APRA Probes CBA

The Australian Prudential Regulation Authority (APRA) today announced its intention to establish an independent prudential inquiry into the Commonwealth Bank of Australia (CBA) focusing on governance, culture and accountability frameworks and practices within the group.

Of note is their perspective that capital security is not sufficient to guarantee the long term security of the financial system, – culture and accountability are critical too. Of course the big question will be – is CBA an outlier?  Does this also provide more weight to calls for a broader Royal Commission?

The prudential inquiry will be conducted by an independent panel, to be appointed by APRA. Subject to settling the final terms of reference, it is anticipated that the panel will provide a final report to APRA around six months from the formal commencement of the inquiry, and that this report will be made public.

APRA Chairman Wayne Byres said the decision to initiate a prudential inquiry followed a number of issues which have raised concerns regarding the frameworks and practices in relation to the governance, culture and accountability within the CBA group, and have damaged the bank’s reputation and public standing.

Mr Byres said: “The overarching goal of the prudential inquiry is to identify any core organisational and cultural drivers at the heart of these issues and to provide the community with confidence that any shortcomings identified are promptly and adequately addressed.

“CBA is a well-capitalised and financially sound institution. However, beyond financial measures, it is also critical to the long-run health of the financial system that the Australian community has a high degree of confidence that banks and other financial institutions are well governed and prudently managed.

“The Australian community’s trust in the banking system has been damaged in recent years, and CBA in particular has been negatively impacted by a number of issues that have affected the reputation of the bank. Given its position in the Australian financial system, it is critical that community trust is strengthened. A key objective of the inquiry will be to provide CBA with a set of recommendations for organisation and cultural change, where that is identified as being necessary.

“The Chairman and CEO of the CBA have assured me that the bank will fully cooperate with the inquiry, and APRA welcomes that cooperation,” Mr Byres said.

Conduct of the inquiry

The names of the panel members and the agreed terms of reference will be finalised and published at the commencement of the inquiry. The costs of the inquiry will be met by CBA.

Broadly, the goal of the inquiry is to identify any shortcomings in the governance, culture and accountability frameworks and practices within CBA, and make recommendations as to how they are promptly and adequately addressed. It would include, at a minimum, considering whether the group’s organisational structure, governance, financial objectives, remuneration and accountability frameworks are conflicting with sound risk management and compliance outcomes.

The independent panel would not be tasked with making specific determinations regarding matters that are currently the subject of legal proceedings, regulatory actions by other regulators, or customers’ individual cases.

CBA says:

The Commonwealth Bank of Australia today acknowledges and supports the Australian Prudential Regulation Authority’s announcement of an independent prudential inquiry. The inquiry, which will focus on governance, culture and accountability frameworks and practices, will have the Bank’s full cooperation.

The Chairman of CBA, Catherine Livingstone AO, said: “CBA recognises that events over recent years have weakened the community’s trust in us. We have been working hard to strengthen trust, and will continue to do so. We welcome this opportunity for independent parties to review the work we have already undertaken and advise on what more we can do.”

“APRA’s oversight of this inquiry will ensure the independence and transparency needed to reassure all our stakeholders.”

CBA Chief Executive Officer, Ian Narev said: “We are confident that our 50,000 people come to work each day to give their best, for the benefit of our customers. At the same time, we know that our mistakes have hurt our reputation.”

“An independent and transparent view on the work we have done, and the work we still have to do, is an important element of strengthening trust. So this inquiry has our full support, to ensure it is as effective as possible.”

CBA also notes APRA’s confirmation today that the Bank is well capitalised and financially sound.

What Lies Beneath? – The Property Imperative 26 Aug 2017

Mortgage Stress hit the headlines thanks to the ABC Four Corners programme, which used data from our household surveys. But if the tip of the iceberg is high debt, rising costs and devalued incomes, what lies beneath?

We helped make the news this week, so in this special weekly edition of the Property Imperative to 26th August 2017, we take a deeper dive into the underlying drivers of high home prices, and the resultant massive debt burden.

