Tag: ABA

The Housing Boom Is “Officially” Over – The Property Imperative 07 Apr 2018

Welcome to the Property Imperative Weekly to 07 April 2018.

Watch the video, or read the transcript.

In this week’s digest of finance and property news, we start with Paul Keating’s (he of the recession we had to have fame), comment that the housing boom is really over at the recent AFR conference.

He said that the banks were facing tighter controls as a result of the Basel rules on capital adequacy, while financial regulators had had a “gutful” of them. This was likely to lead to changes that would restrict the banks’ ability to lend. He cited APRA’s recent interventions in interest only loans as one example, as they restrict their growth. Keating also said the royal commission into misconduct in the banking and financial services sector would also “make life harder” for the banks and pointed out that banks did not really want to lend to business these days and would “rather just do housing loans”. Finally, he spoke of the “misincentives” within the big banks to grow their business by writing new mortgages, including having a high proportion of interest-only lending.

Anna Bligh speaking at the AFR event, marked last Tuesday her first year as CEO of the Australian Banking Association (ABA) – but said she feels “like 500 years” have already passed. Commenting on the Royal Commission she warned that credit could become tighter ahead. The was she said an opportunity for a major reset, not only in how we do banking but how we think about it, its place in our lives, its role in our economy and, most of all, it’s trustworthiness”.

At the same conference, Rod Simms the Chair of the ACCC speech “Synchronised swimming versus competition in banking” He discussed the results of their recent investigation into mortgage pricing, and also discussed the broader issues of competition versus financial stability in banking. He warned that the industry should be aware of, and respond to, the fact that the drive for consumers to get a better deal out of banking is shared by many beyond the ACCC. Every household in Australia is watching.  You can watch our video blog on this for more details.

He specifically called out a lack of vigorous mortgage price competition between the five big Banks, hence “synchronised swimming”. Indeed, he says discounting is not synonymous with vigorous price competition. They saw evidence of communications “referring to the need to avoid disrupting mutually beneficial pricing outcomes”.

He also said residential mortgages and personal banking more generally make one of the strongest cases for data portability and data access by customers to overcome the inertia of changing lenders.

Finally, on competition. he says if we continue to insulate our major banks from the consequences of their poor decisions, we risk stifling the cultural change many say is needed within our major banks to put the needs of their customers first. Vigorous competition is a powerful mechanism for driving improved efficiency, and also for driving improved price and service offerings to customers. It can in fact lead to better stability outcomes.

This puts the ACCC at odds with APRA who recent again stated their preference for financial stability over competition – yet in fact these two elements are not necessarily polar opposites!

Then there was the report from the good people at UBS has published further analysis of the mortgage market, arguing that the Royal Commission outcomes are likely to drive a further material tightening in mortgage underwriting. As a result, they think households “borrowing power” could drop by ~35%, mainly thanks to changes to analysis of expenses, as the HEM benchmark, so much critised in the Inquiry, is revised. Their starting point assumes a family of four has living expenses equal to the HEM ‘Basic’ benchmark of $32,400 p.a. (ie less than the Old Age Pension). This is broadly consistent with the Major banks’ lending practices through 2017. As a result, the borrowing limits provided by the banks’ home loan calculators fell by ~35% (Loan-to-Income ratio fell from ~5-6x to ~3-4x). This leads to a reduction in housing credit and a further potential fall in home prices.

Our latest mortgage stress data, which was picked by Channel Nine and 2GB, thanks to Ross Greenwood, Across Australia, more than 956,000 households are estimated to be now in mortgage stress (last month 924,500). This equates to 30.0% of households. In addition, more than 21,000 of these are in severe stress, no change from last month. We estimate that more than 55,000 households risk 30-day default in the next 12 months. We expect bank portfolio losses to be around 2.8 basis points, though with losses in WA are higher at 4.9 basis points.  Flat wages growth, rising living costs and higher real mortgage rates are all adding to the burden. This is not sustainable and we are expecting lending growth to continue to moderate in the months ahead as underwriting standards are tightened and home prices fall further”. The latest household debt to income ratio is now at a record 188.6. You can watch our separate video blog on this important topic.

ABS data this week showed The number of dwellings approved in Australia fell for the fifth straight month in February 2018 in trend terms with a 0.1 per cent decline. Approvals for private sector houses have remained stable at around 10,000 for a number of months. But unit approvals have fallen for five months. Overall, building activity continues to slow from its record high in 2016. And the sizeable fall in the number of apartments and high density dwellings being approved comes at a time when a near record volume are currently under construction. If you assume 18-24 months between approval and completion, then we still have 150,000 or more units, mainly in the eastern urban centres to come on stream. More downward pressure on home prices. This helps to explain the rise in 100% loans on offer via some developers plus additional incentives to try to shift already built, or under construction property.

