Revised Banking Code Of Conduct A Small Win, But…

The ABA made a big splash when relaunching the revised Banking Code of Conduct which starts today, and yes it is a small win for consumers and SME’s. However, we must ask this: since when are such financial service basic hygiene issues as not charging for no service, advising before charging, considering credit card repayment capacity, speaking in plain English and offering suitable low-fee products, seen as so revolutionary?

Frankly put, these are issues which an industry which truly focused on the well-being of its customers would have long ago addressed. They did not, and were dragged towards better outcomes by the Royal Commission and public pressure.

So, yes, important baby steps, but still a massive leap is required to the desired level of customer-centricity. There is nothing bold or innovative here.

Australia’s banks will comply with a strong new code of practice that significantly increases and enshrines customer protections and introduces tough new penalties for breaches from tomorrow.

The ASIC-approved Banking Code of Practice represents the most significant increase to customer protections under a code in the industry’s history.

From 1 July, under the new Banking Code of Practice, banks will no longer:

– Offer unsolicited credit card limit increases
– Charge commissions on Lenders Mortgage Insurance
– Sell insurance with credit cards and personal loans at the point of sale.

Under the code banks must:

– Offer low-fee or no-fee accounts to low income customers
– Have a 3 day grace period on all guarantees to give guarantors enough time to make sure it’s the right option for them
– Actively promote low-fee or no-fee accounts to low income customers
– Provide reminders when introductory offers on credit cards end
– Simpler and fairer loan contracts for small business using plain English that avoids legal jargon
– Provide customers a list of direct debits and recurring payments to make it easier to switch banks.

Australian Banking Association Chief Executive Officer Anna Bligh said customers can expect to see a change to banking products and services immediately.

“We’ve completely rewritten the rule book for Australia’s banks. The Banking Code of Practice has strong protections for customers, serious consequences for breaches and strong independent enforcement,” Ms Bligh said.

“Banks understand they need to change their behaviour and this new rule book represents an important step in earning back the trust of the Australian public.

“The new Code will form part of every customer’s relationship with their bank and will be strongly enforced both by an independent body, the Banking Code Compliance Committee, and the Australian Financial Complaints Authority.

“Whether it’s through your credit card, home loan, small business loan or just day to day banking, Australian customers will see tangible benefits from this new Code,” she said

Financial Counselling Australia Chief Executive Officer Fiona Guthrie said the new Code was a major step up in the protections for customers, particularly the most vulnerable, and was an important milestone in restoring community trust in Australia’s banks.

“Codes like this really can make a difference because they go beyond black letter law and instead reflect the standards that an industry voluntarily commits to,” Ms Guthrie said.

“The banking industry released its first version of the banking code over 25 years ago and it is really pleasing to see that each version – and this is the fourth major revision – contains advances in consumer protection.

“Financial counsellors in particular welcome provisions around family violence, stronger protections for guarantors, better promotion of free or low fee accounts and more proactive approaches to people experiencing financial hardship,” she said.

Banks have trained more than 130,000 staff on the new requirements in the code so it can begin operating from tomorrow (1st July 2019). Information about the Code has been translated into Mandarin (simplified Chinese), Arabic, Vietnamese, Tagalog/Filipino, Hindi, Spanish and Punjabi.

The Financial Services Royal Commission asked for further changes to the Code which will be implemented by March 2020.

For more information on the new Banking Code of Practice visit ausbanking.org.au/code.

Auction Results 29 June 2019

Domain released their preliminary results for today.

Last week the final result came in at 59%, with a higher result in Melbourne than Sydney. Volumes remain lower than a year back.

This week, in Canberra 18 auctions led to 9 results reported, with 5 sold, 1 withdrawn and 4 passed in, giving a Domain clearance of 50%.

In Brisbane, 94 auctions led to 48 results, 22 sold, 12 withdrawn and 26 passed, giving a Domain clearance of 37%.

In Adelaide, 51 auctions led to 24 results, with 19 sold, 6 withdrawn and 5 passed in giving a Domain clearance of 63%.

May 2019 Credit Weak As…

The RBA released their credit aggregates to May 2019 today, we already covered the APRA ADI series in an earlier post.

