The New Zealand Reserve Bank will be reporting material breaches from banks on its website from next year, in an effort to improve transparency and market discipline.
The decision follows a public consultation on the matter late last year, and ongoing discussion with stakeholders on a new framework for the reporting of banks’ breaches. The Reserve Bank today published a summary of submissions and final policy decisions on the reporting and publication of breaches by banks.
The new policy will require a bank to report promptly to the Reserve Bank when there is a breach or possible breach of a requirement in a material manner, and report all minor breaches every six months. Only actual material breaches will then be published on the Reserve Bank’s website.
“The policy aims to enhance market discipline by ensuring prompt breach reporting and publication, and by making it easier to find and compare information about banks’ compliance history,” says Geoff Bascand, Deputy Governor and General Manager Financial Stability. “It also encourages bank directors to focus on materially significant issues and the management of key risks rather than concern themselves with relatively minor issues.
“We will be further discussing the implementation of this policy directly with banks, and at this stage we expect it will take effect from 1 January 2020,” Mr Bascand says.
Reverse factoring, a form of financial engineering, is on the rise. This is a technique used by a number of companies to dress their financial results.
Australian engineering group UGL, which is working on large
infrastructure projects such as Brisbane’s Cross River Rail and
Melbourne’s Metro Trains, recently sent a letter
to suppliers and sub-contractors informing them that as of October 15,
they will be paid 65 days after the end of the month in which their
invoices are issued. The company’s policy had been, until then, to
settle invoices within 30 days.
The letter also mentioned that if the suppliers want to get paid
sooner than the new 65-day period, they can get their money from UGL’s
new finance partner, Greensill Capital, one of the biggest players in
the fast growing supply chain financing industry, in an arrangement
known as “reverse factoring”. But it will cost them.
Reverse factoring is a controversial financing technique that played a major role in the collapse of UK construction giant Carillion,
enabling it to conceal from investors, auditors and regulators the true
magnitude of its debt until it was too late. Here’s how it works: a
company hires a financial intermediary, such as a bank or a specialist
firm such as Greensill, to pay a supplier promptly (e.g. 15 days after
invoicing), in return for a discount on their invoices. The company
repays the intermediary at a later date.
In its letter to suppliers UGL trumpeted that the payment changes would “benefit both our businesses,” though many suppliers struggled to see how. One subcontractor interviewed byThe Australian Financial Review complained that the changes were “outrageous” and put small suppliers at a huge disadvantage since they did not have the power to challenge UGL. Some subcontractors contacted by AFR refused to be quoted out of fear of reprisal from UGL.
CIMIC is one of Australia’s largest construction and infrastructure
groups. It is majority owned by the German company Hochtief, which in
turn is majority owned by the Spanish consortium ACS. In August ACS, the
world’s seventh largest construction company, admitted
it is making “extensive use” of both conventional factoring and reverse
factoring “across the group,” to “more efficiently manage cash flows
and match revenues and costs over the course of the year.”
Conventional factoring is a perfectly legitimate, albeit expensive,
way for cash-strapped companies to speed up their cash flow. It involves
selling accounts receivable — the amounts a company has billed to its
customers and expects to be paid in due time — at a discount to a third
party, which then collects the money from the customers.
Reverse factoring, by contrast, is a much more pernicious yet
increasingly prevalent form of supply chain financing that is being used
by large companies to effectively transform their supply chain into a
bank. Put simply, if suppliers want to get paid in a reasonable period
of time, they must pay an intermediary for the privilege.
More importantly, in most countries there is no explicit accounting
requirement to disclose reverse factoring transactions. The companies
can effectively borrow the money from the third party lender — thus
incurring a debt — without having to disclose it as debt, meaning it
expand its borrowing while maintaining its leverage ratios. This process
causes the debt to be understated.
Credit rating agency Fitch warned last year that reverse factoring effectively served as a “debt loophole” and that use of the instrument had ballooned, though no one knows by exactly how much since there is so little disclosure.