CoreLogic reported  last week’s Easter period slowdown saw 670 homes taken to auction across the combined capital cities, down significantly on the week prior when a record number of auctions were held (3,990). The lower volumes last week returned a higher final clearance rate, with 64.8 per cent of homes selling, increasing on the 62.7 per cent the previous week.  Both clearance rate and auctions volumes fell across Melbourne last week, with only 152 held and 65.5 per cent clearing, down on the week prior when 2,071 auctions were held across the city returning a slightly higher 65.8 per cent success rate.

Sydney had the highest volume of auctions of all the capital city auction markets last week, with 394 held and a clearance rate of 67.9 per cent, increasing on the previous week’s 61.1 per cent across a higher 1,383 auctions.

Across the smaller capital cities, clearance rates improved week-on-week in Canberra, Perth and Tasmania; however, volumes were significantly lower across each market last week compared to the week prior.

Across the non-capital city auction markets, the Geelong region recorded the strongest clearance rate last week with 100 per cent of the 20 auction results reporting as successful.

The number of homes scheduled to go to auction this week will increase across the combined capital cities with 1,679 currently being tracked by CoreLogic, up from last week when only 670 auctions were held over the Easter period slowdown.

Melbourne is expected to see the most significant increase in volumes this, with 669 properties scheduled for auction, up from 152 auctions held last week. In Sydney, 725 homes are set to go to auction this week, increasing on the 394 held last week.

Outside of Sydney and Melbourne, each of the remaining capital cities will see a higher number of auctions this week compared to last week.

Overall auction activity is set to be lower than one year ago, when 3,517 were held over what was the pre-Easter week last year.

Finally, with local news all looking quite negative, let’s look across to the USA as the most powerful banker in the world, JPMorgan Chase CEO Jamie Dimon, just released his annual letter to shareholders.  Given his bank’s massive size (it earned $24.4 billion on $103.6 billion in revenue last year) and reach (it’s a giant in consumer/commercial banking, investment banking and wealth management), Dimon has his figure on the financial pulse.

He says that’s while the US economy seems healthy today and he’s bullish for the “next year or so” he admits that the US is facing some serious economic headwinds.

For one, he’s concerned the unwinding of quantitative easing (QE) could have unintended consequences. Remember- QE is just a fancy name for the trillions of dollars that the Federal Reserve conjured out of thin air.

He said – Since QE has never been done on this scale and we don’t completely know the myriad effects it has had on asset prices, confidence, capital expenditures and other factors, we cannot possibly know all of the effects of its reversal.

We have to deal with the possibility that at one point, the Federal Reserve and other central banks may have to take more drastic action than they currently anticipate – reacting to the markets, not guiding the markets.

And of course the DOW finished the week on a down trend, down 2.34%, and wiping out all the value gained this year, and volatility is way up. Here is a plot of the DOW.

This extreme volatility does suggest the bull market is nearing its end… if it hasn’t ended already. Dimon seems pretty sure we’re in for more volatility and higher interest rates. One scenario that would require higher rates from the Fed is higher inflation:

If growth in America is accelerating, which it seems to be, and any remaining slack in the labor markets is disappearing – and wages start going up, as do commodity prices – then it is not an unreasonable possibility that inflation could go higher than people might expect.

As a result, the Federal Reserve will also need to raise rates faster and higher than people might expect. In this case, markets will get more volatile as all asset prices adjust to a new and maybe not-so-positive environment.

Now– here’s the important part. For the past ten years, the largest buyer of US government debt was the Federal Reserve. But now that QE has ended, the US government just lost its biggest lender.

Dimon thinks other major buyers, including foreign central banks, the Chinese, etc. could also reduce their purchases of US government debt. That, coupled with the US government’s ongoing trade deficits (which will be funded by issuing debt), could also lead to higher rates…

So we could be going into a situation where the Fed will have to raise rates faster and/ or sell more securities, which certainly could lead to more uncertainty and market volatility. Whether this would lead to a recession or not, we don’t know.

We’ll leave you with one final point from Jamie Dimon. He acknowledges markets have a mind of their own, regardless of what the fundamentals say. And he sees a real risk “that volatile and declining markets can lead to a market panic.”

Financial markets have a life of their own and are sometimes barely connected to the real economy (most people don’t pay much attention to the financial markets nor do the markets affect them very much). Volatile markets and/or declining markets generally have been a reaction to the economic environment. Most of the major downturns in the market since the Great Depression reflect negative future expectations due to a potential or real recession. In almost all of these cases, stock markets fell, credit losses increased and credit spreads rose, among other disruptions. The biggest negative effect of volatile markets is that it can create market panic, which could start to slow the growth of the real economy. Because the experience of 2009 is so recent, there is always a chance that people may overreact.

