ASIC makes product intervention order banning short term lending model

ASIC has used its product intervention power to ban a model of lending in the short term credit industry which has been found to cause significant consumer detriment.

In its first deployment of this power ASIC targeted a particular business model where a short term credit provider and its associate charged fees under separate contracts.

The law allows short term credit providers to remain exempt from credit licensing, conduct and responsible lending obligations under the National Consumer Credit Protection Act 2009, if the fees charged for a loan of up to 62 days do not exceed 5% of the loan amount and 24% per annum interest.

Under the short term lending model, the short term credit provider charged costs within these limitations, however its associate charged significant upfront, ongoing and default related fees under a separate contract for management and administrative services in relation to the loan. When combined, these fees can add up to almost 1000% of the loan amount.

The model has been used by Cigno Pty Ltd and Gold-Silver Standard Finance Pty Ltd, and more recently by MYFI Australia Pty Ltd and BHF Solutions Pty Ltd.

In making the order, ASIC considered:

  • submissions received in response to CP 316, with only 2 out of 35 submissions opposing ASIC’s proposed product intervention order;
  • data provided by industry participants, demonstrating the size and scale of the short term credit industry; and
  • ASIC complaints data in relation to the short term lending model, which comprised over 200 reports of misconduct, with the      majority being about excessive fees and charges.

The order does not seek to modify the existing exemption for short term credit; rather, it ensures that short term credit providers and their associates do not structure their businesses in a manner which allows them to charge fees which exceed the prescribed limits for regulated credit.

In announcing ASIC’s decision Commissioner Sean Hughes said “ASIC is ready and willing to use the new powers that it has been given. The product intervention power provides ASIC with the power and responsibility to address significant detriment caused by financial products, regardless of whether they are lawfully provided.

ASIC will take action where it identifies products that can or do cause significant consumer detriment. In this case, many financially vulnerable consumers incurred extremely high costs they could ill-afford, often leading to payment default that only added to their financial burden.”

The order is an industry wide order made by legislative instrument and will apply to any person that attempts to use this short term lending model or variations of the model. The order was registered with the Federal Register of Legislation on 12 September 2019 commencing on 14 September 2019 and remains in force for 18 months unless it is extended or made permanent. ASIC can extend the order’s duration or make it permanent, but only with Ministerial approval.

There are criminal and civil penalties for breaching the product intervention order, including up to 5 years imprisonment and fines of up to $1.26 million per offence.

Broker remuneration at “lowest levels ever observed”

The Mortgage and Finance Association of Australia (MFAA) has released a report examining the broker channel’s performance over the past six months; via AustralianBroker.

The eighth edition of the Industry Intelligence Service Report (IISR) drew on data supplied by 12 major aggregators from October 2018 to March 2019. 

While the the broker channel achieved a record high market share of 59.7% during the period, it settled just $87.56bn in home loans – the lowest six-month value recorded since the MFAA commenced reporting in 2015, down 10.32% on the previous year. 

The average value of new home loans settled per broker also continued to decline but at a rate “far greater than ever before,” down 10.66% on the year before. 

The number of loan applications also reached never before charted territories, with applications down 8.53% from the period before and 13.39% year-on-year.  

Further, the average number of applications lodged per broker declined across all states excepting Tasmania. 

The broker population is down from the record high of 17,040 industry participants, with the net industry turnover – accounting for those joining and leaving the industry, as well as those moving between aggregators – up to 10.9% from 9.6% a year ago. 

Notably, despite the proportion of new female recruits increasing by 10% compared to new male recruits, the population of female brokers declined over the six months, down 1.79%.

All of these factors contributed to a fall in the average total broker remuneration “to the lowest levels ever observed” by the IISR. 

Average combined remuneration has dropped 3.49% from the last six month period and is down 3.08% year on year. Compared to the high of April to September in 2016, it’s down 9.64%. 

The report linked the decline to the lower upfront commissions as trail increased across all states. 

