Social Trends – Page 172 – Digital Finance Analytics (DFA) Blog

Half Of Households Not Confident They Get Best Financal Deals – ASIC

According to a recent ASIC survey, about half of Australians are NOT confident they are getting the best deal when making important financial decisions. They found that:

57% of population with credit card (7,112,000) are NOT confident that they are getting the best deal on their credit cards
45% of population with a mortgage (3,609,000) are NOT confident that they are getting the best deal on their mortgage
48% of population who have superannuation (7,107,000) are NOT confident that they have it sorted.

Australians don’t often seek independent expert advice when making important financial decisions.

84% of people with credit cards did not seek independent expert advice on the matter
54% of people with a mortgage did not seek independent expert advice on the matter
67% of people who set up a super did not seek independent expert advice on the matter

This demonstrates that many consumers don’t know where to go for independent information or how to make the best choice and find out what’s important in choosing a credit card, mortgage or superannuation. Nearly all Australians (92%) think it would be useful if all Australians had access to a free and independent source of help on financial matters such as managing their money or how to reach their financial goals. Looking at the product specific findings:

Credit cards : 57% (7,112,000) of Australians are unsure or don’t think they have the best deal on their credit cards. 84% of people (9,540,000) who have credit cards did not seek independent expert advice on the matter. Of those who have credit cards:
GENERAL: 84% of people with a credit card get no independent advice on credit cards yet 25% are confident they didn’t get a good deal; and 33% are either NOT confident, or don’t know if they got a good deal
YOUTH: Less 25 to 49 year olds (37%) are confident they are getting the best deal on their credit card than 16-24 year olds (42%). The highest numbers of confident people are in the 65+ age group but still 45% of them are unsure
AN ISSUE FOR 25 to 49 YEAR OLDS: Less 25-49 year olds than any other age group are confident that they think they’re getting the best deal out of their credit cards. Reasons for this are likely to be due to a very high proportion of the 25-49 year age group have a mortgage. Only 27% don’t have a mortgage compared to 72% of 50+ or 87% of 16-24. Hypothesis they may be more aware of the LOW rate of mortgages compared to credit cards, or that they should bundle CC into mortgage offer. Other age group’s confidence that they are getting the best deal on their credit cards is: 65+ are 55%; 50+ are 49%; 16-24 are 42%; 25-49 are 37%. (Average is 43%, so 25 to 49s are below average).
STATE: More people in SA (32%) are confident that they DON’T have a good deal on their credit card, than in any other state. Less Victorians/Tasmanians likely to think they don’t have a good deal (22%)
GENDER: Women feel less confident then men that they are getting the best deal on their credit card (47%) to (53%)
ADVICE: Among those who had sought independent expert advice when getting a credit card half (54%) were confident that they were getting the best deal possible on their credit cards, compared to 34% of those who didn’t seek independent advice.
Mortgage: With 46% of people with a mortgage (3,609,000) NOT confident that are getting the best deal on their mortgage, there is a large portion of the population that lacks this assurance. Over half those with mortgages did not seek independent advice (54%). Young first home buyers seek less advice on mortgages than any other age group and are the least confident that they got the best deal on their mortgage. 65% of 18-24 year olds with a mortgage say they’re unsure or don’t think they got the best deal on their mortgage. Conversely, 25-49 year old home buyers were the most likely to seek independent advice (56%) and are more confident than any other age group that they got the best deal on their mortgage. People living outside capital cities were less likely to have sought independent expert advice when choosing a mortgage (37% vs 52%)
YOUTH: Fewer 16-24 year olds (35%) are confident they got the best deal on their mortgage, compared to any other age group. 25 to 49 year olds (57%) are highest. Average is 55%
YOUTH: Far more 16-24 year olds (36%) are confident they have did NOT get the best deal on their mortgage compared to 20% for 25-49 year olds. Average is 21%
YOUTH: Yet fewer 16-24 year olds (27%) than any other age group sought independent advice about their mortgage. Average is 46%; 25-49 year olds (56%); 50+ are 31% and 65+ are 23%
25 to 49 YEAR OLDS: More 25-49 year olds (56%) got advice than any other age group, compared to the average (42%)
ADVICE: 54% of people who have a mortgage did not seek independent advice.
Superannuation: Approximately half of Australians (48% or 7,107,000) are NOT confident they have their super sorted out. Though this statistic improves with age, there are still 29% of the population (1,505,000) aged 50+ who have NOT sorted their super or don’t know if it is. 67% of people (9,413,000) who last joined a superannuation fund did not seek independent expert advice. But among those that did, 67% were confident their superannuation was sorted out, compared to only 49% of all Australians who feel this confidence. It can be inferred that those who got advice, received value and confidence out of it.
AGE: Under 50s were much less likely to be confident their super was sorted, compared to other age groups; 16-24 at 39% and 25-49 at 41% and 50+ at 72%
STATE: More people in Victoria//Tasmania are likely to feel confident they have their super sorted than in any other state. Average is 52%. Victoria/ACT is 57% compared to 48% across all other states
ADVICE: Under 50s were less likely to have sought independent expert advice when choosing a super fund, compared to other age groups; 16-24 at 14%, 25-49 at 28%. The average of ALL people whether or not they have superannuation is 26%. The average of those with super is 33%.