The ABC Four Corners programme set out the first order issues quite well, and you can even use their interactive map to look at stress and interest rate sensitivity by post code, which is based on our data. But they did not touch on the more fundamental second order issues which need to be understood to explain how we got here. So we will discuss some of these more fundamental factors, and show why the whole housing conundrum is so complex.

There are a number of factors which have worked together to create very high property prices here, and in other countries around the world. The root cause is the shift in attitude towards property from somewhere to live, to seeing it as an asset class ripe for investment – the financialisation of property. Given the availability of cheap finance (thanks to low interest rates and in many economies extra stimulus from quantitative easing), and the high demand from investors, globally, price rises evident in many countries, mirroring high stock prices. Many baby boomers are at the front of the queue, looking for investment opportunities. But such high home prices makes it ever harder for new purchasers to enter the market, so rates of home ownership are dropping.

We also see flows of investment capital crossing international boarders, thanks to financial deregulation. For example, in Australia, last year Chinese investors bought more than $30 billion of property, including in some post codes more than 15% of residential purchases. Around the world there is hot money looking for a home, and the stellar returns on Australian property have made it an attractive target, especially in the light of the relatively stable political environment here, and until recently the ease by which foreign purchasers could enter the market. That said, Beijing has tightened controls on outbound investment, and this move will put pressure on prices in key property markets from New York to London. The top three overseas destinations for Chinese property investors in 2016 were the United States, Hong Kong and Australia.

In Australia, demand has also been stoked by strong migration. The recent census showed that 1.3 million new migrants have come to Australia since 2011. The impact of this is much debated, with many arguing that the floods of new residents moving to Australia is one of the most significant factors in play. The “big Australia policy” which, though not planned, is based on the assumption that we need more people to drive growth and pay tax; and so the current migration settings reflect this. Yet there is little proper planning for this continued lift in numbers. Some are now questioning this approach, which is causing significant congestion in our capital cities. And migration rates seem to be climbing with the fastest net overseas migration in 4 years, according to the ABS.

About one in three Australians are employed in property related industries, from building and construction, real estate, finance and specialist services. Because of this there is strong political and economic support for high levels of ongoing investment. The HIA this week released the latest National Outlook Report which suggests the housing sector will become less of an economic driver of the Australian economy, and also underscores the various regulatory interventions from state taxes, to limiting foreign investment and investor lending.

It is also worth saying that the standard line of there being an under-supply of property is questionable when we look at the census data on number of people per residence. In fact, this metric has remained static at 2.6 since 2000. Yet most households in our surveys believe we need more construction, not less.

Property Investment by local residents continues apace, supported by overgenerous tax concessions, across both negative gearing and capital gains.  Around 36% of mortgage lending is for investment property. Strong continued capital appreciation is driving this, and our recent surveys showed that even first time buyers were motivated by these gains. Property investment is pervasive, and as the Four Corners programme showed, some investors are geared up across multiple properties, with an appetite for more.  Earlier this year the ATO released their summary data which included quite comprehensive view of the range of costs those with rental properties have offset income. They also divide rentals into those functioning at a loss, and those who make a profit.

Of the 2.9 million rentals, 1.1 million made a profit, the rest a loss (which can be offset against other categories of income). That means 60% of rentals are under water.

We also showed this week that the Bank of Mum and Dad is the 11th largest lender in Australia, and that more than half first time buyers are looking to borrow from the family many of whom drew capital from their existing property. The Bank of Mum and Dad provides an average of $88,000, and some of this goes to assist first time buyers to go direct to the investment sector.

Then there is the wealth effect which rising home prices provides. Anyone holding property will benefit, at least on paper from capital appreciation, and so do not want to see prices slide. Two thirds of households own residential property, so the political weight of numbers is on the side of keeping home prices growing. No wonder, politicians do not want to be holding the reins of power when prices go south.  Neither do they want to rock the boat on negative gearing – though Labor says they would tackle it.