Seasonally adjusted owner occupied housing rose by 0.34% to $1.24 trillion dollars while investment lending slid 0.04% to $595 billion dollars, and comprises 32.5% of all household finance, in seasonally adjusted terms. Business lending was down 0.35% to $959.6 billion dollars and was 32.7% of credit, the lowest for the past six months. Personal credit fell again, down 0.59% to $145.8 billion dollars.

The monthly movements were quite volatile once again.

However the annual movements paint a clearer picture. Over the past year owner occupied lending rose 5.3%, investor lending rose just 0.5% while personal credit fell 3.2%. Business lending grew 4.5%. Broad money grew 4.1%, the earlier acceleration in the first past of the year has not been explained.

We can proxy the growth in the non bank sector by comparing the APRA and RBA dataset. Whilst only approximate, it does give a fair indication. Non-bank lending recorded an estimated 7.8% rise over the year, significantly higher than the ADI’s.

Overall growth in the non-bank, non-ADI sector for mortgages was an impressive 7.8% annualised.

Further analysis by category shows that owner occupied lending by non-banks rose 10.7% over the past year, while investment loans rose 5.8%. Both are higher than the ADI’s, suggesting the non-bank sector is able and willing to lend.

Total household credit growth remain above both inflation and wages, so households are getting mired further into debt, the sustainability of which we question. And again, we think regulators are not looking at the non-bank sector sufficiently hard.

Next month we will see the post-election post-rate cut situation. Many are expecting credit to rebound, and home prices to follow – we will see.

Changing The Game

It is also worth noting the RBA will be changing the reporting on the credit aggregates ahead. You can read about their plans. But essentially it will provide more granularity, and make some “significant” revisions to past results. The RBA plans to start publishing the financial aggregates from August 2019 using an improved conceptual framework and a new data collection.

The New Economic and Financial Statistics Collection

Over the past few years, APRA, the ABS and the RBA have worked to modernise the existing set of forms, and banks and other reporting institutions have adapted their infrastructure to be able to report on the new versions of these forms. This has been a large scale and complex project, involving considerable collaboration between the three agencies and the industry. The new set of forms are called the Economic and Financial Statistics (EFS) collection and will better meet the data needs of policymakers.

The EFS collection will be implemented in three phases.

The first phase will focus on data used for the financial aggregates and national accounts finance and wealth estimates.

The second phase will update current forms on housing and business loan approvals. It will also provide much more granular information on banks’ and other reporting institutions’ lending, their liabilities and interest rates.

The third phase will provide information on other aspects of reporting institutions’ activity and performance, including profits, fees charged and activity in specific financial products and markets. The first phase national accounts aggregates will be used in addition to this performance data in the compilation of Australia’s Gross Domestic Product (GDP).

The EFS collection will increase the reliability and accuracy of the inputs used to calculate the aggregates. One of the most important changes in the EFS is more detailed and precise definitions of the data to be reported. These definitions are accompanied by comprehensive guidance to assist institutions in reporting consistent data.

ADI’s Mortgage Lending May Update

APRA has released their monthly banking statistics to end May 2019. It updates the stock of mortgages by lender.

Overall mortgage lending rose o.24% (or 2.8% annualised) to a new record of $1.69 trillion dollars. Within that owner occupied lending rose 0.34% to $1.13 trillion dollars while lending for investment purposes rose 0.023% to $557 billion dollars. Investment loans as a proportion of all loans outstanding fell again to 33.85%.

This of course is the last month before the election, and APRA easing mark 2 and the RBA cash rate cut.

So little here to show the credit impulse is accelerating. Investment lending remains in the doldrums, and owner occupied lending eased back in growth terms.

The monthly movements between the banks shows Westpac and CBA in positive territory, on both investment and owner occupied lending, while NAB and ANZ dropped investment loans further. HSBC and Macquarie also advanced, along with Bendigo and Adelaide Banks. Members Equity (ME Bank) dropped also.

That said the portfolio movements were quite limited. CBA holds the largest share of owner occupied loans and Westpac investment loans.

The annualised investment lending trends (sum of monthly movements) puts the majors well behind the likes of Macquarie and HSBC. The abolished investment loan speed limit just accentuates the point that some are driving loan growth very hard.

We would expect lending momentum to pick up in the light of APRA’s changes, lower interest rates and the chatter about home price recovery.

However, to emphasize the obvious point one more time – lending is still growing faster than incomes – so household debt is still growing – adding more weight in the saddlebag of consumer spending. Not that the RBA seems at all worried – though we think they should be!