Dimon cautioned investors that interest rates could rise much sooner than they expect. If inflation suddenly comes roaring back. Indeed, it’s entirely possible the 10-year could break above 4% in the near future as inflation returns to 2% and the Fed shrinks its balance sheet.

Dimon also cast a wary eye toward exchange-traded funds, which have seen their popularity multiply since the financial crisis. There are now many ETF products that are considerably more liquid than their underlying assets. In fact far more money than before (about $9 trillion of assets, which represents about 30% of total mutual fund long-term assets) is managed passively in index funds or ETFs (both of which are very easy to get out of). Some of these funds provide far more liquidity to the customer than the underlying assets in the fund, and it is reasonable to worry about what would happen if these funds went into large liquidation.

And Finally America’s net debt currently stands at 77% of GDP (this is already historically high but not unprecedented). The chart below also shows the Congressional Budget Office’s estimate of the total U.S. debt to GDP, assuming a 2% real GDP growth rate. Hopefully, with the right policies they can grow faster than 2%. But more debt does seem on the cards.

And to add to that perspective, we spoke about the recent Brookings report which highlighted the rise in non conforming housing debt in the USA. debt as lending standards are once again being loosened, and risks to mortgage services are rising.

The authors quote former Ginnie Mae president Ted Tozer concerning the stress between Ginnie Mae and their nonbank counterparties.

… Today almost two thirds of Ginnie Mae guaranteed securities are issued by independent mortgage banks. And independent mortgage bankers are using some of the most sophisticated financial engineering that this industry has ever seen. We are also seeing greater dependence on credit lines, securitization involving multiple players, and more frequent trading of servicing rights and all of these things have created a new and challenging environment for Ginnie Mae. . . . In other words, the risk is a lot higher and business models of our issuers are a lot more complex. Add in sharply higher annual volumes, and these risks are amplified many times over. . . . Also, we have depended on sheer luck. Luck that the economy does not fall into recession and increase mortgage delinquencies. Luck that our independent mortgage bankers remain able to access their lines of credit. And luck that nothing critical falls through the cracks…

They say that goldfish have the shortest memory in the Animal Kingdom… something like 3-seconds. But not even a decade after these loans nearly brought down the entire global economy, SUBPRIME IS BACK. In fact it’s one of the fastest growing investments among banks in the United States. Over the last twelve months the subprime volume among US banks doubled, and it’s already on pace to double again this year.

What could possibly go wrong?

Royal commission could prompt credit constraint: ABA CEO

From MPA.

Anna Bligh marked on Tuesday her first year as CEO of the Australian Banking Association (ABA) – but said she feels “like 500 years” have already passed.

In a speech at the AFR Banking and Wealth Summit held yesterday (4 April), the chief executive said the last year has seen the country’s banks confronted with a new tax, and more scrutiny and intervention on top of the 50-odd inquiries and reviews they have faced since the global financial crisis.

Now with the royal commission underway, “without doubt, we have seen some compelling evidence of failures”. But she said some of these issues have already been addressed and remediated by the banks.

The banks face a challenge: they need to lend prudentially and responsibly, be careful and diligent when assessing a customer’s suitability for credit, while also not holding back credit unreasonably or making the process unduly onerous, she said.

The temptation is strong for governments to add complexity and weight to the assessment process to guard against failure, she added.

“At worst, this temptation can tighten access to credit and make it more expensive – this would be a poor outcome for the overwhelming number of customers for whom buying a house is their best financial decision.”

She warned that tightening access to credit could push vulnerable customers out of the regulated banking world and into the far riskier sector of pay day lenders.

“We will all look on with interest as the royal commission does its work and reaches its conclusions. As we do, we should hope that the more measured and sober environment of the judicial setting will produce a more reasoned and balanced outcome for customers and for the system than the overheated corridors of our current federal parliament.”

Transformations are often painful as the old gives way to the new, according to Bligh. But people need to see them as an opportunity.

“An opportunity for a major reset, not only in how we do banking but how we think about it, its place in our lives, its role in our economy and, most of all, its trustworthiness,” Bligh said. “I look forward to the next twelve months with enthusiasm.”

ABA Says New Banking Code of Practice will be compulsory, binding and enforceable

The ABA says that in a first for the industry, retail banks in Australia will be required to sign up to the new Banking Code of Practice as a condition of membership to the Australian Banking Association.

Anything which improves the cultural norms of banking should be welcomed, but this is very little and very late – and could be interpreted as a reaction to the Royal Commission evidence in the past few days.

Acting ethically is certainly helpful, but banks should be putting the interests of their customers first and foremost. This can build trust, one brick at a time. All the evidence shows that do this, customers win, and benefits also flow to shareholders thanks to greater customer loyalty and brand value. We need cultural reform from within the banks and the rate of reform needs to be accelerated significantly.

