Can AMP save financial advice?

From the excellent James Mitchell at InvestorDaily. The embattled wealth manager has outlined an ambitious strategy to deliver financial advice to more Australians at a time when its competitors are abandoning the sector completely.

When AMP announced its new advice strategy last month, including a significant reduction in practice values, the news was met with anger and frustration by a significant cohort of its advisers. 

But unlike its major bank competitors the group is not looking to sell off its advice arm; instead, it has set itself the challenging task of trying to service more customers.

“It’s about more advice to more people in more ways,” AMP group executive, advice, Alex Wade told Investor Daily. “We have to solve the problem of not enough advice for Australians.”

Research by Momentum Intelligence shows that 71 per cent of Australians who don’t have a financial adviser don’t actually know what one does. There is a fundamental lack of awareness among the population about the value of advice. The royal commission, which gained widespread media coverage, hasn’t helped groups like AMP or its 2,200-strong network of advisers. 

The company has announced plans to invest half a billion dollars in its advice channel, including the development of a digital offering, which Mr Wade says will aid human interactions rather than compete with them. 

“I think there is a very big market for face-to-face. I think that will grow given that competitors are leaving,” he said. 

“The trouble with face-to-face advice is it is becoming more expensive, given regulatory changes and compliance costs.

“The AMP strategy is that we are doubling down on all advice where the others are leaving. I think we need to focus on our face-to-face advisers having compliant, professional practices at a business level. We also need to solve the underlying problem with digital.”

Mr Wade sees the digital advice element effectively acting as an engagement tool for the mass market – customers that cannot afford to pay a financial adviser a hefty annual fee. Yet. 

“That will be supported by phones, people still want to speak to a person, but I think for the mass Australian, people who can’t afford face-to-face advice yet, we need to solve it with digital. That digital channel will then send people up the three tiers to phone or face-to-face. 

“I think it will help our advisers, both employed and aligned, because they will be able to use our digital service for some of those clients who can’t afford face-to-face advice. For example, the children of their clients,” he said. 

As fees for service replace commissions, the natural trend has been for advice practices to move up-market and begin servicing wealthier clients who can actually afford their fees. 

“This all creates a problem for those who can’t afford advice,” Mr Wade said. “We are trying to counter that. We have announced $500 million to invest in advice. A large part of that will be technology in practices, compliant in design, to make them as efficient as possible.”

No Australian company has been able to successfully deliver a digital advice offering that has been embraced by the mass market. Yet. But AMP believes it can do just that. 

The company’s brand has been badly bruised by a series of scandals in recent years. Its new advice strategy has triggered an ugly backlash from advisers that have already been given termination letters. But that’s only half of the story. 

The group recently raised $784 million from shareholders, much of which will be spent on its journey to bring a digital advice solution to market while continuing to develop its network of employed and aligned advisers. The company has been in the advice game a long time. Its new approach appears to be one that will use the power of digital channels to optimise face-to-face advice, rather than eradicate it.

Lenders sought for the First Home Loan Deposit Scheme

The National Housing Finance and Investment Corporation (NHFIC) is starting detailed consultations with lenders regarding their potential participation the Federal Government’s new First Home Loan Deposit Scheme, via Property Observer.

The Scheme is scheduled to commence on 1 January 2020.

It will be administered by NHFIC, subject to the passage of legislative amendments, which have been introduced into the Parliament today. 

It is known as the National Housing Finance and Investment Corporation Amendment Bill. Michael Sukkar, the Minister for Housing, presented the bill.

It seeks to establish a First Home Loan Deposit Scheme to assist eligible first home buyers with a minimum 5 per cent deposit (rather than the industry standard of 20 per cent) to purchase a home.

NHFIC is seeking feedback from lenders on implementation of the Scheme via a market sounding consultation process.

This market sounding is the pre-cursor to a procurement process which will be used to establish a panel of lenders to participate in the Scheme.

It builds on initial stakeholder consultations undertaken to date. 

All residential mortgage lenders are welcome to participate in the market sounding process.

NHFIC is making a Scheme Features paper available to participants for the purposes of the market sounding process. 

Further information on the market sounding process, including how lenders can participate and obtain a copy of the Scheme Features paper, is available via the NHFIC website

Responses to the market sounding are required to be submitted before 5pm AEST on Thursday 3 October 2019. 

The introduction of legislation giving effect to the Commonwealth Government’s deposit gap scheme is the first step in easing the pathway to home ownership, according to the Urban Development Institute of Australia (UDIA).

The UDIA’s National Executive Director Connie Kirk has welcomed introduction of the legislation and said the next critical step was getting design features right.

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.”