We ran out live stream event last night. During the session we discussed our revised scenarios, taking account of the complex local and international backdrop.
Using a baseline of July 2018, and looking ahead this is how it plays out. The risks from an international crisis have risen, the RBA itself is now projecting higher unemployment so lower wages growth, and the iron ore price is falling. Business and consumer confidence is being eroded, and the fall-out from the high-rise construction fiasco are only just starting to play out.
There is a path to property values rising, but we think this is relatively short lived.
You can watch the edited edition of our show, complete with some behind the scenes views.
Or watch the original streamed version with the pre-show, and live chat.
As we recently highlighted APRA only looks at loan data not household mortgage data in their analysis. They have now confirmed this again in a piece in their newly released APRA insight 01 2019.
As I have argued before, this myopic view of mortgage land helps to explains the excesses we have seen in the sector, and the lack of effective supervision.
The
Quarterly Authorised Deposit-taking Institution Property Exposures
(QPEX) statistical publication provides bank, credit union and building
society aggregate statistics on commercial property exposures,
residential property exposures and new residential loan approvals. The
QPEX publication is published each quarter on APRA’s website.
In the most recent QPEX publication – March 2019
(issued in June 2019), APRA’s data (as seen in Chart 1) highlighted
negative growth in housing lending over 2018. Between the year ending 31
March 2019 and 31 March 2018, there was a decrease of:
7.2 per cent in owner-occupied new housing loan approvals, and
14.9 per cent in new housing investment loans.
While there has been a decrease in housing loan approvals, the average loan size has continued to grow (as seen in Chart 2).
Since the last QPEX (December 2018) was published, some commentators have misinterpreted APRA’s data in their analysis of the average balance of housing loans. They have assumed that an increase in the number of housing loans (as seen in Chart 2) meant an increase in the number of borrowers with a housing loan. This misinterpretation has resulted in a suggestion that the average balance of housing loans represents the level of indebtedness of Australian households. This conclusion cannot be drawn from the data.
The QPEX publication reports data from the ADI’s perspective (e.g.
the value of loans and number of loan accounts on the ADI’s books)
rather than the borrower’s perspective. The data is a simple average
calculated as the total balance of all housing loans divided by the
total number of housing loans extended by ADIs. In practice, a customer
may have multiple housing loans, which means that the average balance of
housing loans cannot be used to determine the average housing debt of
each borrower. When APRA supervises an ADI, we do not consider the
average loan size to be a reliable indicator of risk; rather the data is
just one of many inputs to identify potential changes to the overall
structure and size of loans.
APRA requires ADIs’ to maintain high lending standards to ensure they
are effectively managing risk when issuing new housing loans to
borrowers. When a borrower applies for a housing loan, APRA requires the
ADI to assess the borrower’s ability to repay the loan, taking into
account the borrower’s other debt commitments and everyday expenses. We
set out our expectations for ADIs on lending standards in Prudential Practice Guide APG 223 Residential Mortgage Lending.
The RBA released their minutes from their last meeting today. What is clear now is the a weakening global economic outlook may make them cut again, not just a weaker labour market – a significant shift, which actually gives them a paper thin alibi in terms of plausible deniability for bad policy! In fact they spun the local economic outlook more positively.
Yet we know they are considering government bond purchases to drive rates lower. QE is coming.
Members commenced their discussion of the global economy by noting that global growth had remained reasonable, having eased since mid 2018. Near-term indicators relating to trade, manufacturing and investment had remained subdued, although consumption growth had been relatively resilient, supported by strong labour market conditions especially in the advanced economies. Despite wages growth having generally trended higher over the preceding few years, inflation had remained below target in a range of economies.
Growth in major trading partners was expected to slow a little in 2019 and 2020. This outlook had been
revised down a little since the May Statement on Monetary Policy in light of the escalation
of the US–China trade and technology disputes and the related weakness in indicators of
investment. Members noted the recent announcement by the US administration of a 10 per cent
tariff to be imposed on a further US$300 billion of Chinese exports to the United States. Further
escalation presented a downside risk to the outlook, particularly if heightened uncertainty weighed
further on business investment. Members noted that investment intentions had already eased significantly
in a number of economies, including the United States and the euro area, and investment had fallen in a
number of economies with a high exposure to international trade, including South Korea.
In China, a range of activity indicators suggested that domestic economic conditions had slowed further
in the June quarter. Further monetary and fiscal stimulus measures had also been announced. Fiscal
support had encouraged investment in infrastructure, while residential construction had continued to
grow relatively strongly, which in turn had supported steel production. The outlook for the Chinese
economy had been revised lower, largely because of the ongoing US–China trade and technology
disputes. Uncertainty about how these disputes would play out and how effective domestic policy measures
would be in supporting Chinese demand continued to be an important consideration for the global growth
outlook and, from an Australian perspective, the future demand for steel and bulk commodities.