The use of an accounting loophole allowing companies to extend ‘payables days’ by the use of third-party supply chain financing without classifying this as debt may be on the rise, according to Fitch Ratings. We believe the magnitude of this unreported debt-like financing could be considerable in individual cases and may have negative credit implications.
Supply chain financing continues to be actively marketed by banks and other institutions in the burgeoning supply chain finance industry. A technique commonly referred to as reverse factoring was a key contributor to Carillion’s liquidation as it allowed the outsourcer to show an estimated GBP400 million to GBP500 million of debt to financial institutions as ‘other payables’ compared to reported net debt of GBP219 million.
The debt classified as ‘other payables’ was unnoticed by most market participants due to the near complete lack of disclosure about these practices and the effect on financial statements. Whether these programmes require disclosure under accounting standards depends greatly on their construction, which in practice allows many companies not to disclose them.
In the six months to June, CIMIC used reverse factoring and other
supply chain financing techniques to increase its total days payable to
159 days from 135 days in the previous six months, according to New Zealand investment bank, Jarden. By the end of June, its total factoring level was almost $2 billion.
More and more Australian companies are following the same playbook.
Rail group Pacific National told suppliers in May that it was using
global financial group C2FO‘s services to facilitate what it calls “accelerated payment of approved supplier invoices.”
Telecoms giant Telstra has ramped
up its exposure to “reverse factoring” more than 14-fold in the space
of just one year, from $42 million to almost $600 million. This $551
million increase, which is also reportedly being provided at least in
part by Greensill, represents a staggering 18% of Telstra’s 2019 free
cashflow, according to a report by governance firm Ownership Matters.
Yet the company’s credit is still rated A- by S&P Global, making it
one of Australia’s highest rated industrial corporations.
A Telstra spokesman said the company strongly denies that its
accounts “are not an accurate reflection of our business,” adding for
good measure that “supply chain financing is a practice commonly used
worldwide – it provides our suppliers the option of getting paid upfront
while at the same time getting the benefit of Telstra’s strong credit
rating.” Once again, it’s a win-win for both company and suppliers.
Yet in its last financial report, Telstra disclosed that it had extended payment terms to suppliers from 30 to 45 days to 30 to 90 days. This is part of “a persistent trend” that is hurting the cash flows of small and family businesses across Australia, revealed a review of payment terms released in March by the Australian small business and family enterprise ombudsman.
There is a persistent trend in Australia of payment times being extended beyond usual industry standards. Late payment, where businesses get paid beyond contract terms, adds to the cash flow problem faced by suppliers. It appears as though large Australian companies and multinationals apply these policies to improve their own working capital efficiencies at the expense of their suppliers. While the average days to get paid is declining, it is still above 30 days at an average of 36.74 days
This average obscures the imbalance between large and small business as large business are the worst for late payments and small business the fastest.
This imbalance intensifies cash flow pressure for small and family businesses. Scottish Pacific, a large independent finance provider, estimates the cost is $234.6 billion in lost revenue. That is, SMEs would have generated more revenue if cash flow was improved, as late payments accounted for a 43% downturn in cash flow.
Small and family businesses must find other ways to finance the short fall in their working capital. This places stress on smaller businesses with significant ramifications for solvency and mental health.
The outcome; small businesses cannot invest in growth and cannot increase employment.Since the Hayne Royal Commission, banks have tightened responsible lending standards across the board which has caused a ‘credit crunch’ for small businesses. They are finding it increasingly difficult to demonstrate ‘employee-like’ cash flow like a consumer. A high growth, entrepreneurial SME is highly unlikely to demonstrate cash flow in this way.
The increased bank focus on ‘employee-like’ cash flow means more needs to be done by large corporations paying their suppliers on time. Where large corporations delay payment to their small business suppliers beyond the contracted payment time, small business cash flow is unpredictable and presents significant difficulties in their ability to access and service finance.
Not only that, it’s also making it more likely that Australia will sooner or later have a Carillion of its own on its hands.
