Tag: Australian Broker

Broker remuneration at “lowest levels ever observed”

The Mortgage and Finance Association of Australia (MFAA) has released a report examining the broker channel’s performance over the past six months; via AustralianBroker.

The eighth edition of the Industry Intelligence Service Report (IISR) drew on data supplied by 12 major aggregators from October 2018 to March 2019. 

While the the broker channel achieved a record high market share of 59.7% during the period, it settled just $87.56bn in home loans – the lowest six-month value recorded since the MFAA commenced reporting in 2015, down 10.32% on the previous year. 

The average value of new home loans settled per broker also continued to decline but at a rate “far greater than ever before,” down 10.66% on the year before. 

The number of loan applications also reached never before charted territories, with applications down 8.53% from the period before and 13.39% year-on-year.  

Further, the average number of applications lodged per broker declined across all states excepting Tasmania. 

The broker population is down from the record high of 17,040 industry participants, with the net industry turnover – accounting for those joining and leaving the industry, as well as those moving between aggregators – up to 10.9% from 9.6% a year ago. 

Notably, despite the proportion of new female recruits increasing by 10% compared to new male recruits, the population of female brokers declined over the six months, down 1.79%.

All of these factors contributed to a fall in the average total broker remuneration “to the lowest levels ever observed” by the IISR. 

Average combined remuneration has dropped 3.49% from the last six month period and is down 3.08% year on year. Compared to the high of April to September in 2016, it’s down 9.64%. 

The report linked the decline to the lower upfront commissions as trail increased across all states. 

The MFAA reiterated throughout the report that the inhospitable credit environment did not only impact the broker channel, as the value of home loans settled directly with lenders was down 15.71% from the last six months and 19.1% from the year before.

CBA Drops Profit 8.1%

CBA reported an 8.1% drop in profit over fiscal year 2019 in its full year results released this morning.

Commonwealth Bank’s (CBA) FY19 net profit was $8.6bn as compared to $9.4bn the year preceding. NIM looks under pressure ahead (thanks to lower cash rates) and non-performing loans are on the rise. The mortgage business may offer some support ahead.

CEO Matt Comyn partially attributed the “subdued” result to higher remediation costs totalling $2.2bn in FY19, up $1bn from the year before.

He said, “While this year’s headline results were impacted by customer remediation costs, revenue forgone for the benefit of customers and elevated risk and compliance expenses, our core business continued to perform well – underpinned by growth in home lending, business lending and deposits.”

“Our home lending balances are up 4%, which is above the system. Our business lending is also up 4% and we’ve continued to see strong transaction deposit growth of 9% for the year.”

Owner-occupied loans made up 71% of new lending in FY19.

Comyn also provided an update on the implementation of the recommendations from the royal commission.

“We’ve already completed six of the recommendations and we’re going to make sure we complete at least another eight before the end of the calendar year, taking the total to 14 of the 23 that we can implement by ourselves,” he said.

“Specifically in the result, we call out $275m of revenue that’s been forgone by deliberate choices that we’ve made to make sure we’re delivering better outcomes for our customers.”

The bank also gave an update on the suspended demerger of its wealth management and mortgage broking businesses, communicating it intends to cease providing licensee services through Financial Wisdom by June 2020 at which point it will proceed with an assisted closure.

When first announced, the demerged business – CFS Group – was to include CBA’s Colonial First State, Colonial First State Global Asset Management (CFSGAM), Count Financial, Financial Wisdom and Aussie Home Loans businesses.

In the subsequent months, CFSGAM and Count Financial have both been sold or are currently in the process of being sold separately.

In today’s release, CBA reiterated that it’s “committed to the orderly exit of its remaining wealth management and mortgage broking businesses,” comprising Colonial First State, Aussie Home Loans and CBA’s 16% stake in Mortgage Choice. From Australian Broker.

Westpac warns on rise of non-banks in NZ

Like Australia, New Zealand is consulting on the capital requirements for its top banks, to mitigate their risk of failure. The Reserve Bank of New Zealand (RBNZ) received 160 industry submissions in the last round of consultation, including contributions from Australia’s major banks with Westpac voicing “significant concerns” around the advantages that could be handed to non-banks. Via AustralianBroker.