The US–China disputes and the slowing in Chinese domestic demand had affected export and
investment growth in the east Asian region. However, exports to the United States had increased for some
economies in the region, including Vietnam, as a result of trade diversion. By contrast, growth in
consumption in the east Asian region had generally remained more resilient. Growth in output in India
had slowed and the outlook was weaker than previously forecast, largely because there had been less
fiscal support and trade tensions with the United States were emerging.
In the major advanced economies, risks to the outlook remained tilted to the downside, reflecting the
trade disputes. The US economy had continued to grow relatively strongly into the June quarter. This was
despite the effects of the trade dispute on the manufacturing sector and on business investment more
generally, partly because tight labour markets had supported strong consumption growth. Members noted
that the most recent round of tariff announcements would affect US imports of consumption goods from
China and could boost US consumer prices to some extent. Further slowing in investment seemed likely as
the effect of earlier fiscal stimulus waned and the uncertainty related to the trade and technology
disputes persisted.
Weaker global trade and greater uncertainty had also affected growth in output in the euro area. Growth
in Japan was expected to be boosted temporarily by spending brought forward ahead of an increase in the
consumption tax in October, although weaker external demand had weighed on export growth.
Commodity prices had generally fallen since the previous meeting, partly in response to the escalation
of trade tensions in early August. After more than doubling in the first half of 2019, iron ore prices
had declined to be below US$100 per tonne. Coal and oil prices had also declined over the previous
month. Rural commodity prices had been little changed. Members noted that the terms of trade for
Australia in the June quarter had been higher than expected.
Domestic Economic Conditions
Turning to the domestic economy, members noted that GDP growth was expected to have been firmer in the
June quarter after three weak quarters. This was partly because resource exports had recovered from
earlier supply disruptions and mining investment was likely to be less of a drag on growth. Partial
indicators suggested that consumption growth had remained subdued in the June quarter; the volume of
retail sales had been subdued and sales of new cars had declined. While dwelling investment was expected
to have declined further in the June quarter, public demand and non-mining business investment were
expected to have continued to support growth.
Members observed that the lower near-term GDP growth forecast mostly reflected the fact that
consumption growth had been weaker than expected over recent quarters. Members noted that consumption
growth per capita had been particularly weak recently. The forecast for GDP growth over 2019 had been
lowered to 2½ per cent. Growth was expected to pick up to 2¾ per cent over
2020 and to around 3 per cent over 2021. This was supported by a range of factors, including
lower interest rates, tax measures, signs of an earlier-than-expected stabilisation in some established
housing markets, the lower exchange rate, the infrastructure pipeline and a pick-up in activity in the
mining sector.
Members noted that although the outlook for consumption remained uncertain, the risks around the
outlook were more balanced than they had been for some time. The low- and middle-income tax offset was
expected to boost income growth, with a surge in the lodgement of tax returns since the end of June. In
addition, signs of a recovery in some established housing markets suggested that the dampening effect of
declining housing prices on consumption could dissipate earlier than had previously been assumed.
The evidence that conditions in housing markets were showing signs of a turnaround had strengthened in
July. In Sydney and Melbourne, housing prices had increased, housing turnover appeared to have reached a
trough and auction clearance rates had risen further. Outside the two largest cities, housing market
conditions had shown tentative signs of improvement; prices had risen in Brisbane, while the pace of
decline had slowed in Perth. Rental vacancies had been low in most cities except in Sydney, where they
had risen further as new apartments were added to the rental stock.
Members observed that it could take some time for the stabilisation of conditions in the established
housing market to translate into a pick-up in construction activity. Indeed, leading indicators
suggested that dwelling investment was likely to decline further in the near term. Residential building
approvals had declined further over May and June and were around their lowest levels in six years.
Timely information from liaison contacts suggested that increased buyer interest had yet to translate
into more housing sales. However, members noted that signs of a turnaround in housing markets suggested
there were some upside risks to dwelling investment later in the forecast period, particularly given the
expected strength in population growth.
Forward-looking indicators for business investment had been mixed. Survey measures of business
conditions had been less positive than a year earlier, especially in the retail and transport sectors,
but generally had remained around average. By contrast, non-residential building approvals had trended
up in recent months and the pipeline of work under way was already quite high. There was also a large
pipeline of private sector projects to build transport and renewable energy infrastructure, which was
expected to support non-mining business investment.