Jyske Bank A/S, Denmark’s second-largest listed lender, will impose negative rates on all private customers with 750,000 krone ($110,000) or more, according to Bloomberg. Until Friday, only people with roughly $1 million in surplus cash at their banks were facing a negative rate. Now, the threshold has been reduced to just over $100,000, with no guarantee it won’t go lower.
Chief Executive Officer Anders Dam said the latest Danish rate cut this month means Jyske is now “losing even more money” when it deposits excess reserves at the central bank at minus 0.75%. Dam also says it’s possible the rule will be extended to an even larger group of depositors.
Denmark’s monetary policy is designed to defend the krone’s peg to the euro. But its effect on the broader economy is being closely watched. Danes have now spent seven years with rates below zero — a world record — and Dam at Jyske says he’s bracing for another eight.
Normally, low rates encourage more household spending as it gets cheaper to borrow and less appealing to save. In Denmark, negative rates have led to a surge in mortgage refinancing, but they’ve also coincided with a record build-up of consumer deposits. And, as is the case in much of the rest of Europe, inflation is missing in action.
“Households have gotten all the benefits of negative rates so far, but now they’re starting to see the bad side of negative rates,” Nielsen said.
For consumers, it’s made more sense to keep their cash in a deposit account that paid zero, rather than invest in short-term market products at negative yields. Jyske’s decision now has implications for everything from debt levels to inflation.
But it may not just be a question of economic theory. In Germany, lawmakers have debated whether to ban banks from passing negative rates on to retail depositors. Finland’s regulator has also asked its lawyers to examine the legality of the practice. In Denmark, politicians have voiced concerns.
Perhaps is time here in Australia to mount a campaign to outlaw negative deposit rates here, and even align it to the war on cash!
Australia’s pioneering
alternative lender, SocietyOne,
has reinvented P2P lending for retirees and savers in response to continuing
reductions in interest rates, where a growing inability to survive on
fixed-term deposit returns is causing an exodus into higher-risk investment
options.
Where P2P or marketplace investment
options have traditionally been segmented by risk-return tiers, SocietyOne is
once again leading with its new “P2P 2.0” model, which provides two completely
separate and differentiated offerings for its two key investor categories:
individual investors and institutional investors.
Under the new model,
institutional investors will access the original P2P product but now at a
minimum investment of $10 million, so they gain exposure to a large enough pool
of loans to achieve an acceptable level of diversification and risk for the
desired return.
Individual investors will instead
be offered an entirely new income-managed fund in which investment can now
start as low as $50,000, and which will provide a smoothed 6 per cent per annum
return, paid monthly and supported by a reserving mechanism, as well as
increased liquidity, access, and diversification.
The new model is the next
evolution of traditional P2P or marketplace lending, says CEO Mark Jones, and
yet again demonstrates SocietyOne’s commitment to a constant process of
innovation to meet its customers’ changing needs.
“Being the first P2P lender in
Australia, we’ve had many years to build a thorough understanding of our
different investor categories’ needs, and hone our investment products accordingly,”
said Mr. Jones.
“We’re also conscious of changing
economic conditions, such as the all-time-low interest rates pushing a growing
number of retirees and savers to invest in more risky products to achieve
acceptable returns. We wanted to provide a more diversified, higher-return, and
income-producing alternative.”
The Reserve Bank recently cut
interest rates back-to-back in June and July of this year, landing them at a
historic low of 1 per cent and representing the first back-to-back cut since
2012.
Long-term falling yields are
forcing the growing pool of retiree savings into higher risk products such as
‘high-income or defensive equity portfolios’ more suited to institutional and professional
investors. The significant capital-at-risk nature of these asset classes is
often glossed over.
In the event of a further
economic downturn, such as a significant global equities correction, these
higher-risk options mean Australians who are no longer earning and who require
income-based investments could lose a substantial proportion of their savings,
according to SocietyOne Chief Investment Officer, John Cummins.
“Current and future market yields
are a reflection of a slowing global and local economy. Any further downturn in
global growth and trade should lead prudent investors to choose quality
yield-based assets and not higher-risk investments,” said Mr. Cummins.