Talking of political power, most states are befitting significantly from the stamp duty received on home purchases. For example, NSW enjoyed more than $7bn of receipts from residential transactions last year – a sizable share of their entire revenue budget. So states and territories do not want to turn that off.  In addition, many are slugging foreign investors additional taxes and charges, to further boost revenue.

Then of course, the banks continue to grow residential lending at three times inflation or CPI, creating, as we discussed last week an amazing debt monster.  This is helped by generous capital ratios which makes home lending more capital efficient than lending to business, even of the growth it generates is, well, illusory.  But for lenders, mortgage lending is highly profitable, and remains their primary growth engine. They will continue to lender as hard as they can, targeting lower risk households in particular.

The profitability of the finance industry was underscored by results from two of the aggregators – these players sits between the banks and mortgage brokers. Mortgage Choice delivered a 10.2% growth in cash profit, though revenue was up just 1.1% to $199 million. They have 654 credit representatives and settlements rose to 12.3 billion.

Australian Finance Group (AFG) reported a 2017 net profit of $30.2 million an increase of 33% on FY2016. They now have around 2,900 mortgage brokers, and process on average around 10,000 loan each month with 45 lenders on their panel.

The finance sector is reliant on a buoyant home lending sector, and as Four Corners highlighted, with 60% of their assets in this business, they would be exposed in any downturn. We also saw in the programme some examples of shoddy practices in the sector, and generally we believe that underwriting standards are still too generous.

The regulatory structure in Australia, with the RBA, ASIC and APRA, collectively with Treasury in the Council of Financial Regulators, has been myopic in its focus, not wanting to rock to boat given the high economic impact of the construction sector, with high volumes of apartments coming on stream in the next year or two. They finally got around to pressing down on interest only loans – too little too late in our view, but this has given the banks ample ammunition to lift the interest rates on these loans, and as a result, they are competing for principal and interest loans, especially for owner occupied borrowers below 80%, with keen rates.  Note too, lenders were forced to tighten their controls, which suggests that the risk management processes in the banks is not adequate, we think they are trading volume and profit over prudent behaviour. Overall loan growth is too strong relative to incomes, but no one wants to talk about the risks of this in a low income growth environment. The regulators are trapped because rates are too low, but they cannot raise them because of the pressures this would exert on households. They argue the systemic financial stability risks are being adequately managed, we are not so sure.  Currently loan volumes continue to grow too strongly.

So in summary, if you pile up all the stakeholder groups who benefit from rising prices, ranging from existing owners, investors, lenders, the construction sector, and the political weight of numbers, no surprise that little is being done to tackle the root cause issues – of high migration, poor lending standards and too strong mortgage loan growth.  This underpins the high household debt and rising mortgage stress.

The politicians may play lip service to housing affordability, and lenders still claim they are being disciplined in the current environment. But it could all too easily turn to custard.

We need a focussed policy on controlling migration, effective planning to accommodate growth, tighter lender restrictions and higher interest rates. But the likelihood is we will continue to muddle though, kick the can down the street, and hope it will turn out ok. But, hope, to quote former New York City Mayor Rudy Giuliani, is not a strategy.

And that’s the Property Imperative Weekly to 26th August. If you found this useful, do subscribe to get our latest updates, and check back again for next week’s installment.

Federal Reserve Board Proposes to Produce Three New Reference Rates

Given questions about the transparency of the U.S. dollar LIBOR rate benchmark, and the quest for a more robust alternative, the US Federal Reserve Board has requested public comment on a proposal for the Federal Reserve Bank of New York, in cooperation with the Office of Financial Research, to produce three new reference rates based on overnight repurchase agreement (repo) transactions secured by Treasuries.

The most comprehensive of the rates, to be called the Secured Overnight Financing Rate (SOFR), would be a broad measure of overnight Treasury financing transactions and was selected by the Alternative Reference Rates Committee as its recommended alternative to U.S. dollar LIBOR. SOFR would include tri-party repo data from Bank of New York Mellon (BNYM) and cleared bilateral and GCF Repo data from the Depository Trust & Clearing Corporation (DTCC).