The RBA data also comes out today and this will give a whole of market view.

The Lowdown on Libra

Cryptocurrencies have become a global phenomenon in the past few years. Now Facebook is launching it’s own cryptocurrency, in association with Visa, MasterCard, Uber and others. The stated aim of Libra is to “enable a simple global currency and financial infrastructure that empowers billions of people”. Via The Conversation.

The announcement has sparked fears that Libra could be a threat to traditional banks, warnings to be cautious, and sceptical commentary of claims that it will help developing countries.

But let’s go back to the basics and look at what Libra is, how it compares to other cryptocurrencies and whether you should be concerned about using it when it eventually arrives.

What is a cryptocurrency?

Currency is a system of money that is commonly used in exchange for goods and services and, as a result, holds value. Cryptocurrencies are digital currencies that are secured using cryptography.

The more popular recent cryptocurrencies are based on blockchain technology which uses a cryptographic structure that is difficult to change. One of the key properties of this structure is a distributed ledger that keeps account of financial transactions, which anyone can access.

What is Libra?

Libra is a new currency that is being proposed by Facebook. It’s considered a cryptocurrency because cryptography will be used to help protect the value of the currency from tampering – such as double spending – and to protect the payment process.

Libra has the potential to become successful because of the backing from the Libra Association, which is made up of large international corporations such as Facebook, Uber and Vodafone. MasterCard and Visa have also thrown their hats in the ring, but no traditional banks are on the list.

What’s different about Libra compared with other cryptocurrencies like Bitcoin?

Cryptocurrencies like Bitcoin and Ethereum are quite egalitarian in nature. That’s because there is no single authority that verifies transactions between parties, so anyone could potentially do it.

To authorise a Bitcoin transaction you would have to prove that you have done the work, known as a “proof of work”. For Bitcoin, the proof of work is to solve a mathematical puzzle. People who successfully solve the puzzle (proving they have done some work), can add transactions to the blockchain distributed ledger and are rewarded with Bitcoins. The process is known as mining.

The good thing about this is that it reduces fraud. Since anyone can potentially mine Bitcoins, it’s harder to collude as you wouldn’t know who the next person to mine a coin would be. And it’s simple to verify that the person is authorised because anyone can check that the puzzle has been solved correctly.

Based on the initial descriptions of the currency, it sounds like the difference with Libra is that it will verify transactions using a consensus system known as “proof of stake”, or a variation of this method. Under this system, transactions would be authorised by a group of people who have a stake or ownership in the currency.

This makes it easier to predict who the next person to authorise a transaction might be (since there are a relatively small number of authorising group members), and then collude to launder funds without other group members knowing.

It appears the criteria to become a founding member of the Libra Association is to contribute a minimum of US$10 million entrance fee, have a large amount of money in the bank and be able to influence a large number of people.

What are banks and regulators worried about?

Cryptocurrencies affect governments and tax systems since they have little to no transaction costs when money is transferred across borders. So while the low transaction costs would be good for everyday users, the advent of a new cryptocurrency with a potentially very large user base has governments and traditional banks very concerned.

While Libra is open source – meaning the source code is available for all to view, use and modify – it’s the members of the association who will be overseeing the currency. Libra could herald a shift away from traditional government taxes and banking fees to a new international monetary system controlled by corporate entities like Facebook and Uber. That’s a concern because of the lack of oversight from regulatory bodies.

What should everyday people expect from Libra?

The backing of software giants means it’s likely that the user interface for Libra coins would be smooth and simple to use.

Low transaction costs would benefit users and the Libra Association promises to control the value of the currency so that it does not fluctuate as much as other cryptocurrencies. It’s unclear how they plan to do this. But value stability would be a great advantage in times of uncertainty.

What are the risks?

The everyday consumer probably wouldn’t know the difference between the “proof of work” and the “proof of stake” mechanisms. But since Facebook has a large database of users that are known to use Libra, it may be able to link Libra transactions to individuals. This could be a privacy concern. (Bitcoin transactions are anonymous because account numbers used in Bitcoin transactions are not linked to an individual’s identity.)

Recent cybersecurity breaches have contributed to a growing awareness of the vulnerabilities of IT systems. As with all software, the Libra implementation and management could be vulnerable to attack, which in turn could mean users could lose their money. But that is a risk that all cryptocurrency users face, whether they are aware of it or not.