The SocietyOne P2P
2.0 “Personal Loans Unit Trust” for individual investors, as it’s named, is
currently open to wholesale and professional investors. SocietyOne intends to
open it to retail investors in the future.
Class action lawyers are having a field day following the Hayne royal commission. A top litigation funder reveals how taking Aussie companies to court has become big business, via The Adviser.
Maurice
Blackburn Lawyers was the first to file a class action against a big
four bank following the publication of the royal commission final report
in February. The law firm filed a class action against Westpac over
alleged breaches of the bank’s responsible lending laws.
But
Maurice Blackburn is now reconsidering after ASIC lost its infamous “red
wine and Wagyu steak” case against Westpac last month.
Meanwhile,
embattled wealth giant AMP is facing multiple class actions in light of
the extensive misconduct uncovered by the royal commission. AMP
advisers are now preparing their own class action against the group.
Neill
Brennan, the co-founder and managing director of litigation funder
Augusta Ventures, believes class action lawsuits improve the regulatory
regime.
“Two
of the bigger regulators, the ACCC and ASIC both favor class actions.
From an ASIC perspective with shareholder class actions, it acts as a
policeman to some extent. So, if there are breaches of rules such as
continuous disclosure, ASIC can intervene, obviously, but it’s from a
regulatory perspective cheaper for an individual group of shareholders
to bring an action on their behalf, for themselves,” Mr Brennan
explained.
“Similarly, for the ACCC, there are kind of three
prongs to how they regulate. There are obviously penalties that they
impose. There are jail terms that can be imposed for cartel activity, et
cetera. But also, if there are damages brought by individuals or by
groups, that helps with the ACCC control of competition as well. So,
from a regulatory perspective, class actions are beneficial.”
In May, Augusta Ventures announced that it would be funding a class action against AMP.
Herbert
Smith Freehills partner Jason Betts said the focus of class actions has
largely been about governance issues and corporate malfeasance.
“When
we started this journey 25 years ago, I think people thought this will
be more a story about traditional products liability, manufacturing
defects, or mass disaster, mass tort accidents, natural disasters,” he
said.
“That hasn’t been the story, I think largely because the
cost of prosecuting these claims is significant, and in Australia, these
claims relied largely but not exclusively on litigation funders to
support them. And funders have, again, largely but not exclusively
focused on corporate malfeasance.
When you talk about the big
cases in Australia at the moment, they are predominately directed toward
corporate governance issues like continuous disclosure, like
misrepresentation in respect of financial parameters, earnings guidance,
impairments, financial calibrated cases.”
We don’t have a lot of
guidance in this country on how the law will determine those issues at
the moment. Statistically speaking, these corporate governance cases
settle. And so we’re in unusual state of opaqueness around how this
regime will look in five or 10 years’ time.
Mr Betts said that
statistically most corporate governance cases settle. He said
Australia’s class action culture, which is very strong, is much like
America’s. With a few cost differences.
“We’ve got a high rate of
adult share ownership. We’ve got the high focus on corporate governance
issues generally. We don’t have guidance from the law. We’ve got an
entrepreneurial funding market, different to really the rest of the
globe,” he explained.
“All of these doctrinal challenges that
that raises, there couldn’t be a more interesting time to sort of think
about the future of class action litigation.”
Betting on the
outcomes of a legal dispute is a risky game. As a litigation
funder, Mr Brennan said the stakes are higher for class actions where
limited information is available.
“A funder walks into a
situation at the start where legal merit is judged but not obviously
absolutely clear. It’s prior to disclosure, prior to witness statements,
prior to a lot of information, so you’re making a call with limited
information,” he said.
“Then you have question marks over whether
or not the case will actually be run, because of multiplicity [of]
hearings. And then when it comes to the end of it, the court can
actually obviously step in and say, ‘Well, we think the funding
commission should be X instead of Y,’ and that’s a hindsight decision.