“SOFR will be derived from the deepest, most resilient funding market in the United States. As such, it represents a robust rate that will support U.S. financial stability,” said Federal Reserve Board Governor Jerome H. Powell.

Another proposed rate, to be called the Tri-party General Collateral Rate (TGCR) would be based solely on triparty repo data from BNYM. The final rate, to be called the Broad General Collateral Rate (BGCR) would be based on the triparty repo data from BNYM and cleared GCF Repo data from DTCC.

The three interest rates will be constructed to reflect the cost of short-term secured borrowing in highly liquid and robust markets. Because these rates are based on transactions secured by U.S. Treasury securities, they are essentially risk-free, providing a valuable benchmark for market participants to use in financial transactions.

Comments on the proposal to produce the three rates are requested within 60 days of publication in the Federal Register, which is expected shortly.

Super fees set to become more transparent and easier to understand

ASIC says from 30 September there will be significant changes to the way superannuation and managed investment funds disclose the fees and charges that affect consumers.

The new requirement follows the Australian Securities and Investments Commission (ASIC) identifying a significant amount of under-reporting of fees, as well as considerable inconsistency in the way fees and charges are listed by funds. ASIC found this made it very difficult for consumers to understand how much they were paying, what they were paying for, and to compare funds.

The changes will help bring industry–wide consistency to exactly what must be included in the product disclosure statement (PDS). And, from later in 2018, the changes will also ensure that the information in PDS and in periodic statements will match more clearly. As a result, consumers will be better able to understand the fees and costs. The consistency and more accurate disclosure of fees will also help ensure that funds are competing more fairly.

ASIC also noted that the fees consumers are being charged may reflect the type of investment, with some higher cost investments also bringing higher returns in the long term. This change to reporting will also make it easier for consumers to identify when this may be the case.

ASIC will make amendments to provide more certainty around the relevant requirements and undertake compliance checks throughout the industry, to ensure funds are meeting their obligations.

Following extensive consultation with industry on the introduction of these changes, ASIC has agreed to extend the deadline for disclosure of property operating costs in the investment fee or indirect costs to 30 September 2018. The extension on this component will help provide additional time for discussions between ASIC and industry about how to calculate these fees.

ASIC has also extended the deadline for certain disclosures in periodic statements that require changes to the internal systems of funds. This is to ensure the change can be made in a cost effective manner.  Those requirements will have effect for annual statements for the year ending 30 June 2018.

Background

These changes to reporting of superannuation and managed funds fees arise from ASIC’s concerns with inconsistency and under–reporting of fees. This issue was investigated in Report 398 Fee and cost disclosure: Superannuation and managed investment products, which identified the following key issues:

  • under–disclosure of fees and costs associated with investing indirectly through other vehicles
  • tax treatment of fees and costs
  • performance fees
  • under disclosure of management costs

Following the release of Report 398, in November 2015 ASIC issued updated Regulatory Guide 97 Disclosing fees and costs in PDSs and periodic statements to bring greater consistency and transparency to fees reporting. These changes are due to come into force from 30 September 2017, as outlined above.

Mortgage Choice delivers 10.2% growth in cash profit

Mortgage Choice Limited announced its annual results for the financial year ended 30 June 2017. NPAT on a cash basis was $22.6 million – up 10.2% on FY16, although revenue was up 1.1% to $199 million. They have 654 credit representatives in Australia and 486 franchises. 88.5% or gross revenue came from Mortgage Choice Broking.  Settlements rose 1.2% to $12.3 billion and the loan book grew to $53.4 billion.