This is what the ABA has said.

The new Code, currently awaiting ASIC approval, has been completely rewritten and updated to better meet community standards and will be binding and enforceable.

CEO of the Australian Banking Association Anna Bligh said the new Code, now to become a requirement of ABA membership, was a significant ramp up of the industry’s efforts to improve conduct and culture.

“In the past it was up to each individual bank if they wanted to sign up however this new customer focussed Code will become compulsory for all ABA members with a retail presence,” Ms Bligh said.

“This new code will be binding, forming part of relevant customer contracts, enforceable by law and will be monitored by an independent body.

“Australians expect their banks to operate in an ethical and appropriate way when they apply for a credit card, home, small business loan or other financial product.

“While there is much work still to be done, Australia’s banks are serious about genuine reform which addresses conduct and culture, with the Banking Code of Practice a cornerstone of these efforts.

“The industry is committed to genuine reform which will rebuild trust with the Australian community, with the new Code an important step in the right direction.

“Once approved by ASIC, the Code will deliver changes across the board with plain English contracts for small business, no more unsolicited offers to increase credit card limits, greater transparency around fees and customers having an ability to cancel a card online – just to name a few,” she said.

Finalised and lodged with ASIC in December the new Code outlined important changes for individuals and small businesses, including:

  • Plain English contracts
  • Ending unsolicited offers of credit card increases
  • The mandated ability for customers to cancel a credit card online
  • Improved transparency around fees by telling customers about service fees immediately before they occur.

Bank who have signed up are required to include in its contracts a statement that the Code applies, which in turn is a legally enforceable document. This new industry code will have the force of the law. There will be a 12 month implementation period for the Code once ASIC has given its approval.

In addition, an independent body, the Banking Code Compliance Committee (BCCC) will monitor and oversee compliance with the code. The committee has power to investigate breaches of the Code and apply sanctions if necessary.

ABA’s Positive Spin On ACCC Report

Every cloud, even the ACCC report, they say has a silver lining. The ABA found theirs…. but it sort of missed the point….

The Australian Banking Association welcomes today’s ACCC interim report into residential mortgages, which clearly shows very high levels of discounting in the Australian home loan market. It’s clear that competition is delivering better deals for customers, shopping around works and Australians should continue to do so to get the best discounts on the advertised rate.

The report itself states that “an overwhelming majority of borrowers with variable rate residential mortgages at the Inquiry Banks were paying interest rates significantly lower than the relevant headline rate” (the advertised rate). Discounts on home loans ranged between .78% and 1.39% below the relevant headline interest rate.

The advertised variable discount rate for home buyers today is 4.5%, close to the lowest ever recorded.

Data from APRA(1) and Canstar further illustrates there is strong competition in the home loan market, with over 140 providers, offering over 4,000 home loan products. Truly a vast and competitive market for Australians to choose a home loan.

Other evidence shows that Australians are taking advantage of this competitive market and are shopping around. Research by Galaxy shows that:

  • 3 million people had switched banks over the last three years.
  • Of those who had switched banks over the last three years, two-thirds (68 per cent) found that switching was an easy process.

FactCheck: do bank profits ‘belong to everyday Australians’?

From The Conversation.

Following mounting pressure from Labor and some National Party MPs, the Turnbull government in December established a Royal Commission into misconduct in the banking, superannuation and financial services industry. Public hearings are now underway.

At the same time, the Australian Bankers’ Association (ABA) has been running a national advertising campaign in which bank branch staff talk about who benefits from bank profits.

The advertisements – broadcast on national television, published in newspapers, shared on social media and displayed on ATMs – state that “nearly 80% of all bank profits go straight back to shareholders and the majority of those shareholders are everyday Australians who own bank shares through their super funds”.

The ABA says bank profits “don’t belong to the banks, they belong to everyday Australians like you”.

Is that right?

Checking the source

The Conversation contacted the Australian Bankers’ Association requesting sources and comment, but did not receive a response.

On the “Australian Banks Belong To You” campaign website, the association cites these references:

The “nearly 80%” figure refers to the dividend payout ratio of the 8 key Australian retail banks averaged over 2016 and 2017. The data are sourced from bank annual reports. The dividend payout ratio is calculated as the sum of the dividends paid divided by the sum of cash earnings.

According to the ATO more than 14.8 million Australians have at least one superannuation fund account (around 40% have more than one). It’s safe to say that many super funds invest in Australian bank shares as part of their portfolio.

This means that millions of Australians own bank shares.

Verdict

The Australian Bankers’ Association claimed that “nearly 80% of all Australian bank profits go straight back to shareholders”. While we can’t say whether that’s correct for all Australian banks, the statement is broadly correct for Australia’s eight largest retail ABA member banks over the last five years.