What steps could consumers take to protect themselves?

No matter what cryptocurrency you choose to use, your funds are still accessible through the same interfaces: a web page or a mobile app. And the way you control access to your personal funds is by authenticating with a password.

Make sure you keep your password safe by making sure it is complicated and hard to guess. Look for applications that allow you to use two-factor authentication and make sure it’s turned on.

Libra is yet to prove its claims of making financial transactions safe and convenient. Only time will tell if its uptake will become widespread following its expected launch next year.

Author: Ernest Foo, Associate Professor, Griffith University

One Step Away From Global Recession – UBS

The world is one step away from a global recession, according to UBS who has questioned if the markets are ready. Via InvestorDaily.

UBS has released global research paper where the investment bank reveals it is anticipating major changers to their forecasts, which would result in a global recession. 

“We estimate global growth would be 75bp lower over the subsequent six quarters and that the contours would resemble a mild ‘global recession’,” said UBS. 

The cause behind this will be the continued escalation of the US-China trade war. 

“Unless a deal is struck soon, the global weighted average tariffs will reach levels last seen in 2003 and the US weighted tariffs will revert to 1947 levels,” found UBS. 

UBS compared this recession to the Eurozone collapse or the mid-’90s “Tequila” crisis as opposed to more recent events like the ’08 crash. 

If UBS is right on the growth impact, all major central banks would ease, which we have already seen the RBA do with a 25-basis-point cut made at the start of June. 

UBS predicted the Fed would cut an additional 100 basis points, on top of an expected 50-basis-point July cut, which would send the economy dangerously low to the ground but would avoid recession. 

However, eyes will be on the escalation of trade conflicts, which would push global equities down by 20 per cent and hurt US growth. 

“As trade tensions escalate, growth and policy rates are likely to decline more in the US than in Europe. Such a scenario is typically negative for the USD, but growth differentials matter less for the dollar when we fall below the 30th percentile of global growth,” said UBS. 

Over half of the impact would be on “innocent bystanders”, said the report, as spillovers from lower growth in US and China impacts the rest of the world. 

UBS is currently watching a few world events that will inform its forecast, including recent public hearings on China tariffs and the Fed meeting in July. 

It also looked forward to the G20 summit where it expected President Trump and President Xi will have made enough progress to forestall tariff escalation and in fact will likely announce tariffs by July. 

If the trade situation escalates, UBS predicted the US growth and policy rates will come down by more than those in Europe but would push global growth into the bottom quartile, which would see the USD top out against G10 currencies in the middle of 2020. 

Overall, UBS did not predict too much change for Australia, with both US-China tariffs or Mexico tariffs not having too great an impact on the base case. 

It did note that, previously, Australia had been buffered from external shocks due to substantial fiscal and monetary policy flexibility. 

However, the low cash rate and a post-GFC low for the AUD may see this buffer weakened and the external shocks having more of an impact. 

ASIC Still Looking At Responsible Lending

In a keynote address by ASIC Chair, James Shipton at Committee for Economic Development of Australia (CEDA) event in Melbourne yesterday, it appears the regulator will hold public hearings about responsible lending practices. 

He said that ASIC was updating its responsible lending guidance, and as part of its consultation, public hearings would be held to “robustly test some of the issues and views that have been raised in submissions”.

This is a follow-up to ASIC’s consultation paper on updating its guidance on responsible lending, which was issued in mid-February 2019.

Interestingly, ASIC has discretion as to whether such hearings would take place privately or publicly. However the regulator is required to have regard to whether it is in the public interest for a hearing to take place in public.

In addition, ASIC also has power to summon witnesses and require the production of documents for the purposes of a public hearing.  It may also refer to a court any questions of law arising at a hearing.

To date ASIC has hardly used it hearings powers but is does appear they intend to utilise these as an aspect of its renewed approach to enforcement in the wake of the Hayne Royal Commission.

We are embedding and expanding new supervisory approaches and promoting best practice and innovation in regulation – particularly through our Close & Continuous Monitoring program (or CCM) and our corporate governance review that is aimed at improving governance practices at the board level.

We are also implementing new and existing reforms and working towards our new obligations and responsibilities in response to the Royal Commission. This includes an expanded role for ASIC to become the primary conduct regulator in superannuation.