  • NPAT on a statutory basis was $22.2 million – up 13.5% on FY16.
  • Mortgage Choice’s core broking business recorded its best ever settlement result, with settlements totalling $12.3 billion.
  • Mortgage Choice’s loan book reached a record $53.4 billion – up 3.2% on FY16.
  • Financial Planning gross revenue surpassed $10 million in FY17 while Gross Profit grew 26% from FY16.
  • Funds Under Advice and Premiums In Force both rose significantly, up 60.3% and 26.0% respectively to $532.4 million and $24.2 million.
  • A fully franked final dividend of 9 cents per share was declared by the Board. Total dividend for the year was 17.5 cents per share – an increase of 1 cent on FY16.
  • 46 new Greenfield Franchises added to the network, the highest number recruited in one year.
  • 11.5% of total cash gross revenue derived through diversified services.

“Throughout FY17, the Group performed very well, with settlements volumes, total loan book and financial planning revenue all growing to record levels,” Mortgage Choice chief executive officer John Flavell said.

“Cash Net Profit After Tax grew by more than 10% for the second consecutive year, highlighting the ongoing strength of the business.

“FY17 was a year that saw increased complexity across all areas of retail financial services. The volume and velocity of policy and pricing changes for lending products, as well as wealth and insurance solutions, was unprecedented. This complexity drove more consumers to Mortgage Choice than ever before.

“Mortgage Choice delivered increased value to our customers by addressing more of their financial needs and creating simplicity in a complex environment.

“Our core broking business performed very well, with home loan settlements reaching $12.3 billion for the first time and our loan book grew 3.2%, reaching a new high of $53.4 billion at 30 June 2017.”

Mr Flavell said it wasn’t just the core broking business that performed well throughout FY17, with the Company’s diversified services also delivering impressive results.

“Throughout FY17, the gross revenue generated from our diversified services continued to grow,” he said.

“For the year, 11.5% of the Company’s cash gross revenue came from our diversified offering – up from 10.5% in FY16.

“Our Financial Planning division delivered its first full year profit, with Funds Under Advice and Premiums In Force rising 60.3% and 26.0% respectively to $532.4 million and $24.2 million.

“As this business matures and our advisers spend more time building relationships with our network of mortgage brokers, referrals naturally grow. Throughout FY17, the number of referrals from the core broking business increased by 13%.

“At Mortgage Choice, we want to be Australia’s leading provider of financial choices and advice, delivering exceptional customer value. To achieve this, we understand that we have to be able to cater to our customers’ growing financial needs and deliver expert advice across a full suite of services.

“To this end, at the beginning of FY17, the Company launched a new branded asset finance offering. The new service offering was embraced by the network, with more than 1,600 vehicle, plant and equipment loans financed in the first year alone.

“As we move into FY18, our asset finance offering will continue to gather momentum and deliver growth for the Company.

“Beyond the strong financial performance, FY17 was also a record year for network growth. 46 new Greenfield Franchises were recruited over the year and the number of Credit Representatives across the country increased to 654, well up from FY16.

“As these new recruits become more skilled and increase their productivity over the coming months and years, we will see continued growth in the business.”

“In addition, our shareholders will be very pleased with the dividend result. The ongoing strength of the Mortgage Choice business means we have been able to deliver a fully franked dividend of 17.5 cents per share for the year, a 1 cent increase on FY16,” he said.

Future growth

Heading into FY18, Mr Flavell said he is confident the business can continue to deliver exceptional results in an increasingly complicated market.

“Mortgage Choice’s continual investment in the business will help us to drive solid results today, tomorrow and over the longer term,” he said.

“We will focus on increasing efficiency for the current network, the continued growth of our network via targeted recruitment and a commitment to assisting new recruits run successful, profitable businesses.

“In addition, we will continue to accelerate our local area marketing activities to deepen the relationships we have with our customers. Throughout FY17, we implemented a series of grass-roots brand awareness initiatives that proved to be very successful. You may well have noticed a new Mortgage Choice retail store in your local area, seen more Mortgage Choice branded cars on the road, or heard more Mortgage Choice advertising on the radio. Heading into FY18, the momentum created will be carried forward.”

Mr Flavell said the Company had identified its four key business priorities for the year ahead. These priorities include:

• Increase and diversify franchisee revenue and asset growth;
• Distribution growth;
• Deeper customer relationships; and
• NPAT growth.