The MFAA reiterated throughout the report that the inhospitable credit environment did not only impact the broker channel, as the value of home loans settled directly with lenders was down 15.71% from the last six months and 19.1% from the year before.

More Weak Consumer News And The Pressure On The Mutuals

We review the latest APRA data, consumer sentiment, and other burning issues.

https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/economics-research/er20190911BullConsumerSentiment.pdf

https://www.apra.gov.au/publications/quarterly-authorised-deposit-taking-institution-statistics

Mortgage Data To Jun 2019 (APRA) – Mutuals Alert!

APRA released their quarterly property exposures data to Jun 2019 today. We can see some of the moving parts in the Industry, though only at an aggregated levels.

At the top level we can see the impact of APRA first imposing restrictions on investment lending in 2015, and later in 2017 on interest only loans. The subsequent loosening of standards which APRA introduced has yet to hit the statistics.

We can see that mortgage lending growth did slow thanks to their measures, with total ADI mortgages at $1.67 trillion, comprising $547 billion of investor loans and $359 billion of interest only loans. This translates to 32.6% of loans being for investment purposes (still too high) and 21.4% of all mortgages being interest only. Not disclosed is the distribution of interest only loans between owner occupied and investment loans, but we can assume most are investment related.

We can pull out the same data for the four major banks. Here total loans are $1.33 trillion, with $452 billion being investment loans and $303 billion being interest only, giving a 34% share of investment loans and 22.8% of interest only loans, so they still have a larger share of investment loans and IO loans relative to the market. No bank level data is disclosed, though we know Westpac has a larger share of investment loans, and we assume interest only loans too.

We can then look at the new lending flows across the various lender types. The flow of new investment loans is running at 32% to June, and is rising (we expect it will be even higher next time as the APRA loosening is executed). As a result mutuals are writing a lower share of investment loans now.

The proportion of new loans via Brokers varies by lender category, with foreign banks sitting around 65%, compared with the 48% of major banks. Mutuals are seeing a fall, as competition from majors increases.

The proportion of new interest only loans is at around 17% for most lender types, with foreign banks writing less. Mutuals are writing more IO loans now.

Loans written outside serviceability has fallen across the industry, though major banks are still at 4.7%, and above the other lender types. Mutuals are writing more, as they attempt to gain share in the increasingly competitive market. There are higher risks in these loans.

Finally, we can look across the loan to value bands, at time of origination.

Major banks are writing around 7.4% of loans above 90%, compared to mutuals at 13% – once again showing mutuals having to break their rules more often to win business.

In the 80-90 bands, majors are at 16.1% and rising.

Nearly half of all loans written are around 50% of loan to value ratio – here the best deals are on offer, so refinancing is quite strong. There is little variation across the lender segments.

The lower LVR bands are around 26%, with other banks (including regionals) a little higher.

So this data suggests that mutuals are under pressure, the effect of the APRA tightening is obvious, the question now will be how this changes in the new “you set the risk” environment. It appears from our data lenders are more willing now, so we will be watching the serviceability and LVR metrics. But loan volumes remain constrained, which will limit potential excesses, at least for a time.

COBA CEOs remind MPs, don’t lose sight of competition

More than 30 CEOs and Directors from customer owned banking institutions will arrive in Canberra today to remind Members of Parliament to keep competition in mind as the Financial Services Royal Commission recommendations are implemented.

The leaders of Australia’s customer owned banking institutions and the Customer Owned Banking Association will urge MPs to adopt the principles of proportionate regulation and invest in more ways to boost competition in the retail banking market.

Customer Owned Banking Association CEO Michael Lawrence said that customer owned banking institutions are key to improving competition in the retail banking market but need to be given the opportunity to compete fairly.

“The message is clear, greater competition leads to greater customer outcomes. Government must keep competition front of mind if consumers are to receive a better outcome from their banking.

“Without robust competition consumers are the ones who lose out. If there isn’t fear that your customers will up and leave you, there is very little incentive for banks to do what is best for customers.