“The
risks that a funder faces are large, and if it all goes wrong, the
money is nonrecourse, so the funder’s not going to be paid anything. And
so, the risks a funder faces need to be commensurate with the rewards
that they’re going to achieve in a competitive environment.”
The Council of Financial Regulators (the Council) is the coordinating body for Australia’s main financial regulatory agencies. There are four members: the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC), the Australian Treasury and the Reserve Bank of Australia (RBA). The Reserve Bank Governor chairs the Council and the RBA provides secretariat support. It is a non-statutory body, without regulatory or policy decision-making powers. Those powers reside with its members. The Council’s objectives are to promote stability of the Australian financial system and support effective and efficient regulation by Australia’s financial regulatory agencies. In doing so, the Council recognises the benefits of a competitive, efficient and fair financial system. The Council operates as a forum for cooperation and coordination among member agencies. It meets each quarter, or more often if required.
This is the source of the Australian financial regulatory group-think and underscores connection between the “independent” central bank and Treasury! The CFR has recently started publishing updates on its activities. This is the latest. We need an inquiry into the regulatory system, something which was missing from the Hayne Royal Commission, by design.
At its meeting on 18 September 2019, the Council of Financial Regulators (the Council) discussed risks facing the Australian financial system, regulatory issues and developments relevant to its members. The main topics discussed included the following:
Financing conditions and the housing market. Council members discussed credit conditions and recent developments in the housing market. Housing credit growth has been subdued, particularly growth in credit to investors. The major banks have seen slower growth relative to other lenders. Subdued credit growth has been primarily driven by weaker credit demand, though loan approvals have picked up recently. The potential for risks to financial stability from falling housing prices in Sydney and Melbourne has abated somewhat, with prices rising in the past few months. In contrast, prices have continued their prolonged decline in Western Australia and the Northern Territory and so the prevalence of negative equity for borrowers in those regions has continued to rise. The Council also discussed the continuing tight credit conditions for small businesses, with little growth in credit outstanding over the past year. The Council will continue to closely monitor developments.
Members discussed progress with updating the guidance
regarding responsible lending provisions in the National Consumer Credit
Protection Act 2009. The updated guidance should provide greater clarity about
what is required for a lender to comply with its obligations, taking into
consideration enhancements to lending practices, the impact of competition from
new market entrants, as well as enhanced access to and usage of consumer credit
data and technological tools.
Policy developments. APRA provided an update on a number of policy initiatives, including changes to the related entities framework for banks and other ADIs and proposals to strengthen remuneration requirements across all APRA-regulated entities. The proposed remuneration requirements seek to better align remuneration frameworks with the long-term interests of entities and their stakeholders, and incorporate a recommendation from the Royal Commission on limiting remuneration based on financial metrics. APRA briefed members on the outcomes of its capability review.
Superannuation fund liquidity. The Council considered arrangements for managing liquidity at superannuation funds during periods of market stress. They noted that arrangements had operated as intended during the financial crisis and had since been strengthened. They agreed that existing arrangements provide an appropriate incentive for superannuation funds to manage their liquidity and that circumstances where a systemic liquidity problem could arise for the superannuation system were highly unlikely. Members concluded that no additional measures, including access to liquidity from the Reserve Bank, were warranted.
Financial market infrastructure (FMI). Members discussed key elements of a package of proposed regulatory reforms for FMIs, including some changes to the supervisory framework and a resolution framework for clearing and settlement facilities. The reform package is expected to be released by the Council for consultation later in 2019. The package will seek to modernise and streamline regulators’ supervisory powers and provide new powers to resolve a distressed domestic clearing and settlement facility. Following the consultation, the Council will provide its findings to the Government to assist with policy design and the drafting of legislation.
Stored-value payment facilities. The Council finalised a report to the Government proposing a revised regulatory framework for payment providers that hold stored value. The proposed framework seeks to reduce the complexity of existing regulation, while providing adequate protection for consumers and the flexibility to accommodate innovation. Both the Financial System Inquiry and the Productivity Commission’s inquiry into Competition in the Australian Financial System called for a review of the regulatory framework. The report will be provided to the Government in the near future.