“I am confident the business can deliver to all of the aforementioned priorities whilst maintaining our focus on our 2020 vision,” he said.

“We are in a very exciting stage of the business. We are successfully transitioning Mortgage Choice into a diversified financial services company, which is providing additional value to our customers, franchisees, and our shareholders,” he said.

“Throughout FY17, we achieved a lot as a business. These achievements were realised against a backdrop of increasing complexity and various market challenges. Whilst we are expecting the market to remain complex, we are well positioned to provide expert advice to more customers for all of their financial services needs.”

CBA hungry for broker business

From The Adviser.

Australia’s biggest bank could be making an aggressive play to win broker business after losing a significant amount of home loans through the third-party channel in recent months.

While its biggest rivals NAB and ANZ have been steadily increasing their share of broker-originated mortgages, major lender CBA saw its third-party flows drop by 8 per cent over the 2017 financial year.

The fall was more pronounced in the second half. For the six months ending June 2017, brokers wrote just 38 per cent of new home loans for the retail banking services, down from 46 per cent on the prior comparative period.

Regulatory measures to curb interest-only lending, introduced in March, have been a key driver. However, one Sydney broker believes that CBA is now back in business.

FirstPoint broker Chris Pryer told The Adviser that the major bank is marketing “some very competitive rates” at the moment and appears to have streamlined its third-party services.

“I know there are some other lenders with sharp fixed rates out there at the moment, but CBA are matching them, if not bettering them,” Mr Pryer said. “They are also giving large discounts on variable rates.

“Their turnaround times are still within 24 to 48 hours. We spoke to them this week, and by the sounds of things they are very much back on. They have delivered on the deals we have given them so far.”

Earlier in the year, CBA used brokers as a lever to control its interest-only mortgage volumes following instructions from APRA. For a period of time, CBA stopped refinancing investor mortgages through the third-party channel. Any CBA customers with an investor home loan looking to refinance would have to visit the bank directly.

The management of regulatory caps is now creating some interesting dynamics in the home loan market, such as price discounting, to win more business and rate hikes to cool demand.

“Different banks are turning the tap on at different times when they get their back office in order,” Mr Pryer said.

AFG Reports 33% 2017 Profit Uplift

Australian Finance Group (AFG) reported a net profit after tax (NPAT) of $30.2 million for the 2017 financial year (FY2017). This excludes the impact of the recognition of AFG Home Loans (AFGHL) white label settlements relating to prior years (normalised NPAT). This is slightly ahead of the result forecast and an increase of 33% on FY2016.

They now have around 2,900 mortgage brokers, and process on average around 10,000s loan each month with 45 lenders on their panel.

AFG Chief Executive Officer David Bailey said the strong result has been driven by AFG’s core business of residential mortgages, commercial lending, and the continued strong growth in the own-branded AFGHL business.

“Today’s results are a testament to AFG’s strategy of continuing to focus on our core business and growth through earnings diversification. We are very pleased with our progression down this path.”

These results have been achieved in an environment of flat credit growth and significant regulatory changes impacting foreign investment and credit appetites of Australia’s lenders.”

Highlights include:

  • Reported NPAT of $39.1 million, normalised NPAT of $30.2 million
  • White label AFG Home Loans settlements of $2.7 billion
  • Combined residential and commercial loan book of $133 billion, growth of 11% over FY2016
  • Residential settlements of $34.3 billion
  • Commercial settlements of $2.8 billion
  • Final dividend 5.5 cents per share
  • Earnings Per Share (EPS) for FY2017 is 14 cents per share based on normalised NPAT
  • ROE of 31%

Company Outlook

The AFGHL business finished the full year 2017 with settlements of $2.7 billion. This result represents a 38% increase on FY2016 and evidences the success of our ongoing strategy to deliver competitive choice to Australian borrowers. The AFGHL loan book is now $5.5 billion, an increase of 44% from $3.8 billion in FY2016.