Reflections on FSI

The final report of the Financial Systems Inquiry was released on Sunday. We already provided a summary of the 44 recommendations and discussed some of the specific proposals. It is of course a report to Government, so still a political process will run before we see what translates into policy, though some recommendations – for example changed capital rules – are outside the political processes, being the responsibility of the regulators. However, DFA wanted to reflect on the overall 350 page report.

We think this it is a fine, balanced and independent piece of work. Given the complex task, the various powerful lobbies involved, and the short time frame, this is a landmark study, and should provide direction for the financial services industry in Australia for the next few years.
The underlying philosophy, that the markets should be allowed to work, with regulation used where necessary to balance the various stakeholder capabilities in appropriate. More regulation is not always better. The emphasis on consumers is welcome.
The capital buffer recommendations are appropriate, and should be adopted by APRA. Capital levels need to be brought up to best global practice, and given the likely continued global push to lift capital higher, this process will continue for some time. Clearly there is a cost to do this, and the easy route will be for banks to trim deposit rates and lift loan rates to protect their margins and shareholders. The right course would be to expect the banks to drive greater efficiency to partly offset, at least, the costs of holding more capital. The bail-in bonds route will also provide additional buffers. The extra disclosure recommended is helpful.
The move to lift the capital ratios of banks with advanced IRB capital calculations will help to make the playing field more level than it is, but it will not necessarily be sufficient to fundamentally change the competitive landscape. We will continue to have four large, vertically integrated players dominating the market.
We believe the recommendation to rebalanced the regulatory focus towards competition is appropriate, as until now financial stability was the main game. As a result we have high industry concentration, and limited competition. This has led to super-profitable banks, which costs Australia Inc dear.
The financial services regulatory environment in Australia is complex, with ASIC, APRA, ACCC and RBA all stakeholders. The FSI report has not recommended major changes, though ASIC’s role will be enhanced to focus on products, and enhanced consumer protection. Will this be adequately funded by charging industry participants more? A body to review the Regulators is proposed (another layer of cost?)
The superannuation system was condemned as inefficient, and the proposals to drive fees lower, provide greater choice and have a default income structure on draw-down, are appropriate. We agree that the majority of directors in a super fund should be independent. Lets be clear, mandatory saving for retirement is a good policy, but the industry has been milking this for years, and changes need to be made. MySuper should be given a chance to work, but we like the idea of providers bidding for savings. The prospect of returns rising by 25% or more reflects the powerful impact the annual fees have on performance. Fees need to come down substantially.
The support for SMSF is appropriate, as is the emphasis on saving for retirement, not generic wealth creation. The removal of leverage in SMSF’s makes sense, given the rise in property investment, but it is worth remembering the shares are issued by companies who are often leveraged, so risk exists here too in a down turn!
The changes to advice are appropriate. Advisers need to declare their alignment to product providers, be better trained, and the concept of general advice should be tuned.
Card surcharging should be brought under control. There is no justification of consumers paying more than the cost of the transaction, yet some businesses are charging a percentage of transactions. We agree there is further work to do on interchange fees, and especially making the use of debit cards easier (thus avoiding card service fees).
The Treasurer will find several ways to lift taxes, including potentially revising the tax treatment of superannuation, and negative gearing. In addition, the report comments on GST in relation to financial services products, leaving the door open for GST to be extended.
The report recognises the impact of new technologies, and the comments on technology neutrality are appropriate. The report recommends a federated digital identity strategy that involves the Government setting up a framework under which private and public sectors compete to supply digital identities to consumers and businesses. This is needed because of increasing consumer preference for online, fraud concerns and efficiency. We think it understates the importance of P2P.
The main area of weakness relates to the SME sector, which is disadvantaged by the current banking environment. No significant recommendations were made in this important area.