The association’s claim that “the majority of those shareholders are everyday Australians who own bank shares through their super funds” is reasonable.

But if you read those statements together as meaning 80% of profits go to Australian shareholders, that would be incorrect. That’s because a proportion of dividend payouts go to non-resident shareholders.

For example, if a dividend was paid on 31 December 2017 by Australia’s ‘Big Four’ banks, non-resident investors would have received between 21.21% and 26.5% of any dividends declared – meaning Australian investors would have received closer to 60% of profits.

Do ‘nearly 80% of bank profits go straight back to shareholders’?

The Australian Bankers’ Association (ABA) is an advocacy group representing the interests of the Australian banking industry. The ABA has 24 member banks, but the claim about what percentage of profits are paid to shareholders doesn’t cover all of its 24 members.

On the “Australian Banks Belong To You” campaign website, the ABA said it based its “nearly 80%” claim on “the dividend payout ratio of the eight key Australian retail banks averaged over 2016 and 2017”, with the numbers sourced from bank annual reports.

Dividends are cash payments that listed companies make to their shareholders. The cash payments are often made regularly. The “dividend payout ratio” is the sum of the dividends paid to shareholders in a year, divided by the sum of the cash earnings the company made.

In other words, the dividend payout ratio is the portion of corporate profits that are paid directly back to shareholders. Companies retain the rest of profits, usually to finance future growth.

While the ABA didn’t name the banks it based its claim on, the eight largest retail banks in the ABA are the Commonwealth Bank, National Australia Bank, ANZ, Westpac, Bank of Queensland, Bendigo Bank, Suncorp and Macquarie Bank.

If we look at dividend payout ratios for those eight banks since 2013, we can see that the overall average payout has consistently hovered around 80% for the past five years.

The same is true of the average payout of the ‘Big Four’ Australian banks – Commonwealth Bank, Westpac, ANZ and National Australia Bank.

In 2012, an outlying dividend payout caused the average dividend payout to appear abnormally high. In the preceding five-year period from 2007 to 2011 payout ratios were lower, as you can see in the chart below.

Do profits ‘belong to everyday Australians’?

The ABA claimed that of those bank profit distributions, the “majority” go to Australians, including “millions of everyday Australians who own bank shares through their super funds”.

The ABA did not define what it meant by “everyday Australians”. In justifying its claim, the ABA correctly cited Australian Tax Office data that shows that as of June 30, 2016, more than 14.8 million Australians had at least one superannuation fund account.

On its website, the ABA stated it’s “safe to say that many super funds invest in Australian bank shares as part of their portfolio”.

Superannuation funds do typically hold a balanced portfolio that represents the major members of the Australian Stock Exchange (ASX). A typical superannuation portfolio might invest in bonds, and in a portfolio of the largest 200 stocks on the ASX, which would include the major banks. This can be subject to individuals’ investment preferences.

For example, say the fund invests in the largest 200 companies on the ASX, and invests in proportion to the companies’ size (that is – the largest companies get the largest investment). Then, the big four banks would be four of the five largest investments.

Obviously, not all superannuation accounts invest in bank stocks, and portfolios can be structured in different ways. For example, some superannuation funds allow their members to invest only in bonds, and people with self managed superannuation funds choose their own investments.

Some wealthy shareholders, and overseas shareholders, also benefit from holding Australian bank shares. As with all companies, shareholders benefit in proportion to their shareholding. Listed banks have no say over whether wealthy Australians, or overseas buyers, purchase their shares.

But it is fair to say that “millions of everyday Australians who own bank shares through their super funds” benefit from dividend payouts. – Mark Humpherey-Jenner

Blind review

The Australian Banking Association claimed that nearly 80% of all Australian bank profits go back to shareholders, and that the majority of those shareholders are everyday Australians who own bank shares through their super funds.

Those claims are valid when read independently, as set out above. But they should not be read together as indicating that nearly 80% of profits go to Australian shareholders.

The proportion of dividends that go back to Australians, either directly or through their investment portfolios, would be less than 80% of bank profits.

Reviewing the investor profiles of ANZ, CBA, NAB and Westpac shows that on December 31, 2017, Australian investment ranged from 73.5% to 78.79% across the big four banks, and institutional investment, which includes superannuation funds and other financial institutions, represented slightly under half of investors.

The high representation of domestic institutional holdings demonstrates the significance of bank shares in most investment portfolios, including superannuation funds.