The submission not only highlighted the significant opportunity created for non-banks by increasing the regulation on traditional banks, but indicated that the changes would unfairly inhibit its participation in the market. 

It reads, “As the costs of credit rise, these [non-bank] alternatives become more attractive to New Zealanders. And as digital capability evolves to maturity, the potential for such models to emerge, and emerge quickly, has increased materially.”

Westpac’s submission drilled down yet further, going on to question the wisdom of instituting regulation “with the potential to re-ignite the shadow banking system”.

“Should the capital requirements…increase, it creates an incentive for other lenders outside of the registered banking system to provide credit, because they can do so more cost effectively.

“The RBNZ’s proposals…may support the emergence of unregulated, less capitalised entities which, as we have seen in past cycles, can weaken the stability of the whole financial system.”

NAB communicated similar concerns in its response.  

Its submission says that the steady increase in “regulatory burden” being put on banks is responsible for over half (55%) of the growth evidenced in the non-bank sector between 2007-2017, a statistic attributed to Xavier Vives.

According to NAB, the conversation around competition is particularly important given that New Zealand is operating on an open data system, which allows consumers to move their transactions between institutions with ease.

Crucially, this means there could be many lessons for Australia to take from New Zealand’s experience. As of October 2018, lending growth in Australia’s non-bank sector was occurring at a rate over 11% annually, the strongest since October 2007 according to RBA and CommSec data (see graph). Further, stage one of open banking launched on Monday and proposed revisions to the capital framework for ADIs are expected to go into effect from 1 January 2022, following another round of consultation.

Who Cut What

Via Australian Broker.

At the time of writing, cuts of 25bps had been announced by Resimac, State Custodians and Athena Home Loans. Reduce Home Loans cut its rates by 22bps, taking its lowest advertised rate to 2.89% and putting the lender in the sub 3% category with Greater Bank, HomeStar Finance and BOQ.

Unlike last month’s cut, all the majors responded to the RBA’s announcement before the day’s end.

As with last month, ANZ was the first to react, announcing a full 25bps decrease across all variable interest rates for Australian home and residential investment loans.

In June, ANZ elected to pass through just 18bps of the RBA’s 25bps cut, defying Treasurer Josh Frydenberg’s public demand for a full transference of the reduction.

CBA was next to go public, opting for a 0.19% reduction across both its owner occupied and investor P&I standard variable rate home loans.  

The interest only home loans, both owner occupied and investment, received the full 25bps cut.

Last month, CBA passed through the 0.25% cut in full.

The bank also announced a special five-month term deposit rate for savers, introduced at 2.20% per year, which is a 0.20% increase.

“With official interest rate settings already at record lows, we are focused on balancing the benefits and the costs of further interest rate reductions between our 1.6 million home loan and over 6 million savings customers,” said Angus Sullivan, group executive of retail banking services.

“It is not possible to pass on the full rate reduction to over $160 billion of our deposits, including deposits where interest rates are at or already near zero,” he added.

In June, NAB also passed through the full 25bps. However, this month they elected to reduce variable home loan interest rates by 19bps, but also provided more commentary along with the decision than the other majors.  

“Decisions like these are difficult and reflect the current unique circumstances, with home loan rates at record lows at the same time as deposit and savings rates also being at record lows,” said chief customer officer of consumer banking, Mike Baird. 



“The difference between what we charge and how much it costs us to fund a mortgage remains under pressure and while the circumstances of each RBA cash rate decision will vary and has some influence on the cost of borrowing money, it is not the only funding cost driver for NAB.”

“Getting the balance right is an ongoing challenge for banks and, with 9 million customers, making the right decisions for our customers matters for the Australian economy,” he explained.

Westpac rounded out the responses yesterday evening, announcing a reduction of 20bps for variable rates including owner occupier paying P&I, investment p&I, and owner occupier for interest only customers.

The rate was reduced by 0.30% for residential investment property loans for customers for customers with interest only repayments.

In June, Westpac reduced rates for owner occupiers paying P&I by just 0.20%, and rates for investor customers with interest only payments by 0.35%

Australians particularly at risk of financial deception

Amid the ongoing discussion around who should bear the responsibility for assisting vulnerable customers, recent data has revealed further need for targeted care and education, as Australians are falling prey to bank fraud and other financial scams at an alarming rate, via Australian Broker.