FSI Report Out

The final FSI report is out, a 350 page document making 44 core recommendations. They received over 6.800 submissions and met more than 50 financial institutions as part of international consultations.

“Australia’s financial system has performed well since the Wallis Inquiry and has many strong characteristics. It also has a number of weaknesses: taxation and regulatory settings distort the flow of funding to the real economy; it remains susceptible to financial shocks; superannuation is not delivering retirement incomes efficiently; unfair consumer outcomes remain prevalent; and policy settings do not focus on the benefits of competition and innovation. As a result, the system is prone to calls for more regulation”.

The Inquiry has made recommendations on five specific themes:
• Strengthen the economy by making the financial system more resilient.
• Lift the value of the superannuation system and retirement incomes.
• Drive economic growth and productivity through settings that promote innovation.
• Enhance confidence and trust by creating an environment in which financial firms treat customers fairly.
• Enhance regulator independence and accountability, and minimise the need for future regulation.

Although the Inquiry considers competition is generally adequate, the high concentration and increasing vertical integration in some parts of the Australian financial system has the potential to limit the benefits of competition in the future and should be proactively monitored over time. The Inquiry’s approach to encouraging competition is to seek to remove impediments to its development. The Inquiry has made recommendations to amend the regulatory system, including: narrowing the differences in risk weights in mortgage lending; considering a competitive mechanism to allocate members to more efficient superannuation funds; and ensuring regulators are more sensitive to the effects of their decisions on competition, international competitiveness and the free flow of capital.

Here is the summary of recommendations by chapter. More commentary to follow, but much is in line with expectations. We are pleased to see comments on “Rename ‘general advice’ and require advisers and mortgage brokers to disclose ownership structures”.

Chapter 1 Resilience.

The Inquiry’s recommendations to improve resilience aim to: 1. Strengthen policy settings that lower the probability of failure, including setting Australian bank capital ratios such that they are unquestionably strong by being in the top quartile of internationally active banks. 2 Reduce the costs of failure, including by ensuring authorised deposit-taking institutions maintain sufficient loss absorbing and recapitalisation capacity to allow effective resolution with limited risk to taxpayer funds — in line with international practice.

Set capital standards such that Australian authorised deposit-taking institution capital ratios are unquestionably strong.
Raise the average internal ratings-based (IRB) mortgage risk weight to narrow the difference between average mortgage risk weights for authorised deposit-taking institutions using IRB risk-weight models and those using standardised risk weights.
Implement a framework for minimum loss absorbing and recapitalisation capacity in line with emerging international practice, sufficient to facilitate the orderly resolution of Australian authorised deposit-taking institutions and minimise taxpayer support.
Develop a reporting template for Australian authorised deposit-taking institution capital ratios that is transparent against the minimum Basel capital framework.
Complete the existing processes for strengthening crisis management powers that have been on hold pending the outcome of the Inquiry.
Maintain the ex post funding structure of the Financial Claims Scheme for authorised deposit-taking institutions.
Introduce a leverage ratio that acts as a backstop to authorised deposit-taking institutions’ risk-weighted capital positions.
Remove the exception to the general prohibition on direct borrowing for limited recourse borrowing arrangements by superannuation funds.