Banks’ offshore funding. The IMF’s recent Financial Sector Assessment Program (FSAP) review of the Australian financial system recommended that Australian regulators encourage a reduction of banks’ use of offshore funding and an extension of the maturity of their borrowings. Members noted that banks manage their risks from offshore borrowing through currency hedging and holding foreign currency liquid assets, and that there are various other factors mitigating the risks. They welcomed the progress that the banks had made in lengthening the maturity of their offshore term debt over recent years. A further lengthening of the maturity of their offshore borrowing would reduce the rollover risk for banks and the broader financial system.
Stablecoins. The Council considered some potential policy implications of so-called ‘stablecoins’ and associated payment services, particularly those linked to large, established networks. A stablecoin is a crypto-asset designed to maintain a stable value relative to another asset, typically a unit of currency or a commodity. Members concluded that elements of the existing regulatory framework, along with the framework proposed for stored-value facilities, were likely to apply to products of this type, but that Australian regulators would need to consider any international regulatory frameworks that might ultimately be established. Council agencies and a number of other Australian regulators are collaborating on their analysis of stablecoins. They are also drawing on their membership of several international groups focused on similar issues. Council members stressed the benefits of having a flexible, technology-neutral regulatory regime in dealing with these and other innovations.
Cyber security and crisis management. The Council reviewed work under way and planned by working groups focused on cyber security and crisis management. One focus of cyber security work in the period ahead will be aligning financial sector efforts with broader initiatives, including those of the Australian Cyber Security Centre and the Government’s 2020 Cyber Security Strategy. Recent work on crisis management in the banking sector has included a joint crisis simulation with New Zealand regulators, focussed on the testing of communications, under the auspices of the Trans-Tasman Council on Banking Supervision.
The volumes are creeping up a little, but still below a year ago. 1,663 compared with 2,112 last year. Final clearance rates 73% last week in Sydney and Melbourne, so transaction throughput still on the low side. A number of agents will be fretting about cash flow on these numbers!
Canberra listed 38, reported 32 with 17 sold, 1 withdrawn and 15 passed in giving a Domain clearance of 52%.
Brisbane listed 88, reported 44 and sold 23 with 11 withdrawn and 21 passed in, giving a Domain clearance of 42%.
Adelaide listed 68, reported 39 and sold 25 with 5 withdrawn and 14 passed in, giving a Domain clearance of 57%.
The latest edition of our weekly finance and property news digest with a distinctively Australian flavour.
Contents
1:00 The Apprentice
2:45 OECD Economic Outlook
06:28 Fed and the Repo
09:10 Trade Wars
10:00 US Markets
12:30 Central Bank Divergence
13:00 Euro zone and Brexit
13:30 Deutsche Bank Sales
15:45 AP Property Exposures
17:00 New Zealand GDP
18:24 Australian Section
18:24 Latest economic data
19:40 Employment data
20:48 Scenarios
21:30 Property prices and auctions
26:00 War on Cash
33:40 Australian markets
35:50 Australian Bank derivatives
According to the Fed, they will conduct another $75 billion worth of repurchase operations on Friday to help keep the federal funds rate within the target of 1 3/4 to 2.0 per cent. So things are still looking out of kilter – perhaps because of the Fed’s earlier balance sheet reduction?
In accordance with the FOMC Directive issued September 18, 2019, the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York will conduct an overnight repurchase agreement (repo) operation from 8:15 AM ET to 8:30 AM ET tomorrow, Friday, September 20, 2019, in order to help maintain the federal funds rate within the target range of 1-3/4 to 2 percent.
This repo operation will be conducted with Primary Dealers for up to an aggregate amount of $75 billion. Securities eligible as collateral in the repo include Treasury, agency debt, and agency mortgage-backed securities. Primary Dealers will be permitted to submit up to two propositions per security type. There will be a limit of $10 billion per proposition submitted in this operation. Propositions will be awarded based on their attractiveness relative to a benchmark rate for each collateral type, and are subject to a minimum bid rate of 1.80 percent.