Foreign ownership of Australian banks. NAB presents the data in a different way to the other banks. Author provided based on reports from ANZ, CBA, NAB, Westpac

So if a dividend had been paid on 31 December 2017 for Australia’s ‘Big Four’ banks, non-resident investors would have received between 21.21% and 26.5% of that dividend declared, meaning Australian investors would have received closer to 60% of profits. – Helen Hodgson

Author: Mark Humphery-Jenner, Associate Professor of Finance, UNSW; Reviewer, Helen Hodgson, Associate Professor, Curtin Law School and Curtin Business School, Curtin University

 

Open Banking Report Paves The Way For Competitive, Customer Centric Services

Treasurer Morrison has release the report by King & Wood Mallesons partner Scott Farrell today in to open banking which aims to give consumers greater access to, and control over, their data. It mirrors recent UK developments, and is another nail in the competitive advantage the large players currently have.  Later the scheme could be widened to other industry sectors, such as energy or telecommunications.

This “open banking” regime mean that customers, including small businesses, can opt to instruct their bank to send data to a competitor, so it can be used to price or offer an alternative product or service.

The report recommends that the open banking regime should apply to all banks, though with the major banks to join it first. For non-banks and fintechs, the report wants a “graduated, risk-based accreditation standard”. Superannuation funds and insurers are not included for now.

In fact, all authorised deposit-taking institutions (ADIs) will automatically be accredited to receive data.

There are exclusions. For example, value added data which is created by banks as a result of their analysis will not be included in the regime. Know your customer data though should be sharable. De-identified aggregate data would not be sharable.

Data provided under the regime will initially be “read only”, but the successful adoption of open banking “could also lead to ‘write access’ reforms” in the future. The following products are called out as in scope.

Transfer of data should be made free of charge, the report says.

Safeguards will be important, including under the Privacy Act, and a customer’s consent under Open Banking must be explicit, fully informed and able to be permitted or constrained according to the customer’s instructions. Joint accounts will need some special considerations in terms of authority, and advice.

An appropriate data standard will need to be agreed, and a clear and comprehensive framework for the allocation of liability between participants in Open Banking should be implemented. This framework should make it clear that participants in Open Banking are liable for their own conduct, but not the conduct of other participants. To the extent possible, the liability framework should be consistent with existing legal frameworks to ensure that there is no uncertainty about the rights of customers or liability of data holders.

In terms of implementation, data holders should be required to allow customers to share information with eligible parties via a dedicated application programming interface, not screen scraping.
The starting point for the Standards for the data transfer mechanism should be the UK Open Banking technical specification.

A period of approximately 12 months between the announcement of a final Government decision on Open Banking and the Commencement Date should be allowed for implementation. From theCommencement Date, the four major Australian banks should be obliged tocomply with a direction to share data under Open Banking. The remaining AuthorisedDeposit-taking Institutions should be obliged to share data from 12 months after the
Commencement Date, unless the ACCC determines that a later date is more appropriate.

The ACCC as lead regulator should coordinate the development and implementation of a timely consumer education programme for Open Banking. Participants, industry groups and consumer advocacy groups should lead and participate, as appropriate, in consumer awareness and education activities.

The ABA welcomed the report:

Banks are excited to enter the Open Banking age that will spark new innovations and deliver cutting edge products, with customers the big winner.

The Farrell Report into Open Banking released by the Treasurer today recognises both the opportunities and challenges that data sharing will bring. While the Australian Bankers’ Association has some concerns surrounding the implementation, the report lays out a broadly sensible path to Open Banking. Mr Farrell’s report should be commended for its focus on customers and its commitment to work with stakeholders to design a safe and secure data sharing framework.

Giving customers greater access to their own data will boost choice in banking and further simplify the application process for a financial product.

Australians have one of the most innovative and technologically advanced banking systems in the world. Examples of this is 24-hour banking, payWave and the soon to be launched PayID and New Payments Platform.

As the Productivity Commission affirmed this week, Australian banks are at the forefront of global innovation which has delivered a superior customer experience. Investments in how banks use data are already leading to new innovations that are improving the customer experience and this is set to continue under Open Banking.

A reform as large as Open Banking must be carefully considered and properly implemented.

Research shows that Australians trust their banks with personal information, more than online retailers, social media companies and even governments. It’s important that banks maintain this trust and ensure that the open data reforms don’t place personal information at risk.

Banks will continue to work with stakeholders like consumer groups, FinTech’s, regulators and government to get this right so it is a good model for all industries and customers are protected.

The ABA looks forward to carefully analysing Mr Farrell’s report and working with members and stakeholders to address any challenges to ensure its success. Banks would also like to thank Mr Farrell for his thorough and thoughtful inquiry

There’s no evidence behind the strategies banks are using to police behaviour and pay

From The Conversation.

APRA’s investigation into the Commonwealth Bank’s culture is starting to look at how it compensates employees, and whether that incentivises bad behaviour. In fact, my research has shown that cash bonuses are at least partly responsible for the scandals plaguing the financial services industry.

But there isn’t good evidence either to support the banks’ alternative – balanced scorecards. This is a system organisations use to set and track their goals. Companies first set out a series of strategies to achieve their objectives, then create criteria (linked to individual team members) to track progress and give feedback.