Although mining investment had declined in the March quarter as large liquefied natural gas (LNG)
projects approached completion, the medium-term outlook for mining investment had remained positive. A
number of projects had been committed and others were under consideration, which would add to investment
in coming years if they went ahead. Members noted that the outlook for mining investment had not been
affected by the recent elevated levels of iron ore prices. However, they observed that higher iron ore
prices would add to government taxation revenues and boost household income and wealth through dividends
and the effect on share prices. At the margin, this could provide greater impetus to spending than
currently assumed.
Resource exports had picked up during the June quarter as some supply disruptions to iron ore had been
resolved and LNG production had increased further. Resource exports were expected to contribute to
growth over the forecast period and the recent depreciation of the Australian dollar was expected to
support further growth in service and manufacturing exports.
Members noted that recent labour market data had been mixed. The unemployment rate had remained at
5.2 per cent for the third consecutive month, which was higher than had been expected in May.
However, growth in employment had continued to exceed growth in the working-age population in the June
quarter and had been stronger than forecast in May. As a result, the employment-to-population ratio and
the participation rate had remained around record highs. Over the previous year, there had been a
particularly notable increase in the participation rates of women aged between 25 and 54 years
and workers aged 65 years and over. Members noted that the increase in participation by older
workers had more than offset any tendency for the ageing of the population to reduce aggregate
participation in the labour force. Members discussed some of the factors that could be contributing to
these trends, including slow income growth, improvements in health and greater flexibility in the labour
market.
Leading indicators implied a moderation in employment growth over the following six months: job
vacancies had declined slightly over the three months to May (but remained high as a share of the labour
force) and firms’ near-term hiring intentions had moderated, to be just above their long-run
average. The unemployment rate forecast had been revised higher, with the unemployment rate expected to
remain around 5¼ per cent for some time before declining to about 5 per cent as
growth in output picked up.
Members noted that the outlook for the labour market was one of the key uncertainties for the
forecasts, with implications for growth in wages, household income and consumption. The outlook for
wages growth had been revised a little lower because the outlook for the labour market suggested that
there would be more spare capacity than previously thought. Private sector wages growth was expected to
pick up only modestly, while public sector wages growth would be contained by government caps on wage
increases. Members observed that the outlook for household consumption spending could be weaker if
households expected low income growth to persist for longer.
Members noted that the June quarter CPI had been largely as expected. Trimmed mean inflation had
increased a little to 0.4 per cent in the June quarter, but had remained at
1.6 per cent over the preceding year, consistent with the forecast in May. Headline inflation
had been 0.7 per cent (seasonally adjusted), partly because fuel prices had increased by
around 10 per cent in the June quarter; over the year, headline inflation had also been
1.6 per cent. Overall, members noted that there had been few signs in the June quarter CPI
numbers of inflationary pressures emerging.
Inflation in market-based services had remained steady, which was consistent with a lack of wage
pressures in the economy. Inflation in the housing-related components of the CPI had been around
historical lows. New dwelling prices had declined again in the June quarter, reflecting the use of bonus
offers and purchase incentives by developers to counter the weak housing conditions. Rent inflation had
been flat in the quarter in aggregate, but had fallen noticeably in Sydney, consistent with the rising
vacancy rate; rent deflation had eased in Perth and had been steady in most other cities. Members noted
that low inflation in new dwelling costs and rents, which represent around one-sixth of the CPI basket,
was likely to persist in the near term.
There had been an increase in inflation for retail items because there had been some pass-through of
the exchange rate depreciation and the drought had boosted certain food prices. These effects were
expected to dissipate if there was no further exchange rate depreciation, as is usually assumed in the
forecasts, and once normal seasonal conditions returned. Inflation in the prices of administered items
and utilities had remained well below typical increases recorded a few years earlier.
Inflation was expected to pick up more gradually than previously forecast because of subdued wage
outcomes and the evidence of spare capacity in the economy. The experience of other economies suggested
that any pick-up in wages growth might take longer to translate into inflation than in the past.
Underlying inflation and headline inflation were both expected to pick up to be a little above
2 per cent over 2021, as spare capacity in the labour market declined and as growth increased
to run above potential. Members noted that there were downside risks to some individual CPI components.
In the near term, electricity prices could grow at a below-average pace or even fall, and government
cost-of-living initiatives could weigh on other items in the CPI basket. Inflation rates for both new
dwelling prices and rents were also expected to remain low in the near term, but were more uncertain
towards the end of the forecast period.
Financial Markets
Members commenced their discussion of financial markets by noting that central banks in the major
economies had eased, or were expected to ease, policy settings in response to downside risks to growth
and subdued inflation outcomes. Financial market volatility had increased recently from low levels, in
response to the escalation of the trade and technology disputes between the United States and
China.
The US Federal Reserve lowered its policy rate target by 25 basis points in July. Market pricing
suggested that the federal funds rate was expected to decline by a further 100 basis points or so
over the following year. The Federal Reserve noted that the US labour market had remained strong.
