Finance Sector Must Address Trust Deficit

The banking royal commission has caused a massive erosion of consumer trust in financial services – and it’s up to the industry to stop it, according to a new survey, via InvestorDaily.

New findings from a survey by financial services marketing agency Yell and research firm Ipsos, conducted in June during the royal commission, has revealed that consumer trust in banks dropped by 8 per cent from 2017.

Similarly, trust in financial advisers also dipped by six per cent.

When asked to rank financial services organisations according to trust, banks slipped to third place from second place in 2017 and financial advisers fell from third place to fifth place.

“This year’s results showed an acceleration in the gradual erosion of consumer trust that’s still not being recognised by the industry as a whole,” said Yell founding partner Nigel Roberts.

The financial services industry would need to take responsibility for the declining trust and reorient its offerings to better serve the customer, he suggested.

“The challenge for all of financial services and especially the banking sector, is to halt the slide in trust or face real consequences.

“This can be achieved, but will involve much greater empathy and delivering solutions that truly meet customer needs, rather than meeting sales targets,” Mr Roberts said.

“The shift away from pushing product requires more than just having a view on the vast quantities of data currently being collected; it needs a human-centred approach as well.”

He also posed the question of whether incumbents would see a “significant commercial impact” as new market entrants entering the industry did not “carry the stigma of some of the established players”.

“We’ve seen the big four shifting away from wealth services ahead of and during the royal commission, maybe in anticipation of any potential findings, but the question is: will it be enough to protect them from the emergence of neo-banks and other viable alternatives in Australia?”

Bank customer satisfaction drops: Roy Morgan

Recent statistics from research house Roy Morgan have also pointed to declines in customer satisfaction as a result of the royal commission.

Bank customer satisfaction was at 82.3 per cent in January at the beginning of the year, but then fell to 78.5 per cent in May and then even lower to 78.3 per cent in June.

“This represents a decline of 4.0% points since January and is now at the lowest monthly satisfaction level since April 2012,” according to a Roy Morgan statement.

Furthermore, figures also demonstrated that dissatisfaction levels were increasing — and this represented a threat to retention, the statement said.

“The following chart shows that the level of dissatisfaction with banks has increased to 6.2 per cent from 4.6 per cent in January, just prior to the royal commission and is now at the highest level since April 2012.

“The combination of the 15.5 per cent of bank customers who are indifferent to their relationship with their bank (neither satisfied or dissatisfied) and those who are dissatisfied (6.2 per cent) means that more than one in five (21.7 per cent) bank customers pose a potential threat to customer retention, particularly considering that this has increased from 17.7 per cent in January 2018.”

Banks retreat further from SMSF lending

From InvestorDaily.

Over the past week, four separate lenders have announced their exit from the SMSF lending space, with a further two banks saying loans will no longer be offered to SMSFs.

 Westpac announced that effective 31 July 2018 it would no longer offer property loans to SMSFs for both residential and commercial properties.

This followed an earlier announcement from its subsidiary St.George that it will withdraw its SMSF loan products from sale effective 31 July 2018.

Westpac Group confirmed to InvestorDaily sister title Mortgage Business that the removal of SMSF loans for both residential and business properties will be applied across all of the brands in the Westpac Group, including Bank of Melbourne and BankSA.

Commenting on the decision to withdraw all its brands from the SMSF lending space, Westpac stated that the bank “continually reviews its products to ensure we meet the expectations and requirements of customers”.

“To streamline our product offering, effective Tuesday, 31 July 2018 applications for new consumer or business lending will no longer be accepted for SMSFs,” Westpac stated in a public release.

The borrowing market has been getting tougher for SMSF trustees for several months, especially with loan to value expectations, as foreshadowed by specialist brokers like Thrive Investment Finance’s owner Samantha Bright last year.

Most recently, Ms Bright said off-the-plan purchases are becoming increasingly difficult to finance, with lenders either refusing applications for properties that are less than six months old or requiring stronger assets than normal to back their loans.

Super funds struggling with shift to digital

Superannuation funds have made some strides in transitioning to digital platforms and online communication, but the process has been challenging for them, according to Investment Trends; via InvestorDaily.

Researcher Investment Trends’ latest Super Fund Member Engagement report, compiled from surveys of the member services and activities of Australia’s largest 44 super funds, has found that super funds are “still learning to manage” their move to the online space.