According to the KPMG Global Banking Fraud Survey, 61% of banks worldwide have reported an increase in fraud – both in value and volume – over the past three years, with Australia being among the countries hit the hardest.

“We are seeing a disproportionately high volume of scam attempts on Australians – there were 177,000 scam reports here last year, costing almost half a billion dollars. This compared to around 85,000 scam reports in the US and UK, with far bigger populations,” said Natalie Faulkner, KPMG global fraud lead.

KPMG’s survey found customer awareness is key for detecting fraud and reducing losses, and the firm called for more to be done to educate consumers. While branch staff in banks are a major point of contact, brokers – who now help six in 10 home owners to secure a mortgage – are naturally on the front line of this work.

“Education should be multifaceted to reach different audiences. For example, many scam victims tend to be the elderly or socially isolated, so education should not just be through digital channels but also through television, traditional media and even face-to-face sessions with vulnerable customer groups,” said Faulkner.

The data also revealed that cyber-related fraud is the most significant challenge faced worldwide, a reflection of the growth in digital banking.

“This is set in the context of a changing global banking landscape, where branch networks are shrinking, volumes of digital payments are increasing and there is less customer face time,” explained Faulkner.  

Open banking – which will be implemented next week – was mentioned as an emerging challenge in fraud risk, as it will see banks allowing third parties to access their customer data.

However, Faulkner noted, “On a positive note, having more transparency across accounts will enable the banks to know their customer more holistically and trace funds in fraud detection.”

Bank requirement leaves brokers “entirely exposed”

A professional indemnity (PI) specialist has expressed grave concern over new requirements for brokers to confirm that there are no signs of financial abuse when they assist clients in securing a loan; via Australian Broker.

The action has been taken by the banks in response to the Australian Banking Association’s updated code of practice requiring a higher standard for dealing with vulnerable customers. However, Darren Loades, the FBAA’s dedicated PI insurance specialist for Queensland and the Northern Territory, has questioned the sudden announcement, the lack of clarity as to what the agreement entails, and the days-long timeframe before the 1 July implementation.

“Do you think that’s by accident? I sure don’t,” said Loades. 

“The main point is that it’s been rushed through, no one has actually seen the details, and it could have very far-reaching and onerous implications for brokers. Do not sign anything for the moment.”

Loades highlighted the serious liability concerns of signing an agreement that could likely take brokers out of their current coverage and leave them “entirely exposed.”

“Professional indemnity policies only respond to claims made under common law. Signing one of these declarations could incur contractual liabilities, over and above the liabilities a broker would owe at common law,” he explained.

“The standard PI policy out there on the market will not pick up any liabilities owed under contract. Brokers could potentially be left exposed and not insured at all.”

Last week, FBAA managing director Peter White expressed concern that “PI insurance could increase tenfold to cover a declaration like this.”

“To try and ram this through with little notice is not only ridiculous and ill-conceived, but creates massive risks for brokers with almost no benefit to borrowers,” he added.

As White expressed last week, Loades finds it suspect that the agreements the banks are asking brokers to sign have yet to be made accessible.

He continued, “But knowing the banking industry, the documents are going to be pretty far-reaching with some nasty little clauses in there along the lines of, ‘If you drop the ball in this area, you agree to indemnify the bank against any losses.’ Otherwise, why would they be going to this trouble?

“This seems to be a push from the banks to transfer their liability onto the broker, which isn’t all that fair or realistic.”

While Loades does acknowledge that brokers are the ones to have face-to-face interaction with the borrower, he has serious doubts that a set of written guidelines provided by the bank could translate to brokers being able to identify signs of abuse in real life stations.

“That’s a whole different ballgame. Brokers aren’t qualified or licenced to provide advice in this area of financial abuse,” he said.

“What happens if the broker happens to innocently miss a situation where there is financial abuse? The bank is going to rely on this document to say, ‘Well, you signed off. You’re the one who is liable.’”

June cash rate: three possible outcomes

From Australian Broker.

An “overwhelming majority” of economists are forecasting that the Reserve Bank of Australia will alter the cash rate tomorrow for the first time since August 2016. Below, two analysts explain the ripple effects likely to spread across the economy as a result.    