However, it was perceived by members of the Federal Open Market Committee that there was room for some
easing of monetary policy given the implications of global developments for the US economic outlook and
subdued inflation pressures. Elsewhere, the European Central Bank (ECB) had foreshadowed additional
monetary stimulus unless the outlook for inflation in the euro area improved. The ECB indicated that it
could expand its bond-buying program, among other measures, and market pricing suggested that the ECB
was likely to reduce its policy rate over the following months. Market participants were also expecting
the Bank of Japan to ease monetary policy further in the period ahead.
In response to the shift in the outlook for monetary policy, long-term interest rates had declined to
historical lows in several markets, including in Australia. Yields on government bonds were negative
for a number of European sovereigns and Japan. In addition, corporate bond spreads were low globally,
with a growing portion of corporate debt in the euro area trading at yields below zero. Members
discussed the implications of the low level of bond yields for corporate balance sheets and
investment.
Global equity markets had declined sharply prior to the meeting, in response to the recent escalation
of the trade and technology disputes. Nevertheless, equity market indices were still well above their
levels earlier in the year, supported by lower bond yields and expectations that earnings growth would
be reasonable. During July, equity market indices in the United States and Australia had reached record
high levels.
In foreign exchange markets, prior to the meeting there had been an increase in volatility, from very
low levels, in response to the escalation of the trade and technology disputes. In particular, the yen
had appreciated against the US dollar while the Chinese yuan had depreciated. Members took note of
the market commentary that the US and Japanese authorities could intervene in an effort to lower the
value of their currencies. The Australian dollar had depreciated in recent times to be at its lowest
level in many years.
In Australia, the reduction in variable mortgage rates had been broadly consistent with the reduction
in the cash rate in June and July. The degree of pass-through of the cash rate reductions was also
comparable to that observed over the preceding decade. Housing credit growth had declined in June, for
both owner-occupiers and investors. At the same time, however, loan approvals had picked up in June,
which for investors was the first sizeable increase for some time. This was consistent with other
indicators suggesting that the housing market had stabilised over recent months. However, loan
approvals to property developers had remained subdued. Members also noted that access to finance for
small businesses continued to be tight.
Banks’ debt funding costs and borrowing rates for households and businesses were at
historically low levels. Rates in short-term money markets, bank bond yields and deposit rates had all
declined to historically low levels. The proportion of bank deposits that attract no interest had
increased marginally to be just under 10 per cent. Despite the low level of funding costs,
banks’ bond issuance remained subdued. This reflected slow credit growth, along with the banks
increasing their issuance of hybrid securities to fulfil new regulatory capital requirements. Members
also noted that mergers and acquisitions activity had not been especially high, despite funding
conditions being very accommodative for large businesses.
Market pricing implied that the cash rate was expected to remain unchanged in August. A 25 basis
points reduction had been fully priced in by November 2019, with a further 25 basis points
reduction expected in 2020. The low level of bond yields implied that the cash rate was expected to
remain very low for several years.
Members reviewed the experience of other advanced economies with unconventional monetary policy
measures over the preceding decade. These measures comprised: very low and negative policy interest
rates; explicit forward guidance; lowering longer-term risk-free rates by purchasing government
securities; providing longer-term funding to banks to support credit creation; purchasing private sector
assets; and foreign exchange intervention. Members considered the key lessons from the international
experience, noting that a full evaluation could not be undertaken as many of these measures were yet to
be unwound. One key lesson was that the effectiveness of these measures depended upon the specific
circumstances facing each economy and the nature of its financial system. Some measures had been
successful in reducing government bond yields, which had flowed through to lower interest rates for
private borrowers. Other measures had been effective in addressing dislocations in credit supply.
Members noted that a package of measures tended to be more effective than measures implemented in
isolation. Finally, it was important for the central bank to communicate clearly and consistently about
these measures.
Considerations for Monetary Policy
Turning to the policy decision, members observed that the escalation of the trade and technology
disputes had increased the downside risks to the global growth outlook, although the central forecast
was still for reasonable growth. Uncertainty around trade policy had already had a negative effect on
investment in many economies. Members noted that, against this backdrop, the low inflation outcomes in
many economies provided central banks with scope to ease monetary policy further if required. Indeed, a
number of central banks had reduced interest rates this year and further monetary easing was widely
expected. In China, the authorities had taken steps to support economic growth, while continuing to
address risks in the financial system.
Overall, global financial conditions remained accommodative. Long-term government bond yields had
declined further and were at record lows in many economies, including Australia. Borrowing rates for
both households and businesses were also at historically low levels and there was strong competition for
borrowers of high credit quality. Despite this, demand for housing credit, particularly from investors,
remained subdued, while access to credit for some types of borrowers, especially small businesses,
remained tight. The Australian dollar had depreciated to its lowest level in recent times.