“Many super funds are making inroads in the development of their digital member service platform, but the move from internal processing systems to real-time member facing applications has been challenging,” said a statement from Investment Trends.

Investment Trends technology analyst Ian Webster said the report found several super funds encountered various online stumbling blocks.

“This year, we observe many funds struggling with the reliability, consistency and quality issues in the real-time digital-based channels used to support and interact with their members,” he said.

“However, super funds are gradually mastering the challenge of managing these channels more effectively, building upon basic content publishing towards digital channels that provide easy access to services and promote two-way engagement with members.”

Among the top 10 super funds ranked according to overall member engagement score, nine were industry funds, with ANZ Smart Choice representing the only retail fund at tenth place.

AustralianSuper took out first place, followed by Sunsuper, HESTA, QSuper, HOSTPLUS, Rest Super, Cbus Super, Vic Super and NGS Super.

Mr Webster pointed to HESTA, Sunsuper and AustralianSuper which had all made developments to their website and were “shining examples of industry funds adopting a ‘member first’ approach”.

“The last 12 months alone saw a host of interesting developments by super funds, including an increase in the number of fund mobile apps, increased social media activity, and direct engagement through online chat and bot-based applications,” he said.

Chinese ‘Minsky moment’ looming: Spectrum

The warning signs are ‘flashing amber’ on a credit crisis in China as the authorities stamp down on excessive lending, says Spectrum Asset Management; via InvestorDaily.

Credit-focused Spectrum Asset Management has issued a note titled Our double Minsky risk that focuses on the likelihood of a credit crisis playing out in China and Australia.

Spectrum principal Damien Wood said both countries have seen a build-up of private debt to record levels: from the business sector in China, and from households (via residential mortgages) in Australia.

Both countries are vulnerable to what is known as a ‘Minksy moment’, a term coined by US economist Paul McCulley in relation to the Russian debt crisis of 1998 and inspired by US economist Hyman Minsky.

The warning sign of a Minsky moment, said Mr Wood, is when the availability of credit starts to shrink.

In China, the government’s “well intended” efforts to cut down on excessive corporate leverage are causing the warning lights to ‘flash amber’ on a Minsky moment, he said.

“In October 2017, China’s central bank governor warned specifically of a Minsky moment for China. In the reported statement, he noted high corporate leverage and rising household debt,” Mr Wood said.

“One key step was to reduce lending from yield chasing ‘shadow’ banks. The concerns were that these key providers of speculative lending were an unsustainable source of finance that promoted poor allocation and management of capital.”

Shadow banking is falling in China, and the net impact is that overall lending growth is slowing, Mr Wood said.

Chinese authorities are looking to “smooth the transition of China Inc’s loan book” by cutting reserve requirements, reducing taxes, and directing banks and lenders to help financial SMEs.

But if these measures do not work, China could look to socialise credit losses.

“Notwithstanding the steps taken, a key fall-out from the reduction in credit availability can be seen in the Chinese corporate bond market. Bond default rates are accelerating and credit spreads on corporate bonds have jumped,” Mr Wood said.

If defaults on Chinese corporate bonds continue (see graph above) a “stampede for the exit could begin”, Mr Wood said. “And then we are one step closer to a Minsky moment.”

Australia is facing the prospect of its own Minsky moment when it comes to household debt (which is sitting at 120 per cent), where Spectrum rates the warning light flashing ‘green to amber’.

“The problem is, even if household debt does not cause excessive problems locally, a rapid deleveraging in China would likely hit local financial markets,” said Mr Wood.

“A large debt reduction in China will risk lower than expected demand for our goods from our major export market,” he said.

“Conversely, we doubt a domestically-driven downturn locally would raise an eyebrow in China’s financial markets.”

Embedded ASIC agents risk ‘capture’: Shipton

ASIC chairman James Shipton is asking the government for additional funds to embed his staff within the major banks, but he is wary of the risk of ‘regulatory capture’; via InvestorDaily.

At a public hearing of the House of Representative Economics Committee on Friday, Liberal MP Trevor Evans asked ASIC chairman James Shipton about an ASIC proposal to ‘embed’ its agents within financial institutions.

Under the proposal, ASIC staff would monitor the culture and compliance of the major banks from within rather than at legalistic “arm’s length” – a proposal Mr Evans endorsed.