Chapter 2: Superannuation and retirement incomes

The Inquiry’s recommendations to strengthen the superannuation system aim to: 1. Set a clear objective for the superannuation system to provide income in retirement. 2. Improve long-term net returns for members by introducing a formal competitive process to allocate new workforce entrants to high-performing superannuation funds, unless the Stronger Super reforms prove effective. 3 Meet the needs of retirees better by requiring superannuation trustees to pre-select a comprehensive income product in retirement for members to receive their benefits, unless members choose to take their benefits in another way.

Seek broad political agreement for, and enshrine in legislation, the objectives of the superannuation system and report publicly on how policy proposals are consistent with achieving these objectives over the long term.
Introduce a formal competitive process to allocate new default fund members to MySuper products, unless a review by 2020 concludes that the Stronger Super reforms have been effective in significantly improving competition and efficiency in the superannuation system.
Require superannuation trustees to pre-select a comprehensive income product for members’ retirement. The product would commence on the member’s instruction, or the member may choose to take their benefits in another way. Impediments to product development should be removed.
Provide all employees with the ability to choose the fund into which their Superannuation Guarantee contributions are paid.
Mandate a majority of independent directors on the board of corporate trustees of public offer superannuation funds, including an independent chair; align the director penalty regime with managed investment schemes; and strengthen the conflict of interest requirements.

Chapter 3: Innovation

The Inquiry’s recommendations to facilitate innovation aim to: 1 Encourage industry and government to work together to identify innovation opportunities and emerging network benefits where government may need to facilitate industry coordination and action. 2. Strengthen Australia’s digital identity framework through the development of a national strategy for a federated-style model of trusted digital identities. 3. Remove unnecessary regulatory impediments to innovation, particularly in the payments system and in fundraising for small businesses. 4. Enable the development of data-driven business models through holding a Productivity Commission Inquiry into the costs and benefits of increasing access to and improving the use of private and public sector data.

Establish a permanent public–private sector collaborative committee, the ‘Innovation Collaboration’, to facilitate financial system innovation and enable timely and coordinated policy and regulatory responses.
Develop a national strategy for a federated-style model of trusted digital identities.
Enhance graduation of retail payments regulation by clarifying thresholds for regulation by the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority.
Strengthen consumer protection by mandating the ePayments Code. Introduce a separate prudential regime with two tiers for purchased payment facilities.
Improve interchange fee regulation by clarifying thresholds for when they apply, broadening the range of fees and payments they apply to, and lowering interchange fees.
Improve surcharging regulation by expanding its application and ensuring customers using lower-cost payment methods cannot be over-surcharged by allowing more prescriptive limits on surcharging.
Graduate fundraising regulation to facilitate crowdfunding for both debt and equity and, over time, other forms of financing.
Review the costs and benefits of increasing access to and improving the use of data, taking into account community concerns about appropriate privacy protections.
Support industry efforts to expand credit data sharing under the new voluntary comprehensive credit reporting regime. If, over time, participation is inadequate, Government should consider legislating mandatory participation.

Chapter 4: Consumer outcomes

The Inquiry’s recommendations to improve consumer outcomes aim to: 1. Improve the design and distribution of financial products through strengthening product issuer and distributor accountability, and through implementing a new temporary product intervention power for the Australian Securities and Investments Commission (ASIC). 2. Further align the interests of firms and consumers, and improve standards of financial advice, by lifting competency and increasing transparency regarding financial advice. 3. Empower consumers by encouraging industry to harness technology and develop more innovative and useful forms of disclosure.

