New Small Amount Credit Contract and Consumer Lease Reforms

The Treasury has released exposure drafts for further reform for the Pay Day (SACC) and consumer lease sector (FINALLY)!

The exposure draft of the National Consumer Credit Protection Amendment (Small Amount Credit Contract and Consumer Lease Reforms) Bill 2017 (the Bill) introduces a range of amendments to the Credit Act to enhance the consumer protection framework for SACCs and consumer leases. The amendments contained in the Bill are to be complemented by amendments to the Credit Regulations, which will be consulted on separately at a later date.

The new SACC and consumer leasing provisions will promote financial inclusion and reduce the risk that consumers may be unable to meet their basic needs or may default on other necessary commitments. The Bill implements the Government’s response to the Review of the Small Amount Credit Contract Laws (the Review) that was conducted by an independent panel chaired by Ms Danielle Press. The Review was publicly released in March 2016. The Government’s response to the Review was released by the Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP, on 28 November 2016.

The Draft Bill implements the Government’s response to the Review. This includes:

  • imposing a cap on the total payments that can be made under a consumer lease;
  • requiring small amount credit contracts (SACCs) to have equal repayments and equal payment intervals;
  • removing the ability for SACC providers to charge monthly fees in respect of the residual term of a loan where a consumer fully repays the loan early;
  • preventing lessors and credit assistance providers from undertaking door-to-door selling of leases at residential homes;
  • introducing broad anti-avoidance protections to prevent SACC loan and consumer lease providers from circumventing the rules and protections contained in the Credit Act and the Code; and
  • strengthening penalties to increase incentives for SACC providers and lessors to comply with the law.

Deadline for submissions is 3rd November 2017.

Preliminary Auction Clearance Rate Remains Below 70%

From CoreLogic.

The combined capital cities returned a preliminary auction clearance rate of 69.4 per cent this week, marking the 21st consecutive week where the clearance rate has held below 70 per cent.  The trend towards softer auction market conditions has been led by the Sydney market where the final auction clearance rate has remained below 65% since the first week of October.

Auction volumes were similar week-on-week, with 2,471 properties taken to auction, compared to 2,525 last week. This time last year, 2,680 homes were taken to auction and a clearance rate of 78.1 per cent was recorded. Tasmania, the smallest auction market, recorded the highest preliminary clearance rate with 80.0 per cent of the 5 reported auctions recording a successful result, followed by Melbourne with a preliminary clearance rate of 73.3 per cent across 1,030 results.

2017-10-23--auctionresultscapitalcities

Banking Regulators Asleep at the Wheel?

Well, finally, we got an admission from APRA that mortgage lending standards have decayed over the last decade, and that they needed to take action to reverse the trend. And now they are looking at debt-to-income.

Poor lending standards, they say are systemic, driven by completion, and poor bank practices. They recently intervened (a little). And late to the piece (now) debt-to-income is important. Did you hear the door slamming after the horse has bolted?

This is after ASIC called out poor lending practices, and the RBA have been raising concerns about the high household debt, and the downstream risks to growth this represents.

A completed change of tune from the declarations of 2015 when everything was said to be just dandy!

Those following this blog over the past few years will know we have been flagging these concerns, especially as the cash rate was brought to its all time low.  We said DTI was critical, that standards should be tightened, and the growth of debt to income was unsustainable.

These three parties, plus the Treasury form the “Council of Financial Regulators” which is chaired by the RBA are all culpable.  This body, which works behind the scenes, is referred to when hard decisions need to be take. If you look back at recent APRA and RBA statements, the Council gets a Guernsey!

The problem is there has been group-think for year, driven by the need to use households as a growth proxy for the failing mining and resource sector. And no clear accountability.

But too little has been done, too late.  And it is poor old households who, one way or the other will pick up the pieces – not the banks who have enjoyed massive profit and balance sheet growth.

Even now, lending for housing is growing three time faster than incomes or cpi.

Regulators are now lining up to call out the problems. Managing the risk going forwards is a real challenge. Time to review the regulatory structure.

Worth remembering that the Financial System Inquiry recommended the creation of a new Financial Regulator Assessment Board to assess the performance of the regulatory framework, but this was rejected by the Government!