Overall, the company has a residential loan book of $126 billion that will generate ongoing trail commission. The AFG Home Loans securitised book has seen a 10% increase in settlements for FY2017 to finish the financial year at $1.15 billion, whilst maintaining a strong net interest margin.

Mr Bailey noted the company has achieved another strong year in the recruitment of brokers. From 2,650 active brokers in FY2016, numbers have increased by 8.5% to 2,875.

“In a clear sign of the health of the commercial lending market AFG Commercial asset financing settlements rose 20% to finish the year at $445 million,” he said.

“AFG Commercial mortgage settlements for the year were $2.84 billion, which represents just 0.7% of the overall $410 billion commercial lending market in Australia. The potential for growth is tangible.”

The small to medium enterprise (SME) segment of the market in particular is also one where AFG is optimistic. AFG is poised to harness this growth with the impending rollout of an Australian-first SME lending platform. The new platform, AFG Business, will enable our network of brokers to provide small business borrowers access to a broad range of options and deliver faster access to capital.”

Market conditions

The complexity of the Australian lending market has increased significantly in the past 12 months. “AFG began its listed life with around 1,450 products on its lending platform,” explained Mr Bailey. “That number has now increased to more than 3,400 at FY2107.

“The growth is a reflection of multiple changes by lenders to their Australian product suites. The introduction of new products, changes to LVR bands, numerous product splits with differing rates, repayment options according to loan type, and significant changes to investor and owner occupier pricing have been rolled out across our platform in the past 12 months. These ongoing changes have been delivered at an unprecedented pace and reaffirms the importance to a consumer of having an informed broker.

With more than 10,000 customers seeking the assistance of an AFG broker every month, the value consumers place on the mortgage broking channel continues to be clear. “The mortgage broking channel accounts for 53% of the Australian lending market and more than 20% of those mortgage brokers work with AFG,” said Mr Bailey.

2017 has also been marked by significant regulatory scrutiny of the Australian lending market. “AFG has been at the forefront of consultation with industry, government and regulators. The message we have had for all stakeholders has been clear – AFG has 45 lenders on its panel with more than 35% of borrowings going to lenders other than the four major banks, and we remain committed to ensuring choice and competition remains for Australian consumers.

“This competitive tension ensures consumers continue to have choice and most importantly benefit in terms of home loan price and service because of what brokers deliver on a daily basis across the Australian lending market,” he concluded.

Finance sector must ‘rebuild trust’: Laker

From InvestorDaily.

Australia’s financial system has been suffering from a “steady erosion of trust” ever since the GFC, says former APRA chairman John Laker.

Speaking at a Finsia event about ethics and integrity yesterday, former APRA chairman John Laker said Australia is in danger of being “tarred with the same brush” as financial institutions overseas.

Dr Laker, who is the chairman of the Banking and Finance Oath, noted that the Australian finance sector was one of the few worldwide to successfully negotiate the GFC.

Australia’s banking system was remarkably resilient throughout 2007, 2008 and 2009, he said.

Not only were the big banks well managed and profitable, Dr Laker said – they provided shareholders with double-digit returns on equity almost all the way through the crisis.

By comparison, financial systems elsewhere in the world suffered twin crises of solvency and legitimacy when global credit dried throughout the GFC, he said.

However, in the past decade an ongoing series of financial advice, insider trading, insurance, lending and (most recently) money laundering scandals have seen the major banks’ reputations battered.

Dr Laker pointed to a recent EY survey that found only 20 per cent of Australians trust their financial institution to put their interests first.

“That was the same low level as the UK, which we all thought had a worse GFC experience,” he said.

“The call to action to rebuild trust is as strong in Australia as it has been in other countries.”

Dr Laker said he is trying to convince institutions to encourage their staff to take the Banking and Finance Oath.

“Signing the oath doesn’t make somebody ethical. And not signing it doesn’t [say] they aren’t ethical. It’s aspirational,” he said.

“In a sense it’s a pity that we have to have an oath. But that’s the world Australia is now in. You can’t stay aloof from what’s happening offshore.