Introduce a targeted and principles-based product design and distribution obligation.
Introduce a proactive product intervention power that would enhance the regulatory toolkit available where there is risk of significant consumer detriment.
Remove regulatory impediments to innovative product disclosure and communication with consumers, and improve the way risk and fees are communicated to consumers.
Better align the interests of financial firms with those of consumers by raising industry standards, enhancing the power to ban individuals from management and ensuring remuneration structures in life insurance and stockbroking do not affect the quality of financial advice.
Raise the competency of financial advice providers and introduce an enhanced register of advisers.
Improve guidance (including tools and calculators) and disclosure for general insurance, especially in relation to home insurance.

Chapter 5: Regulatory system

The Inquiry’s recommendations to refine Australia’s regulatory system and keep it fit for purpose aim to: 1. Improve the accountability framework governing Australia’s financial sector regulators by establishing a new Financial Regulator Assessment Board to review their performance annually. 2. Ensure Australia’s regulators have the funding, skills and regulatory tools to deliver their mandates effectively. 3. Rebalance the regulatory focus towards competition by including an explicit requirement to consider competition in ASIC’s mandate and conduct three-yearly external reviews of the state of competition. 4. Improve the process for implementing new financial regulations.

Create a new Financial Regulator Assessment Board to advise Government annually on how financial regulators have implemented their mandates. Provide clearer guidance to regulators in Statements of Expectation and increase the use of performance indicators for regulator performance.
Provide regulators with more stable funding by adopting a three-year funding model based on periodic funding reviews, increase their capacity to pay competitive remuneration, boost flexibility in respect of staffing and funding, and require them to undertake periodic capability reviews.
Introduce an industry funding model for the Australian Securities and Investments Commission (ASIC) and provide ASIC with stronger regulatory tools.
Review the state of competition in the sector every three years, improve reporting of how regulators balance competition against their core objectives, identify barriers to cross-border provision of financial services and include consideration of competition in the Australian Securities and Investments Commission’s mandate.
Increase the time available for industry to implement complex regulatory change.
Conduct post-implementation reviews of major regulatory changes more frequently.

Appendix 1: Significant matters

Explore ways to facilitate development of the impact investment market and encourage innovation in funding social service delivery. Provide guidance to superannuation trustees on the appropriateness of impact investment. Support law reform to classify a private ancillary fund as a ‘sophisticated’ or ‘professional’ investor, where the founder of the fund meets those definitions.
Reduce disclosure requirements for large listed corporates issuing ‘simple’ bonds and encourage industry to develop standard terms for ‘simple’ bonds.
Support Government’s process to extend unfair contract term protections to small businesses. Encourage industry to develop standards on the use of non-monetary default covenants.
Clearly differentiate the investment products that finance companies and similar entities offer retail consumers from authorised deposit-taking institution deposits.
Consult on possible amendments to the external administration regime to provide additional flexibility for businesses in financial difficulty.
Publish retirement income projections on member statements from defined contribution superannuation schemes using Australian Securities and Investments Commission (ASIC) regulatory guidance. Facilitate access to consolidated superannuation information from the Australian Taxation Office to use with ASIC’s and superannuation funds’ retirement income projection calculators.
Update the 2009 Cyber Security Strategy to reflect changes in the threat environment, improve cohesion in policy implementation, and progress public–private sector and cross-industry collaboration. Establish a formal framework for cyber security information sharing and response to cyber threats.
Identify, in consultation with the financial sector, and amend priority areas of regulation to be technology neutral. Embed consideration of the principle of technology neutrality into development processes for future regulation. Ensure regulation allows individuals to select alternative methods to access services to maintain fair treatment for all consumer segments.
Rename ‘general advice’ and require advisers and mortgage brokers to disclose ownership structures.
Define bank accounts and life insurance policies as unclaimed monies only if they are inactive for seven years.
Support Government’s review of the Corporations and Markets Advisory Committee’s recommendations on managed investment schemes, giving priority to matters relating to:
• Consumer detriment, including illiquid schemes and freezing of funds.
• Regulatory architecture impeding cross-border transactions and mutual recognition arrangements.
Introduce a mechanism to facilitate the rationalisation of legacy products in the life insurance and managed investments sectors.
Remove market ownership restrictions from the Corporations Act 2001 once the current reforms to cross-border regulation of financial market infrastructure are complete.