 

ANZ and ASIC Agree to Settle the BBSW case

In a short release, ANZ says it has reached a confidential in-principle agreement with the Australian Securities and Investments Commission (ASIC) to settle court action relating to the Australian interbank BBSW market.

As a result, this morning ASIC has asked the Court to stand down the trial for 48 hours, which ANZ will consent to, so as to progress the in-principle agreement following which ANZ will make a more detailed statement.

Based on the in-principle agreement, the financial impact to ANZ will be reflected in the 2017 Financial Year results and is largely covered by the provisioning held as at 31 March 2017.

APRA Admits Mortgage Lending Standards Have Deteriorated

APRA Chairman Wayne Byers gave the keynote address at the COBA 2017 – Customer Owned Banking Convention in Brisbane. It included some remarks on the state of play of housing lending standards making the point that until recently, systematically, lending standards were eroding, but this is now being reversed. He specifically mentioned a desire for borrower debt-to-income levels to be appropriately constrained in anticipation of (eventually) rising interest rates.

We would say better late than never!

Earlier this year, we announced further measures to reinforce prudent standards across the industry. We did this because, in our view, risks and practices were still not satisfactorily aligning. We remain in an environment of high house prices, high and rising household indebtedness, low interest rates, and subdued income growth. That environment has existed for quite a few years now, and one might expect a prudent banker to tighten lending standards in the face of higher risk. But for some years standards had, absent regulatory intervention, been drifting the other way. Indeed, if we look back at standards that the industry thought important a decade ago, we see aspects of prudent practice that we are trying to re-establish today.

The erosion in standards has been driven, first and foremost, by the competitive instincts of the banking system. Many housing lenders have been all too tempted to trade-off a marginal level of prudence in favour of a marginal increase in market share. That temptation has, unfortunately, been widespread and not limited to a few isolated institutions – the competitive market pushes towards the lowest common denominator. The measures that we have put in place in recent years have been designed, unapologetically, to temper competition playing out through weak credit underwriting standards.

Since we have been focussing on lending standards, APRA’s approach has been consistently industry-wide: the measures apply to all ADIs, albeit with additional flexibility for smaller, less systemic players around the timing and manner in which they have been expected to adjust practices. There is no reason, however, why poor quality lending should be acceptable for some ADIs and not others, or in one geography and not others. Prudent standards are important for all.

At a macro level, our efforts appear to be having a positive impact. As I have spoken about previously, serviceability assessments have strengthened, investor loan growth has moderated and high loan-to-valuation lending has reduced. New interest-only lending is also on track to reduce below the benchmark that we set earlier this year. Put simply, the quality of lending has improved and risk standards have strengthened.

We would ideally like to start to step back from the degree of intervention we are exercising today. Quantitative benchmarks, such as that on investor lending growth, have served a useful purpose but were always intended as temporary measures. That remains our intent, but for those of you who chafe at the constraint, their removal will require us to be comfortable that the industry’s serviceability standards have been sufficiently improved and – crucially – will be sustained. We will also want to see that borrower debt-to-income levels are being appropriately constrained in anticipation of (eventually) rising interest rates.

These expectations apply across the industry, to large and small alike. Pleasingly, the industry is moving in the right direction to achieve that. Improved serviceability standards are being developed, and policy overrides are being monitored more thoroughly and consistenly. The adoption of positive credit reporting, which APRA strongly endorses, will remove a blind spot in a lender’s ability to see a borrower’s leverage. Coupled with the higher and more risk-sensitive capital requirements that I mentioned earlier, these developents should – all else being equal – provide an environment in which some of our benchmarks are no longer needed. The review of serviceabilitiy standards across the small ADI sector that we are currently undertaking will help inform our judgement as to how close we are to that point.

His comments on the role of mutual ADI’s are are worth reading…

ABA Declares Progress On Bank Reforms

The Australian Bankers’ Association has welcomed the latest progress report from former auditor-general Mr Ian McPhee AO PSM, which has found that banks are on track regarding the six reform initiatives.

Mr McPhee stated that since the previous report, a number of initiatives are now being implemented, which is good news for customers and the industry.

