rose, with around 9,300 in WA, around 9,100 QLD, 12,800 in VIC and 13,100 in NSW.

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[1] RBA E2 Household Finances – Selected Ratios June 2017

[2] Gill North ‘The Australian House Party Has Been Glorious – But the Hangover May Be Severe: Reforms to Mitigate Some of the Risks’ in R Levy, M O’Brien, S Rice, P Ridge and M Thornton (eds), New Directions For Law In Australia (ANU Press, Canberra, 2017). An earlier version of this book chapter is available at https://ssrn.com/author=905894.

[3] See also, Gill North, ‘Regulation Governing the Provision of Credit Assistance & Financial Advice in Australia: A Consumer’s Perspective’ (2015) 43 Federal Law Review 369. An earlier draft of this article is available at https://ssrn.com/author=905894.

 

Mortgage stress up despite decline in rates

New research from Roy Morgan shows that mortgage stress has increased to 17.3% of borrowers in July, an increase of 0.3% points over the last 12 months, despite a decline in loan rates.

Home loan rates were based on the standard variable rate from the RBA which in the three months ended July 2017 averaged 5.25%, down from 5.40% for the same period in 2016.

These are the latest findings from Roy Morgan’s Single Source Survey (Australia) of over 50,000 consumers per annum, which includes interviews with over 10,000 owner occupied mortgage holders.

Increase in ‘At Risk’ and ‘Extremely at Risk’ mortgage holders

Over the last 12 months there has been an increase in mortgage stress for both those considered to be ‘At Risk’ (which is based on the amount originally borrowed) and those ‘Extremely at Risk’ (based on the amount currently outstanding). In the three months to July 2016, 17.0% of mortgage holders were ‘At Risk’, this has increased to 17.3% in July 2017. Over the same period the proportion that were ‘Extremely at Risk’ also increased from 12.4% to 12.8%.

Mortgage Stress – Owner Occupied Mortgage Holders



Mortgage stress is based on the ability of home borrowers to meet the repayment guidelines currently provided by the major banks. 1. “At Risk” is based on those paying more than a certain proportion of their household income (15% to 50% depending on income) into their loans based on the appropriate Standard Variable Rate reported by the RBA and the amount the respondent initially borrowed. 2. “Extremely at Risk” is based on those paying more than a certain proportion of their household income (30% to 45% depending on Income) into their home loans based on the Standard Variable Rate set by the RBA on the amount respondents currently owe on their home loan. Source: Roy Morgan Single Source (Australia) 3 months ended July 2016, n = 2,673, 3 months ended July 2017, n = 2,734. Base: Australians 14+ with owner occupied home loan

Household incomes of mortgage holder’s not keeping pace with borrowings

The main cause of the increase in mortgage stress was the fact that over the last year, the median household income of mortgage holders only increased by 2.0%, well behind the increase in the median amount borrowed (up 7.4%) and the median amount outstanding (up 13.1%).

Major Factors Impacting Increase in Mortgage Stress – Last 12 Months

1. Percentage change is based on 3 months to July 2017, compared to 3 months to July 2016. Source: Roy Morgan Single Source (Australia) 3 months ended July 2016, n = 2,673, 3 months ended July 2017, n = 2,734. Base: Australians 14+ with owner occupied home loan

The increase in mortgage stress was despite the fact that home loan rates (based on the RBA standard variable rate) over this period actually declined from 5.40% to 5.25%.