The good news

Martin North, principal of Digital Finance Analytics, expects there will not only be a cut tomorrow, but another to follow later in the year due to the underperforming economy and dramatic drop in household consumption.

He believes it is highly likely the banks would pass along the savings to their customers, attributing his confidence to three major factors: the Bank Bill Swap Rate (BBSW) “dropping dramatically” over the last several months, the “heavy pressure” the RBA has put on banks to ensure they would pass a rate cut on, and the banks’ need to bolster consumer goodwill.

“The PR effect if the banks didn’t respond when rates were cut would be dramatic. The banks are in reputation-rebuilding mode. I think they would want to show that they are responsive to signals from the Reserve Bank,” North explained.

According to the financial analyst, the RBA hopes that banks would lower interest rates even for existing borrowers – a departure from the trend evidenced in the last several months – improving discretionary household spending and stimulating the economy at large.

The bad news

Unfortunately, North has expressed significant doubt that cutting the rate will achieve this goal.   

“The overall economic impact of the RBA’s adjustment will likely only have a marginal effect,” he said.

“In fact, it may have an unintended consequence because cutting that rate basically signals weakness. Sentiment might turn negative, particularly from international investors.”

“The exchange rate will go down, which means we’re likely to import inflation from overseas – high oil prices and high import costs. That may have a limiting impact on the Reserve Bank’s ability to cut further. But I suspect they might be forced to,” he continued.

Potentially rising unemployment, flat income growth, and the rising cost of living seem likely to claim any savings created by a rate cut. 

The unexpected outcome 

While CoreLogic research analyst Cameron Kusher believes a cut is the most likely decision to be made at tomorrow’s meeting, he could understand if the RBA chose to hold this month.

The housing market may be exhibiting the earliest signs of recovery, but according to Kusher, “It’s not a cut about housing. It’s a cut related to economic growth and inflation.”

He added, “Waiting another month would allow the RBA to gather more evidence as to whether the housing market is truly improving, and it will afford them the luxury of seeing the March quarter GDP figures which are released the day after their board meeting on June 5.”

If the report was to show another weak quarter of economic growth, it would “surely trigger the need for a 25 basis point or even 50 basis point cut to the cash rate in July.”

Waiting would also allow for another month’s data regarding the labour force to be examined, with an increase in the unemployment rate more solidly proving it’s a trend.

Given the “slow and measured approach” that the RBA has shown in its cash rate considerations thus far, it would not be shocking for it to wait for the above data to be accessible before taking action. 

Housing market unlikely to rebound soon

Despite the recent surge of optimism regarding the property market, one financial analyst feels that the relief is misplaced, via Australian Broker.

“There are some people now claiming that property prices have hit bottom and it’s all up and away from here. But then, there are others who rightly focus on the burden of debt, which is very big and means there will be some limitation to how far property prices can reverse,” explained Martin North, principal of Digital Finance Analytics.

“There is significantly more interest in property now than there was a few weeks ago, yes. But the jury is still out on whether that will translate to sustainable reductions in the fall of home prices, and rises ahead. The probability of coming into a property boom anytime soon is very limited.”

According to North, a large part of the issue lies in a crucial and crippling disparity in supply and demand.

ABS data reports there are more than one million vacant properties in Australia currently, yet 200,000 new dwellings are scheduled to be built in the next two years.

Aspiring housing market entrants are being barred by tightened lending, immigration has stagnated and investors are not only disinterested in returning to the market, but many are actively trying to sell the properties they do have.

“That’s why I’m still thinking that there’s plenty of room on the downside for property values to continue to fall,” explained North.

Even the initiatives recently proposed, such as APRA changing the servicing rate floor or the promised first home buyer scheme, are likely to have only a “small and positive effect, not a dramatically large one.”

“We’ve still got the very high level of household debt, we’ve still got very high levels of mortgage stress, we’ve still got the banks tight on their lending standards,” the anaylst reminded. 

While North feels confident that the last 18 months of property values sliding is outside the natural ebb and flow of the housing market and indicates the presence of a deeper issue, he doubts the validity of using home prices as the key indicator of the state of the economy.