Banks have already introduced three initiatives – the appointment of customer advocates who help customers resolve issues and proactively improve customer outcomes, the adoption of new whistleblower protections, and the conduct background check protocol when hiring staff.

The remaining three initiatives are showing good progress.

ABA Chief Executive Anna Bligh said it’s encouraging that the industry’s reform program is starting to gain traction and deliver real benefits to customers.

“Banks across the board are serious about change and rebuilding trust and confidence within the community. Introducing these initiatives will better protect customer interests and increase transparency and accountability,” she said.

“The banking industry is currently undergoing the greatest program of reforms seen in decades. It’s vital that the momentum continues, so banks can meet the needs and expectations of the community.

“The ABA appointed the former Public Service Commissioner Stephen Sedgwick AO to review how bank tellers and other customer-facing bank employees, their managers, and third parties are paid by banks. The industry adopted all the recommendations and are now in the implementation phase,” Ms Bligh said.

“The industry understands that through the combination of leadership, performance management, remuneration structures, behavioural standards and culture, a real difference is being achieved.”

Progress since the last quarter McPhee review includes:

* Adoption of best practice whistleblowing policies by 19 banks (last bank to finalise by end of year).

* The Code of Banking Practice is now with key stakeholders for feedback. The new Code is on track to be finalised by December 2017.

* Four banks have published their overarching principles on remuneration and incentives ahead of the December deadline.

“The determined effort that has delivered the reforms to date is set to continue in coming months as banks finalise their implementation of the industry’s Better Banking program,” Ms Bligh said.

A copy of Mr McPhee’s latest report is available at betterbanking.net.au.

Mastercard Opens-Up Access to Blockchain API for Partner Banks and Merchants

Mastercard announced in New York that it will be opening up access to its blockchain technology via its API published on Mastercard Developers.

Mastercard’s blockchain solution provides a new way for consumers, businesses and banks to transact and is key to the company’s strategy to provide payment solutions that meet every need of financial institutions and their end-customers. The Mastercard blockchain API will be part of the Money 20/20 hackathon in Las Vegas next week.

The company has tested and validated its blockchain and will initially implement the technology in the business-to-business (B2B) space to address challenges of speed, transparency and costs in cross-border payments. The Mastercard blockchain technology will complement the company’s existing capabilities including virtual cards, Mastercard Send and Vocalink to support all types of cross-border, B2B payment flows – account-based, blockchain-based and card-based.

There are four key differentiators of the Mastercard blockchain – privacy, flexibility, scalability, and most importantly, the reach of the company’s settlement network.

  • Privacy – Mastercard blockchain provides privacy by ensuring that transaction details are shared only amongst the participants of a transaction while maintaining a fully auditable and valid ledger of transactions.
  • Flexibility – Partners can use the blockchain APIs in conjunction with a wider suite of Mastercard APIs to create a range of powerful, new applications. Software development kits are available in six different languages to make the APIs even easier to integrate.
  • Scalability – Mastercard blockchain is designed for commercial processing speed and extensibility by reaching consensus between a trusted network moderator and network participants.
  • Reach – Mastercard blockchain is integrated into the company’s payment network that includes 22,000 financial institutions to move funds that have been committed on the blockchain.

“By combining Mastercard blockchain technology with our settlement network and associated network rules, we have created a solution that is safe, secure, auditable and easy to scale,” said Ken Moore, executive vice president, Mastercard Labs. “When it comes to payments, we want to provide choice and flexibility to our partners where they are able to seamlessly use both our existing and new payment rails based on the needs and requirements of their customers.”

Mastercard blockchain solution has the ability to power secure and seamless non-card payment transactions such as business-to-business payments and trade finance transactions. It also has the ability to power non- payment solutions such as proof of provenance that helps authenticate products across the supply chain.

With this proprietary solution, Mastercard hopes to create new benefits for its partners and make the commerce ecosystem easier, faster and safer. In addition to building a new solution, the company has also filed for over 35 patents in blockchain and invested in Digital Currency Group, a collaborator that builds, incubates and seeds Bitcoin and blockchain technology-related companies. It recently joined the Enterprise Ethereum Alliance to explore the possibilities of the Ethereum technology across a wide range of potential use cases, many of them well outside the scope of Mastercard’s traditional payments environment. In addition, Mastercard is also working on new use cases with startups that are a part of its Start Path Global program.