Domestically, growth had been lower than expected in the first half of 2019. Looking forward, growth
was expected to strengthen gradually, to 2¾ per cent over 2020 and to around
3 per cent over 2021. This outlook was supported by a number of developments, including lower
interest rates, higher growth in household income (including from the recent tax cuts), the depreciation
of the Australian dollar, a positive outlook for investment in the resources sector, some stabilisation
of the housing market and ongoing high levels of investment in infrastructure. Overall, the domestic
risks to the forecast for output growth appeared to be tilted to the downside in the near term, but were
more balanced later in the forecast period.
Employment growth had been stronger than expected and labour force participation had increased to a
record high. However, the unemployment rate had increased and there appeared to have been more spare
capacity in the labour market than previously appreciated, although there was uncertainty around the
extent of this. The unemployment rate was expected to decline to around 5 per cent over the
following couple of years, consistent with the gradual pick-up in GDP growth. Wages growth had been
subdued and there were few signs of wage pressures building in the economy. Combined with the
reassessment of spare capacity in the labour market, this had led to a more subdued outlook for wages
growth than three months earlier.
In the June quarter, inflation had been broadly as expected at 1.6 per cent. Members noted
that inflation had averaged a little below 2 per cent for a number of years. In the near term,
there were few signs of inflationary pressures building, but, over time, inflation was expected to
increase gradually to be a little under 2 per cent over 2020 and a little above
2 per cent over 2021.
Based on the information available and the central scenario that was presented, members judged it
reasonable to expect that an extended period of low interest rates would be required in Australia to
make sustained progress towards full employment and achieve more assured progress towards the inflation
target. Having eased monetary policy at the previous two meetings, the Board judged it appropriate to
assess developments in the global and domestic economies before considering further change to the
setting of monetary policy. Members would consider a further easing of monetary policy if the
accumulation of additional evidence suggested this was needed to support sustainable growth in the
economy and the achievement of the inflation target over time.
The Decision
The Board decided to leave the cash rate unchanged at 1.00 per cent.
The Australian Prudential Regulation Authority (APRA) has released a strengthened prudential standard aimed at mitigating contagion risk within banking groups. The new rules will come in from 1 January 2021. Until then the 100 or so such operations within a small number of ADIs will remain obscured, with potential higher risks exposure in a down turn.
Such complex group structures could potentially make it difficult for APRA to resolve an ADI quickly and protect depositors’ savings in the unlikely event of a bank failure.
The updated Prudential Standard APS 222 Associations with Related Entities (APS 222) will further reduce the risk of problems in one part of a corporate group having a detrimental impact on an authorised deposit-taking institution (ADI).
Deputy Chair John Lonsdale said APRA began consulting last July on proposed changes to APS 222 to incorporate some of the lessons learned from the global financial crisis.
“Concessions in the existing framework led to some ADIs establishing operations in foreign jurisdictions, which are managed and funded within the domestic bank.
“APRA has only limited visibility of these operations, which also fall outside the purview of foreign regulators. They complicate operating structures and there is no certainty their assets would be available to an ADI if it were to enter resolution. There are currently around 100 such operations within a small number of ADIs.
“Additionally, if an ADI were to fully utilise some of the limits within the existing framework, they would be exposed to excessive levels of contagion risk,” Mr Lonsdale said.
APRA received submissions from 10 stakeholders to its consultation; most supported updating the requirements, however some raised concerns about the complexity of implementing certain proposed changes.
Responding to the consultation, APRA confirmed that APS 222 will be updated to include:
a broader definition of related entities that includes board directors and substantial shareholders;
revised limits on the extent to which ADIs can be exposed to related entities;
minimum requirements for ADIs to assess contagion risk; and
removing the eligibility of ADIs’ overseas subsidiaries to be regulated under APRA’s Extended Licensed Entity framework.
Additionally, APRA will require ADIs to
regularly assess and report on their exposure to step-in risk – the likelihood
that they may need to “step in” to support an entity to which they are not
directly related.
Mr Lonsdale said the stronger APS 222 will enhance the prudential safety of
ADIs and reinforce financial system stability.
“As we saw during the global financial crisis, deficiencies in governance or
internal controls in one part of a corporate group can quickly spread and cause
financial or reputational damage to an ADI. Furthermore, complex group
structures could potentially make it difficult for APRA to resolve an ADI
quickly and protect depositors’ savings in the unlikely event of a bank
failure.
“By updating and strengthening the requirements of APS 222, APRA will ensure
ADIs are better able to monitor, manage and control contagion risk within their
organisations.