“The customer owned banking model is the customer focused alternative to the investor owned model. Our CEOs are here to remind MPs that for more than 150 years, our sector has been trusted by Australians to look after their banking and financial well-being.”

Mr Lawrence said customer owned banking institutions aren’t asking to be regulated differently; but in proportion to the size, scale and complexity of their organisation.

“Using the one size fits all approach for all authorised deposit taking institutions with no consideration of the size or complexity of the organisation has serious consequences.

“The cost of compliance for a smaller institution may outweigh the benefits of the regulation, leading to stifled innovation and reduced investment in the community.”

While a more pro-competitive mindset is important, Mr Lawrence said customer owned banking institutions encourage government to do more to make it easier for consumers to switch banks. “There is a role for Government to play to help make it easier for consumers to switch. Creating a task force of Treasury, ACCC, ASIC, industry and consumer groups to investigate the barriers to switching is a good start.”

ASIC Westpac HEM Battle Is Not Over, Yet…

The ABC, via Michael Janda is reporting that ASIC is appealing the recent judgment which found in favour of Westpac and their use of the Household Expenditure Measures benchmark.

This is important because the Federal Court’s decision in the landmark ASIC v Westpac test case on responsible lending laws could mean the poverty line becomes the new test for whether a loan is responsible or not.

Justice Perram’s judgment, should it stand, effectively validates the bank’s use of the HEM benchmark in assessing loan applications — a benchmark used in some way by most home lending institutions.

ASIC commissioner Sean Hughes said the regulator felt compelled to appeal after Justice Perram ruled that a lender “may do what it wants in the assessment process”.

“The Credit Act imposes a number of legal obligations on credit providers, including the need to make reasonable inquiries about a borrower’s financial circumstances, verifying information obtained from borrowers and making an assessment of whether a loan is unsuitable for the borrower,” he said in a statement.

“ASIC considers that the Federal Court’s decision creates uncertainty as to what is required for a lender to comply with its assessment obligation, nor does ASIC regard the decision as consistent with the legislative intention of the responsible lending regime.

“For those reasons, ASIC will appeal to the Full Court of the Federal Court.”

A Long View Of The Australian Economy

Kudos to Stephen Long from the ABC for an accurate and thoughtful piece on the state of the economy “How a consumer go-slow and a pile of debt is killing the economy“.

I am not just saying this because I featured in the article and news segment on the ABC last night, but because he hits the nail on the head.

In the face of the undeniable weakness, Mr Frydenberg has not dropped the reference to a “strong” economy, instead describing it as “resilient”.

That’s a fair call; a world-record 28 years without a recession is evidence enough

Australia’s weathered the Asian financial crisis of the 1990s, the tech wreck of the 2000s, and the Global Financial Crisis a decade ago without succumbing. But that record has involved some sound management and a lot of luck.

At some stage, the luck will run out.

Alongside spluttering economic growth and households hunkering down at home, a series of risks lurk offshore — a bad Brexit, the US-China trade war, underlying problems in the Chinese economy blowing up among them.

“Any one of those could play us into a GFC 2.0,” says Mr North.

“And if that happens then essentially all bets are off.”

“We are going to see very high levels of unemployment, we’re going to see a lot of households defaulting on their mortgages and that would have a spillover effect on the economy. That would hit the banks and take us into a very dark corner, in my view.”

In recent times, it’s only been population growth that’s kept Australia out of recession. More people have created more demand but high immigration has also helped to suppress wages.

While the pie’s been growing larger, the slices have been getting smaller (leaving aside the distribution of the pie, which is skewed towards those at the top).

Per head, living standards have fallen — a phenomenon that’s been dubbed a “per capita recession”.

The government and the RBA will be banking on the tax cuts which commenced in July and interest rate cuts to lift the economy out of the doldrums. If we’re lucky, things may start to turn around.

But if the luck runs out, there could be far worse to come.