‘No formula’ for mortgage repricing, says NAB CEO

From The Adviser.

NAB chief executive Andrew Thorburn told a parliamentary committee on Friday (20 October) that if the bank wanted to maximise profits, it would not have reduced principal and interest rates by 8 basis points for 500,000 customers.

“We are trying to do a whole lot of very delicate things in a very dynamic market,” Mr Thorburn said.

“APRA required 30 per cent. We then have to make a judgement of what the number should be to get to that. That’s an estimate we make in very fast-moving competitive, dynamic environment.

“There is no base number to work off. You have to estimate what you think it takes with the price to reduce your demand in a market where there are dozens of players doing the same thing.”

Committee chair David Coleman MP was eager to find a correlation between NAB’s 35 basis point hike on all interest-only loans and APRA’s direction for banks to cap new interest-only lending at 30 per cent.

Mr Coleman questioned whether the Australian Competition and Consumer Commission (ACCC), which is currently investigating banks’ mortgage pricing decisions, will find the cost of the change as materially less than what NAB charged its customers.

“I don’t think we will ever know,” Mr Thorburn said. “The ACCC [has] all the documents. There is no formula that tells you what the number should be.”

Also appearing in Canberra on Friday was NAB’s chief operating officer, Antony Cahill, who confirmed that the major bank has reduced its interest-only portfolio from 41 per cent to 37.7 per cent of the total book.

He explained that price was just one of the many levers the bank pulled to meet regulatory requirements and lend responsibly. Others include LVR caps, ceasing lending to non-resident borrowers and introducing an LTI ratio.

Mr Cahill also highlighted that the lender introduced “highly competitive fixed rates” that have driven a surge in volumes.

“Our fixed rate lending has more than doubled in the last three months,” the NAB COO said. “We have gone from $500 million to $1.3 billion of customers with fixed rates.”

Fintech startup, Trade Ledger, launches world-first tech to help banks fight off global tech giants

Fintech Trade Ledger, claimed as the world’s first open digital banking platform has been launched, offering a complete platform-as-a-service for business lenders.

The platform, they say, will help banks assess business lending risk in real time and will so address the US$1.7 trillion global under-supply in trade finance lending, thus providing high-growth companies with much-needed working capital.

Career technologists, Martin McCann and Dr. Matthias Born, are launching a world-first lending tech for banks and traditional lenders that will help to equip them against competition from tech giants such as Facebook, Tencent, and eBay wanting to enter financial services.

Trade Ledger is the world’s first business lending platform that transforms digital data from business supply chains in real time, allowing banks to assess and regularly update credit and default risk of businesses they lend to. Currently this is only done on a one-off or infrequent basis on a very small sample of invoices, and not on any other trade documents.

The platform will finally give banks more advanced network and data analysis technology than global technology companies, in a lending segment that has long suffered from a lack of technological innovation.

“Banks and other business lenders have never been able to accurately leverage quality operational data to determine business lending risk, as a result there is a loan undersupply to the tune of AU$60 billion each year in Australia, and AU$2.1 trillion globally,” said Martin McCann, CEO and Co-Founder of Trade Ledger.

“But as the global economy increasingly transitions towards smaller, high-growth businesses, banks have an obligation to learn how to supply working capital needed by these businesses for sustained growth. If they don’t learn to do this, it’s also only a matter of time before technology giants figure out how to resolve the problem, and swoop in.

“The challenge for banks is improving both its cost/income ratio and capital efficiencies within a segment considered higher risk, and Trade Ledger offers the first open banking platform that resolves both of these challenges.

“This represents a huge opportunity for local Australian banks and specialist business lenders to export financial services globally – so long as they jump on the opportunity to do so before oversees competitors do,” continued Martin McCann.

The idea for the platform came about when the Trade Ledger co-founders realised that the increasing digitisation of business supply chains provided an opportunity to connect the business financial supply chain directly to the bank.

They also wanted to provide a way for banks’ customers to apply for funding in just a few minutes, compared to the current 30-hour average process, helping them to directly compete with more tech-savvy entrants such as fintechs and large tech companies.