“We are being tainted by that loss in confidence in financial institutions.”

The Future: Save More, Work Longer

According to the IMF Blog, Young adults in advanced economies must take steps to increase their retirement income security. Younger generations will have to work longer and save more for retirement.

But with flat income, high debt, and potentially rising interest rates, saving we think may be an impossible task, which will redefine the concept of retirement altogether.

Public pensions have played a crucial role in ensuring retirement income security over the past few decades. But for the millennial generation coming of working age now, the prospect is that public pensions won’t provide as large a safety net as they did to earlier generations. As a result, millennials should take steps to supplement their retirement income.

Pensions and other types of public transfers have long been an important source of income for the elderly, accounting for more than 60 percent of their income in countries that are members of the Organisation for Economic Co-operation and Development (OECD). Pensions also reduce poverty. Without them, poverty rates among those over 65 also would be much higher in advanced economies.

Pressure on pensions

But pensions are also costly to provide. Government spending on pensions has been increasing in advanced economies from an average of 4 percent of GDP in 1970 to close to 9 percent in 2015—largely reflecting population aging.

Population aging puts pressure on pension systems by increasing the ratio of elderly beneficiaries to younger workers, who typically contribute to funding these benefits. The pressure on retirement systems is exacerbated by increasing longevity—life expectancy at age 65 is projected to increase by about one year a decade.

To deal with the costs of aging, many countries have initiated significant pension reforms, aiming largely at containing the growth in the number of pensioners—typically by increasing retirement ages or tightening eligibility rules—and reducing the size of pensions, usually by adjusting benefit formulas. Since the 1980s, public pension expenditure per elderly person as a percent of income per capita—the so-called economic replacement rate—has been about 35 percent. But that replacement rate is projected to decline to less than 20 percent by 2060.

This means that younger generations will have to work longer and save more for retirement to achieve replacement rates similar to those of today’s retirees.


Working longer

To close the gap in the economic replacement rate relative to today’s retirees, one option for younger individuals is to lengthen their productive work lives. For those born between 1990 and 2009, who will start to retire in 2055, increasing retirement ages by five years—from today’s average of 63 to 68 in 2060—would close half of the gap relative to today’s retirees. A longer work life can be justified by increased longevity. But prolonging work lives also has many benefits. It enhances long-term economic growth and helps governments’ ability to sustain tax and spending policies. Working longer can also help people maintain their physical, mental, and cognitive health. However, efforts to promote longer work lives should be accompanied by adequate provisions to protect the poor, whose life expectancy tends to be shorter than average.

Saving more

Simulations suggest that if those born between 1990 and 2009 put aside about 6 percent of their earnings each year, they would close half of the gap in economic replacement rate relative to today’s retirees. In practice, relying on people’s private savings for retirement requires a hard-to-achieve mix of fortune and savvy. First, individuals need continuous and stable earnings over their careers to be able to save sufficient amounts. Second, workers would have to be able to decide how much to put aside each year and how to invest their savings. Third, the risks from uncertain or low returns are borne by individuals. Finally, workers would have to decide how fast to consume their savings during retirement. These are all complex decisions, and people can make mistakes at each step along the way.

Time to cope

For younger generations, acting early is crucial to ensure retirement income security, especially because longevity gains are projected to continue. As millennials start to enter the workforce, retirement might be the last thing on their mind. But with many governments retrenching their role in providing retirement income, younger workers need to work longer and step up their retirement savings.

Governments can make it easier for individuals to remain in the workforce at older ages by reviewing taxes and benefits that might favor early retirement. Nudges to encourage workers to save can also help, for example by automatically enrolling them in private retirement saving plans. For example, starting in 2018, the United Kingdom will require employers to automatically enroll workers in a pension program. Boosting financial literacy and making the workplace more friendly to older workers can also be part of the solution.

The good news for younger workers is that retirement is some four decades away, allowing time to plan for longer careers and to put money aside for later. But they must start now.