“While aspects of the revised standard will have a material impact on some
ADIs, we have adjusted our original proposals in some areas to make the
requirements less burdensome. We are open to considering appropriate transition
arrangements on a case-by-case basis where specific entities request it,” Mr
Lonsdale said.
The new APS 222 will come into effect from 1 January 2021.
The ABC have written a piece on the proposed cash restrictions (even if it was after the closing date for submissions to Treasury relating to the exposure draft). It appears opposition is mounting, given they cite One Nation, CPA Australia, The Institute of Public Affairs and The Australian Chamber of Commerce. However, Chartered Accountants Australia and New Zealand argued the $10,000 cash limit was high, and needed to be lowered.
Australians could face two-year jail sentences and fines of up to $25,200 under proposed laws that limit the use of cash to $10,000 — a move some groups argue would create an Orwellian state by giving authorities greater control over people’s finances.
Key points:
The proposed law would apply to all
payments of more than $10,000 to a business with an ABN, such as buying a
car from a car yard
Private transactions between individuals with no ABN would be exempt from the new rules
One
Nation has indicated it will vote against the bill, as some business
groups argue it is an attack on the basic liberty of free exchange
A number of stakeholders have called on the Federal
Government to withdraw the proposed laws, which were first announced in
the 2018-19 budget as part of measures to fight the so-called black
economy.
The Government’s Black Economy Taskforce had argued a
$10,000 cash limit for transactions between businesses and individuals
would help fight the cash economy by stamping out tax evasion, money
laundering and other crimes.
The
laws would apply to all payments made to businesses with an ABN for
goods or services, affecting major purchases like cars, boats, housing
and building renovations.
The Government has said the measure
would not apply to individual-to-individual transactions, such as
private sales where the seller does not have an ABN, or cash payments to
financial institutions.
The laws, if passed, would take force on January 1, 2020, and for certain AUSTRAC reporting entities from January 1, 2021.
Last week the Judge delivered his verdict in the ASIC-Westpac HEM case, essentially because of the ~260,000 loans examined in the case less than 5,000 would have potentially had their loans tweaked lower if the HEM was not used, whereas the bulk of the loans would have been bigger if HEM was not utilised in the decisioning.
I have now had the chance to speak to a number of industry
players, and most have fallen into expected camps. Lenders in the main welcome
the decision, suggesting that common sense has prevailed, and that ASIC was not
reasonable in its interpretation of responsible lending guidelines. On the
other side, consumer advocates are calling for tighter controls and suggesting
that the HEM benchmarks, even in their revised form are too low – meaning that
households are committed to servicing loans they cannot afford. And ASIC has
commenced a review of responsible lending by years end.
But among my conversations on this topic, I found a sensible and balance view expressed by Fintech CEO Mark Jones from SocietyOne. They of course are on the cutting edge of technological innovation through their lending processes in Australia.
Mark made the point that recently lenders have been raising
their standards, but the question becomes whether a lender has to try and
uncover untruthful declarations from prospective borrowers. In Australia there
is no clear-cut legal obligation of borrowers to be honest and transparent in
their declarations, whereas in the USA there is such a legal obligation, and in
New Zealand a Code of Conduct.
He cited examples where applicants had clearly lied on loan
application forms.
What is the right balance between asking in painful detail
for information from applicants, some of which are unsure of their specific
spending patterns, and the fact that in any case if they take a loan, they may
be capable of “life-style modification”?
So, he sees HEM in the context of the broader loan
assessment processes, with data from applications tested again HEM, and
additional dialogue around other unusual commitments which might include school
fees, alimony, and other elements. This
is all around knowing your customer. And
there needs to be a focus on both discretionary and non-discretionary categories
to give a complete picture.
The systems which Fintech’s like SocietyOne use are more sophisticated and can handle the complex algorithms which reflect real life. Positive credit and now Open Banking, both of which are arriving, are helpful in uncovering critical information. As a result, there are better outcomes for customers. No lenders want to make a loan which is designed to fail! And it opens the door to more sophistication around risk-based pricing
So, in summary, the trick is to get the right balance between getting every scrap of potential data from a customer, thus getting bogged down in the detail but missing the big picture; and applying simplistic ratios which do not provide sufficient precision to spot good and bad business. And it is this balance which needs to be defined in responsible lending, to a level which passes both community expectations and the operational requirements of lenders. To that end, the debate should not really be about HEM at all!
The Treasurer has now (finally) released the proposed timetable for implementation of the recommendations from the Royal Commission made back in February.
It is entitled “Restoring Trust In Australia’s Financial System”, but of course the big question is, will these measures once implemented really get to the heart of the issue – we doubt it.
This is because the final Commission report ducked the critical conflict of interest issue between selling financial services products and delivering them.
There is first the issue of unequal power between a consumer and a financial services organisation.