If anything, research suggests that balanced scorecards don’t work. Many of the criteria are subjective and therefore can be gamed. And the few objective metrics that are included in the scorecard often face the same issues as cash bonuses – incentivising employees to increase short-term profits.

Financial institutions previously gave employees incentives by linking their bonuses to profits and sales. This created an unhealthy fixation on short-term profits and a lack of concern for the longer-term consequences.

Under these schemes, an employee is incentivised to increase short-term profits, even if this may mean selling products that are unsuitable for customers. In the short term this leads to higher profits (and bonuses), but eventually customers figure out they’ve been mistreated. The result is often a loss of reputation and customers, legal costs, customer remediation programs and fines.

To counter this problem, many financial institutions have introduced the balanced scorecard as a method for measuring staff performance and, ultimately, deciding who receives a bonus.

The idea is that by considering a range of performance criteria, not just profits and sales, employees will become less focused on these short-term financial measures. This will, in turn, reduce misconduct.

Implementing balanced scorecards was one of the key recommendations of last year’s Sedgwick Report. The Australian Bankers’ Association sponsored the report.

But even though the balanced scorecard is considered best practice by many in the industry, there is little research to support its adoption.

The research on balanced scorecards

A recent study by Danish researchers reviewed 117 empirical papers on the balanced scorecard that were published in leading academic journals. They found that much of the research has been done on small and medium-sized firms, and that there were design problems in many of the other papers. Therefore, there is too little evidence to conclude whether the balanced scorecards are successful or not.

When balanced scorecards are implemented in financial institutions, they typically include subjective criteria. For example, one criterion could be that an employee’s “behaviour is consistent with organisational values”. A manager would be required to apply a rating to this criterion.

But there is a lot of doubt as to how credible and consistent these ratings really are.

There’s also nothing to definitely discourage bad behaviour (especially in the short term) when criteria include subjective ratings. Due to the large amount of discretion in applying them, managers may give a high rating to staff who are top performers in sales/profits despite poor behaviour.

When scorecards include both subjective and objective measures (which often include sales and profits), staff will tend to focus on the objective criteria. In other words, the balance in the balanced scorecard goes out the window.

The last thing to consider is that behaviour is influenced not just by bonuses, but also the possibility of promotion. If staff see that those who produce high profits are promoted, regardless of the short-term incentive structure applied, they will draw their own conclusions about how best to climb the corporate ladder.

That is why the promotion of Matt Comyn to CEO of the Commonwealth Bank sends a dangerous message.

Author: Elizabeth Sheedy, Associate Professor – Financial Risk Management, Macquarie University

Which Banks Are Changing Broker Commissions Fastest?

From Mortgage Professional Australia.

The latest update on bank reform has revealed the slow and varying progress made by banks in changing broker commissions.

Ian McPhee’s report, commissioned by, but independent of the Australian Bankers Association, asked banks how far they had implemented the Sedgwick Review’s recommendations. Stephen Sedgwick called for an end to volume-based incentives and for banks to ensure remuneration was not directly linked to loan size.

Macquarie Bank, My State Bank, and Bank Australia were amongst the furthest ahead banks, with ‘substantial alignment’ of their broker remuneration to Sedgwick’s recommendation. Only Qudos Bank was fully aligned with the recommendations.

Conversely, Commonwealth Bank’s broker remuneration and governance arrangements were ‘not aligned – planning and/or some implementation progressed’. Work on reforming remuneration had not started at Bank of Queensland, and work reforming governance had not begun at Bank of Sydney.

Of the other majors, ANZ, NAB, and Westpac reported partial implementation of Sedgwick’s reforms.

An imperfect scorecard

McPhee himself notes that “it is not appropriate to draw early conclusions on the status of individual banks’ implementation programs.”

For a start, banks self-reported their own progress with minimal oversight from McPhee. Furthermore, banks’ reporting cycles vary; a bank that reports at the end of the financial year may appear further advanced than a bank that reports at the end of the calendar year, for instance.

According to McPhee “the Sedgwick Review recommendations relating to banks’ arrangements with third parties are least progressed, with a number of banks reporting that they are still in the planning phases. This reflects the time taken to establish the Combined Industry Forum and agree industry-wide responses.”

The Combined Industry Forum set out its changes to remuneration in December.

Trust In Banks May Be Improving, But Its Still Below Average In Australia

The ABA released new research today – The Edelman Intelligence research conducted late last year which tracks community trust and confidence in banks. Whilst progress may being made, the research shows Australian banks are behind the global benchmark in terms of trust.

The ABA, of course accentuates the positive!