He explained that there are too many factors that play into the property market for it to be an accurate litmus test, calling it “a follow up, rather than a lead indicator.”

Instead, he suggested attention should be given to monitoring any significant rises in unemployment, mortgage defaults, or the consumer price index.

APRA changes “unlikely” to invigorate housing market

While APRA’s proposed changes to serviceability assessments for ADIs have been broadly celebrated, others have expressed doubt that the regulatory revisions will stimulate the housing market in as meaningful a way as is hoped. Via Australian Broker.

“While these changes are welcome and will help some borrowers that can’t quite access a mortgage currently to get one, it is unlikely to result in a rebound in the housing market,” said CoreLogic research analyst Cameron Kusher.

Kusher referred to ANZ’s recent investor update to the market to elaborate on his stance.

The update from ANZ attributed reduced borrowing capacity to three factors: changes to HEM accounting for 60%, the servicing rate floor responsible for 30%, and income haircuts causing the remaining 10%.

Kusher pointed out that, according to this data, 70% of the reduction in borrowing capacity is unrelated to the current serviceability assessment model. Even if APRA were to change its current guidelines, it will likely continue to be much more challenging to get a mortgage than in the past.

Roger Ward, director of Champion Mortgage Brokers, agrees that the current 7.25% assessment rate is just one of six lending standards that have contributed to the credit squeeze.

Drawing from his 25 years in the banking and finance industry, Ward outlined the remaining five challenges to lending as:

  • Banks considering borrowers’ capacity to repay for the full 25 to 30 years of a mortgage term, despite most loans now only lasting seven to eight years
  • A one-dimensional and inaccurate approach to identifying spending habits and current costs of living
  • Changes in credit reporting providing data on the last 24 months’ payment history on credit cards, with one late payment sometimes enough to be declined by a bank
  • LVR changes and limitations, especially those impacting investors
  • Tiered interest rates dependant on the size of the original deposit

While allowing lenders to review and set their own minimum interest rate floor will undoubtedly help some borrowers access previously unreachable mortgages, the housing market will require stimulation from elsewhere in order for dwelling values to begin their rise.

According to Kusher, “[APRA’s] proposed changes, in conjunction with the uncertainty of the election now behind, will potentially provide additional positives for the housing market. [They] would potentially slow the declines further and may result in an earlier bottoming of the housing market.

“Despite that prospect, it will remain more difficult to obtain a mortgage than it has done in the past and we would expect that if or when the market bottoms, a rapid re-inflation of dwelling values is unlikely,” he concluded.

Mortgage Price War Hots Up

The recent fall in the BBSW has offered a window of opportunity for CBA and Westpac, the two mortgage behemoths to cut fixed rates.

This will put more pressure on smaller players (see BOQ yesterday) and likely trim some deposit rates as pressure on margins accelerates.

This from Australian Broker.

Just days after CBA announced it was cutting its rates and stepping away from its competitors, another big four has matched the changes across the board – and likely triggered a continued decrease in fixed rates at lenders of all sizes.

The newly announced decreases go into effect at Westpac tomorrow for fixed rate loans paying P&I and are open to both new and existing customers switching into a fixed rate.

“As expected, it hasn’t taken Westpac long to match the fixed rate cuts this week from Commonwealth Bank,” said Steve Mickenbecker, Canstar group executive of financial services.

“These decreases are a further sign that the big banks are wanting to fight back to regain the market share losses to the local arms of foreign banks and other domestic lenders over the past 12-months.”

At Westpac, the three- and five-year fixed rates for owner occupiers paying P&I are to decrease by 0.10% while the four-year rate will drop by 0.20%.

Fixed rates will also decrease for investors paying P&I, by 0.06% for two-year, 0.20% for three-year, and 0.10% for five-year, demonstrating “the bank’s desire to increase investment lending in the face of declining demand,” according to Mickenbecker.

Other lenders have already been making moves of their own to stay competitive.

Suncorp has announced a discount for its three-year fixed package rates for eligible new home lending, meaning the non-major currently has the lowest three-year fixed rate in the market at 3.49% for owner occupied and 3.69% for investment.

“We are now eagerly awaiting the response from the other two major banks and the rest of the market, in light of these competitive fixed rates from the country’s two biggest lenders,” concluded Mickenbecker.