We know from the Commission that financial services players consistently sought to maximise their returns, even when the best interests of consumers are businesses are voided.
And we know that the general level of financial knowledge and expertise in the community is very low – indeed many do not understand, for example the concept of compound interest, the impact of fees on returns, and even what annual percentage benchmarks really mean.
So, my view is that the RC implementation will not be necessary and sufficient to restore trust in the financial system, even if the large players chose to address their cultural deficits in relation to doing right by their customers. And industry bodies are still fighting rear guard actions to avoid significant change.
Which then takes us back to the weak and compromised regulatory system we have, where APRA and ASIC appear to land more on the side the financial system rather than consumers. So, out of all this, who is minding the back of households and businesses?
In other words Frydenberg’s introduction to this small (14 page) document has a hollow ring to it – or as bankers use to write on bad cheques “words and figures differ!”:
On 4 February 2019, I released Restoring trust in Australia’s financial system, the Morrison Government’s comprehensive response to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. In it, the Government committed to take action on all 76 of the Royal Commission’s recommendations and, in a number of important areas, go further. It represents the largest and most comprehensive corporate and financial services law reform package since the 1990s. Of the Royal Commission’s 76 recommendations, 54 were directed to the Government, 12 to the regulators and 10 to the industry. Of the 54 recommendations directed to the Government, over 40 require legislation.
In addition to the Commission’s 76 recommendations, the Government in its response announced a further 18 commitments to address issues raised in the Final Report.
The Government has implemented 15 of the commitments it outlined in response to the Royal Commission’s Final Report. This comprises eight out of the 54 recommendations that were directed to the Government and seven of the 18 additional commitments the Government made as part of its response. Significant progress has also been made on a further five recommendations with draft legislation either introduced to the Parliament, released for comment or detailed consultation papers issued.
The Government’s implementation timetable is ambitious. Excluding the reviews that are to be conducted in 2022, under the Implementation Roadmap by mid-2020, close to 90 per cent of our commitments will have been implemented. By the end of 2020 remaining Royal Commission recommendations requiring legislation will have been introduced.
In this Implementation Roadmap, we set out how we will deliver on the remaining Royal Commission recommendations and additional actions committed to. This will provide clarity and certainty to consumers, industry and regulators on the roll out of the reforms. Of course, the Government’s actions alone will not be sufficient to address the widespread misconduct identified by the Royal Commission. Individual firms must make the changes needed to their culture and remuneration practices to put consumers at the core of their business. I expect industry to also align with the urgency and priority the Government is giving to its implementation task.
The Government will ensure that key firms in the financial sector continue to address the issues identified by the Royal Commission.
At the request of Government, the House of Representatives Standing Committee on Economics will inquire into progress made by major financial institutions, including the four major banks, and leading financial services associations in implementing the recommendations of the Royal Commission. As previously announced, we will also establish an independent review in three years’ time to assess the extent to which changes in industry practices have led to improved consumer outcomes.
The Government is delivering lasting change in the financial sector to ensure public confidence is restored.
Finally, the Australian Banking Association came out with this:
Australia’s banks have welcomed the Government’s timetable for legislative change following the Hayne Royal Commission and will work with the Commonwealth to continue implementing the Commission’s recommendations.
While the forward agenda for the required legislative changes was announced this morning, banks are well down the track of implementing recommendations for which they are responsible to improve customer outcomes and earn back the trust of the Australian community.
Of the Commission’s 76 recommendations, 54 were directed to Government and more than 40 of those recommendations require legislative change. 12 are to be taken forward by the regulators, 10 are for industry to implement – eight of these are specific to the banking industry.
ABA CEO, Anna Bligh said: “Since the Final Report was handed down six months ago, banks have been working to make changes to ensure that the recommendations become part of their operating fabric.
“Make no mistake, banks understand what the community and Government expects of them and are raising their standards to rightly meet those expectations.
“The recommendations included six changes to the Banking Code. All six are underway. The ABA has already drafted provisions implementing five of the changes, had them agreed to by banks and submitted them to the regulators for approval. These are now on track for full implementation by March 2020,” Ms Bligh said.
The sixth change relates to the definition of small business. Consistent with the Commission’s recommendation, the definition was recently changed in the new Banking Code to include businesses with fewer than 100 employees and this measure is now fully operational. The further recommendation to change the financial threshold from $3M to $5M will be subject to a review that will be overseen by ASIC who will examine the potential impacts on the provision of credit to small business. The review is underway and expected to be completed in early 2021.
“In relation to culture within banks, many, including the major banks, have already completed reviews. These banks have also introduced mechanisms for the ongoing tracking of culture to determine whether actions are having the necessary impact. But banks understand that effective cultural change is not going to come about through implementing the Royal Commission recommendations alone. It will only be achieved by putting the customer at the heart of every decision our banks make.