The Treasurer was at pains to point out this is a report to Government, for their consideration, not a Government report, allowing substantial wiggle room if required.

A Guide To Dealing With Debt Collectors

The Australian Competition and Consumer Commission (ACCC) and the Australian Securities and Investments Commission (ASIC) have launched Dealing with debt collectors: Your rights and responsibilities a free guide that helps consumers in trouble with debt understand their options so they know how to deal with collectors and creditors.

The consumer guide explains:

People’s legal rights and responsibilities if they owe a debt;
Where to seek help to work out a budget, negotiate a repayment plan, apply for hardship or better understand their financial and legal options;
What to do if a debt collector contacts them;
What sort of behaviour by debt collectors is not acceptable;
How to dispute an alleged debt or its amount; and
What to do if they are being taken to court.

Dealing with debt collectors also summarises how and when debt collectors can contact someone and provides examples of inappropriate behaviour by debt collectors.

‘If consumers are having problems repaying their debts, it’s important to take action without delay. This free guide explains the options available to consumers to help them cope with the situation and hopefully get back on track’, said ASIC Deputy Chairman Peter Kell.

‘The ACCC and ASIC encourage consumer advocacy groups and financial counsellors to refer consumers to the booklet to help them understand their legal rights and responsibilities if they owe a debt’, added Mr Kell.

ACCC Deputy Chair Delia Rickard said: ‘It is important for consumers to be aware of their rights when dealing with debt collectors and to know how to complain.

The ACCC and ASIC continue to receive complaints about the behaviour of some debt collectors and creditors. Consumers should expect to be treated professionally and in a manner that complies with Commonwealth consumer protection laws.

‘Where creditors or collectors disregard consumer protection laws and the rights of consumers, we will consider appropriate enforcement action against them’, added Ms Rickard.

Dealing with debt collectors: Your rights and responsibilities can be downloadedfrom ASIC’s MoneySmart or from the ACCC’s website.

Background information

In November 2013, the ACCC prosecuted a company ‘Excite Mobile Pty Ltd’, for engaging in false, misleading and unconscionable telemarketing practices, and using undue coercion in relation to debt collection. The Federal Court ordered the company to pay a penalty of $455,000 and the company’s two directors were ordered to pay penalties totaling $95,000 between them (refer to 266/13 MR).

In 2011, ASIC commenced proceedings in the Federal Court of Australia against one of Australia’s largest debt collection companies. In 2012, the Court found ACM Group Limited had harassed and coerced debtors and engaged in ‘widespread’ and ‘systemic’ misleading and deceptive conduct when recovering money (refer: 12-261 MR).

In July 2014,the ACCC and ASIC updated their industry guidance Debt collection guideline for creditors and collectors to reflect significant changes to the law, such as the introduction of the Australian Consumer Law in 2011 and changes to privacy laws in Australia. This industry guidance provides information and case studies for creditors and debt collectors about:

When it is appropriate to contact a debtor, including what constitutes contact and reasonable contact hours, methods or frequency of contact
How the need for collection activity will be greatly reduced when debtors act promptly and responsibly, and collectors are flexible, fair and realistic
New communication technologies developed since the initial publication, including the use of social media platforms and auto dialers, and the potential pitfalls to avoid in using such technologies; and
Key considerations when resolving debtor complaints and disputes.

Regulatory guide 96 Debt collection guideline: For collectors and creditors (RG 96)

ASIC’s MoneySmart website

ASIC’s MoneySmart website at moneysmart.gov.au has comprehensive and impartial information and tools for consumers about all aspects of personal finance, including managing loans and credit.

Debt collection industry research

The ACCC is also undertaking a research project into the debt collection industry to examine a number of concerns about debt collection practices.

The research is intended to inform the ACCC’s understanding of how the industry operates, in particular, the business models adopted in the industry and the influence this may have on activities that take place when collecting debts from consumers. The findings from the research will inform future initiatives designed to address the problems or issues identified.

It is expected that a research report will be issued in mid-2015.