Based on the Annual Edelman Trust Barometer study released in January 2017, Australia remains 4 points behind the global average. Hence, while there is more work to be done to increase trust in the sector, Australians acknowledge that the banking industry is a well-regulated industry that is more stable than many of its international counterparts in Europe. Overall, the two percentage point year on year increase in trust from 2016 to 2017 in the Financial Services sector, and the increment in Australians’ trust from the June 2017 study, has demonstrated a positive shift from ‘distrusted’ to ‘neutral’.  This ‘neutral’ trust indicates that the industry sits above trust in business, media and Government, all of which are distrusted.

The ABA says this new report shows a significant improvement in the perceptions of banks since the first research report published six months ago.

Nearly 80 per cent of people believe that their bank is becoming more customer focused, up from 63 per cent, and 86 per cent believe that banks help customers to make decisions in their own interest, up from 74 per cent.

Customers’ level of trust in their own bank and their perception of the industry overall has also improved.

Australian Bankers’ Association Deputy Chief Executive Officer, Diane Tate, said the results were encouraging and showed that the significant efforts made by the banks to respond to customer expectations and rebuild trust with the community is making banking better.

“Although there’s still a long way to go to restore trust and confidence in the industry, it’s encouraging that the impact of these reforms is being recognised by customers and making an impact on the ground,” Ms Tate said.

“The banks recognised that they needed to change and began undertaking the largest program of reforms in decades.

“This new research is a sign that more customers are experiencing the benefits of change in the way banks conduct their business.

“Through the Banking Reform Program – Better Banking, banks have been changing their practices to be more transparent and make it easier for individuals and small business to do their banking,” she said.

The research shows that awareness of each of the reforms has increased, in particular initiatives to improve how banks manage complaints and compensate customers when mistakes are made.

Strengthening the Code of Banking Practice has again been identified as one of the most important initiatives to drive trust. The new Code was lodged late last year with ASIC and currently awaits approval.

Other factors identified by the research as important factors in change were confidence and transparency in banking, while supporting customers experiencing financial difficulty and removing individuals for poor conduct has increased in importance for customers. Other key findings in the research include:

• 55 per cent of people believe their bank is more interested in what’s good for customers, up from 44 per cent.

• The level of importance that Australians place on the reforms remains strong, with half the initiatives scoring 70 per cent or higher.

Edelman surveyed 1,000 Australians in November 2017 following the first round of research conducted in May 2017, which set benchmarks for the industry to assess the impact of its Banking Reform Program.

ABA Says Small Business Saves Billions With Lowest Rates in Decades … But

The ABA says there is some great news for Australian small businesses who are now paying $9 billion less in interest on current loans than compared to the same time in 2011, with the average interest paid the lowest in 20 years.

According to RBA data, the past six years have seen significant falls in interest rates for small business, with average rates paid on their loans now at the lowest levels since RBA data commenced in 1993.

We assume this is the chart the ABA is referring to – larger business are getting better rates by far!

But it is not that simple, as this chart also from the RBA shows. Advertised rates from both term residential security and overdraft are rising (despite no change to the cash rate).  So the ABA is choosing the chart to fit their narrative.

Australian Bankers’ Association Chief Economist Tony Pearson said small businesses are a significant driver of the Australian economy, so anything that assists them is good news.

“Less interest paid by small business on their loans will help drive economic growth, create new jobs and tackle unemployment,” Mr Pearson said.

“The average interest rate paid on all current loans held by small businesses has fallen in the past six years from 8.40 per cent in 2011 to 5.30 per cent now. Based on a loan of $100,000 that equates to an interest saving of around $3,000 per year.

“When you look at the bigger picture the story is even more positive. As of September, there were a total of $282 billion in outstanding loans to small businesses in Australia, and based on the lower rates, they’re now paying almost $9 billion less a year in interest compared with the same time in 2011.

“With two million small businesses in Australia, employing nearly five million people, we need to ensure this sector continues to flourish,” Mr Pearson said.

Kevin Taylor runs ProActive Chartered Accountants and says for himself, and his 200 plus small business clients, low interest rates are good for the bottom line.

“Every dollar saved means extra profits or a chance to help the business grow by reinvesting in new equipment or hiring more staff,” Mr Taylor said.

“Additional cash flow, through low interest rates, means you can pay down the loan sooner, or put it away for a rainy day. Whatever you choose to do it’s a positive for the business and the economy.

“While business interest rates are at record lows, electricity prices are at the other end of the scale. Higher electricity prices are a double negative for businesses, as they have to pay the bills and their clients have less money to spend on other things,” Mr Taylor said.

For larger businesses, the average interest rate has fallen from 7.10 per cent to 3.40 per cent over the past six years. As of September, there were a total of $747 billion in outstanding loans to large businesses. The amount of interest being saved annually, when compared with six years ago, is a staggering $27.6 billion.

“That’s a lot of extra money that can be invested into growing a business and creating jobs,” Mr Pearson said.