“In addition, all banks continue to review how they remunerate staff, with a focus on good customer outcomes, not just meeting financial targets,” Ms Bligh said.
Following the release of the Final Report, the ABA established a dedicated Royal Commission Taskforce to oversee the industry’s implementation of the recommendations. This Taskforce has met six times over the past six months and will continue to meet regularly to ensure the industry responds swiftly to the Government’s legislative processes and acts to fully implement the recommendations
Australia’s apartment sector is reaping the costs of a “poorly oversighted industry with a lack of competence and, in some cases, a lack of integrity”, says the author of a landmark report into Australia’s building industry. From The New Daily And ABC.
Bronwyn Weir has told an ABC Four Corners special investigation
into the apartment construction industry that “commercial imperatives
have really overtaken public interest” and that the industry was in
crisis.
Ms Weir who, with former senior public servant Peter Shergold, co-wrote the landmark Building Confidence report, found widespread noncompliance and dysfunction in Australia’s apartment construction industry.
The
report has come into even sharper focus after some high-profile
high-rise failures in Sydney and Melbourne, and hundreds of buildings
discovered to have dangerous flammable cladding.
Ms Weir said given her knowledge of industry practice over recent years, she would never buy a newly built apartment.
“If
I was going to be investing in an apartment, I’d buy an older one. It’s
common sense, isn’t it? It’s just logical,” Ms Weir told Four Corners.
The ABC investigation comes only months after the evacuation of Sydney’s Opal and Mascot
towers due to faults, and on the same day as a report by the nation’s
leading construction union that found fixing the country’s residential
apartment block defects could exceed $6.2 billion.
The Shaky Foundations: the National Construction Crisis report,
commissioned by the Construction, Forestry, Maritime, Mining and Energy
Union (CFMMEU) with analysis done by Equity Economics, found the “costs
of failure are piling up” and that Australia’s building industry had
reached “crisis point”.
Another study of apartment building
defects by Deakin and Griffith universities found 97 per cent of
buildings examined in NSW had at least one defect in multiple areas,
while the figure in Victoria was 74 per cent, and in 71 per cent in
Queensland.
Together, the findings together with recent structural
failures and flammable cladding saga paint a picture of an industry in
crisis – a crisis that politicians seem unwilling – or unable – to
tackle.
One of the authors of that report, Nicole Johnston, told Four Corners that defects were “very common” nationwide.
“We have got a real problem here,” Dr Johnston said.
“It’s
systemic, and it’s infecting lots of buildings across the landscape in
all parts of the country. It’s very clear, it’s very prominent and we
have a serious problem here.”
Ms Weir told Four Corners
that noncompliance within the industry had become “particularly bad … in
the last 15 to 20 years”, which had left a huge legacy of sub-standard
buildings.
“It’s gotten worse over that period. And that means
there’s a lot of existing building stock that has defects in it,” Ms
Weir told reporters.
Ms Weir advised anyone thinking of investing in apartments should consider something built five or more years ago.
“You would like to think that if there are major issues with that building, they’ll have started to show,” Ms Weir said.
“So
I think if people are looking at investing, there are ways to do good
due diligence. Buying off the plan is a really tricky proposition at the
moment.”
“The
existing building stock is what it is. We have hundreds of thousands of
apartments that have been built across the country over the last two,
three decades,” she told the program.
“[The new reforms] won’t
improve existing building stock, unfortunately. So there’ll be legacy
issues for some time and I suspect there’ll be legacy issues that we’re
not even fully aware of yet.”
Deakin’s Dr Johnston told the program that previous calls for reform had gone largely unheeded.
“People have been jumping up and down about this for years and years and years,” Dr Johnston said.
“There’s
been lots of committees formed, there’s been lots of task forces,
there’s been lots of consideration around these, but really nothing has
happened.”
In 2017, NSW did try to propose a bill to police
dangerous or non-confirming building products, similar to laws in force
in Queensland.
Executive officer at the Building Products Industry
Council Rodger Hills said the draft bill was shown to industry leaders,
who felt it was even better than the Queensland equivalent.
But by the time the bill entered Parliament, it had been “absolutely gutted”.
“We counted up about 80 clauses that had been pulled out of the documentation,” he told the program.
Engineers
Australia chief executive Peter McIntyre said there was a “crisis of
confidence” in the industry that needed to be fixed urgently.
“There’s
concern among organisations like ours, Engineers Australia, so this is a
pivotal time to take action and fix it,” Mr McIntyre said.
We look at Westpac’s latest data, with a focus on mortgage delinquencies, and also mention our upcoming live stream event tomorrow. You can still send in questions beforehand via the DFA blog, or live on the show tomorrow via the online chat.