“For the first time, banks and other traditional lenders will be able to use the digital information being created in supply chains to predict the exact probability of an individual invoice default at any given time,” continued Martin McCann.

“SMEs will also no longer be treated as one homogeneous, high risk group of borrowers, when differences in corporate structure, business model, cash flow need, degree of technology adoption, scalability, and a multitude of other characteristics that can change hourly all affect default and fraud risk levels significantly,” concluded Martin McCann.

Financial literacy is a public policy problem

From The Conversation.

It’s pretty common nowadays to see the likes of the Reserve Bank of Australia or the Australian Bureau of Statistics issue warnings about the size of Australian household debt. The reason is that the consequences of poor financial decisions often reach far wider than an individual or family.

The global financial crisis showed us how rapidly financial contagion can spread – one person’s debt is another person’s asset, so when the debt is written off so is the asset. However, there has been little improvement in financial literacy in the wake of the financial crisis, the lack of which was one of the underlying causes.

For instance, surveys just prior to the global financial crisis revealed that many Americans taking out home loans either did not read their loan documents or did not understand them. This meant that, in many cases, they did not understand that they were signing teaser loans where the interest rate starts out very low but increases after a few years.

This lack of financial literacy combined with predatory lending caused the subprime loan crisis, the precursor to the full blown financial crisis.

What is financial literacy?

Financial literacy refers to the ability to make sound financial decisions based on knowledge, skills and attitudes, taking into account personal circumstances.

Low financial literacy is particularly concerning in home loans. In an alarming parallel to the United States before the financial crisis, roughly one third of interest-only mortgagees do not understand that their repayments make no inroads into their debt, and that their interest rates will jump considerably after the interest-only period of the loan has expired.

But it isn’t just that low financial literacy increases risk. It is also important for achieving a productive economy. Economic efficiency requires borrowers to not only have good information but to understand it. This allows them to weigh up the costs of borrowing with the benefits that they expect to receive.

If the information is distorted, either deliberately by lenders or through the misunderstanding of borrowers, they will miscalculate the benefits and capital in the economy will be misallocated. Economists call this market failure, a lot of which occurred in the housing market in the United States before the global financial crisis.

Financial literacy isn’t improving

Evidence suggests that financial literacy has not improved since the global financial crisis, and may have gotten worse.

A survey of adult financial literacy in Australia found that in 2014 the number of people who could actually recognise an investment was “too good to be true” – for example a financial asset promising to pay a return much higher than the going return on similar assets and for no greater risk – had actually declined, to 50% from 53% just three years earlier.

The survey also found that those who recognised that good investments (something with relatively low risk) may fluctuate in value fell to 67% from 74%.

But financial literacy education must also go hand in hand with general literacy and numeracy. The Productivity Commission found that 14% of the adult population had relatively low literacy skills in 2011-12. This is defined as being able to, at best, locate basic information from simple texts but being unable to evaluate truth claims or arguments.

The report also found 22% of the population had low numeracy skills, meaning that they can count, add and subtract and do other basic arithmetic. But they cannot understand statistical ideas, mathematical formula or analyse data.

In other words, a significant proportion of the Australian adult population are not equipped to understand the effect of an interest rate increase on their loan repayments, or understand a loan document that includes an interest rate increase after an initial period.

Fixing the problem of financial illiteracy cannot wait until people are in the throes of negotiating home loans and credit cards. And it should definitely take place before Australians resort to pay day loans.

This was the aim of the Australian Government’s National Financial Literacy Strategy, that ends this year. The strategy proposes a number of educational initiatives including embedding financial literacy in the school curriculum, a formal teacher training program, and development of educational resources and tools.

The strategy draws on similar steps that have been adopted by other countries and recommended by the Organisation for Economic Cooperation and Development (OECD).

The problem is that the curriculum is a crowded space. Financial literacy must compete with the latest fashions in school education as well as traditional curriculum content.

Fighting for curriculum space for financial literacy is a political exercise which governments must play hard. For example, by attaching serious funding to the achievement of financial literacy indicators at the school level, and training and certification for teachers. Increasing financial literacy isn’t just in the best interest of individuals, we all benefit from a more literate population.

Author: Ross Guest, Professor of Economics and National Senior Teaching Fellow, Griffith University