“It’s a style of collaboration which would be less legalistic, quicker and much more efficient in the use of regulator resources instead of arm’s-length legal tussles,” Mr Evans said.

“It would hopefully, with the cooperation of a lot of businesses, tease out the noncompliance that sits there in a non-deliberate, minor, systemic sort of way,” he said.

In response, Mr Shipton acknowledged ASIC has approached Treasury about the matter, saying there is a “productive conversation” underway.

The ASIC chairman said that by embedding his staff in the major banks, the regulator’s supervisory teams would become “more knowledgeable and understanding of particular institutions” and have a more “real-time” assessment of emerging risks – both financial and non-financial.

“We will be better able to be honest and speak back the same language the financial institution uses so as to get effective change,” Mr Shipton said.

However, the ‘embedding’ idea does not come without its risks, he said – primarily among them the notion of ‘regulatory capture’, whereby ASIC staff could become complicit in the poor cultural or compliance practices of an institution.

“We have been very mindful of the experiences of overseas supervisors in this regard,” Mr Shipton said.

“There are a number of lessons to be learned and to be aware of such as the risk of regulatory capture, which I am very mindful of,” he said.

The Liberal MP questioned whether ASIC required extra funding to carry out an ‘embedded’ function.

“This could be core regulatory business and I think that ASIC already does have all the powers and authorities to enter into agreements and MOUs with businesses,” Mr Evans said.

In-house product advice a ‘third way’

ASIC should consider replicating the UK’s ‘restricted’ regulatory model in order to make financial advice affordable for more Australians, argues NMG Consulting via InvestorDaily.

In his latest Trialogue note, NMG Consulting partner Oliver Hesketh made the case for financial advice that is exclusively tied to in-house product.

The ‘tied’ advice regulatory model, which operates in the UK as ‘restricted’ advice, involves a “very clear understanding between the customer and the adviser that only in-house product will be offered”, Mr Hesketh said.

At present, holistic advice is prohibitively expensive for the vast majority of Australians unless it subsidised by a vertically integrated business model, he said.

“If vertically integrated advice models can no longer be tolerated, or the cost of regulation renders it unfeasible, that means around 900 thousand Australians would be left without any financial advice at all,” Mr Hesketh said.

Intra-fund advice, on the other hand, is of limited value to super fund members, he said (it doesn’t even allow the adviser to consider the superannuation balance of their spouse).

The solution could be to adopt a similar ‘tied’ regulatory model as the UK, which would “allow industry funds to offer a valuable, lower-cost proposition to more members than they can realistically target today”, Mr Hesketh said.

“It’s difficult to believe the regulator might entertain a tied advice regime right now, but in our view at least, consumers would be well-served by a third regulatory framework for financial advice that recognises the cost of maintaining true independence in advice may be more than the average Australian is prepared to pay,” he said.

Mr Hesketh will be speaking at the 18th Annual Wraps, Platforms and Masterfunds Conference on 1-3 August in Crowne Plaza Hunter Valley.

Strong Australian GDP growth won’t last

Though Australia’s economic growth is currently being buttressed by a number of global and domestic factors, a number of weaknesses will see GDP growth drop back below trend by the end of next year, says Westpac via InvestorDaily.

According to Westpac’s June market outlook report, the 1 per cent GDP growth recorded in the first quarter of 2018 was an “above trend outcome” and “further confirmation that the Australian economy performed solidly over the past year”.

But report co-author and senior economist Andrew Hanlan indicated that this growth would not be sustained in the years ahead.

“Areas of weakness persist and are likely to weigh on the outlook,” Mr Hanlan wrote.

The current growth was being sustained by a cluster of both global and domestic forces, such as global growth which grew 0.6 per cent to 3.8 per cent in 2017, “the strongest pace since 2011”.

“We expect world growth to hold around this 3.8 per cent pace in 2018, supported by the US. However, conditions in China are likely to moderate,” the senior economist noted.

Furthermore, drags on commodity prices and mining investment had minimised, though “not quite complete”.

Other growth drivers such as public demand (that is, activity or investment undertaken by the public sector or government), business construction and exports had also pushed up growth, according to Mr Hanlan.

However, a number of weaknesses persist, particularly regarding consumer spending – which was “choppy”, “slightly below trend” and unsustainable – and housing.

“The consumer is vulnerable at a time of weak wages growth, high debt levels and slipping house prices,” with falling house prices potentially resulting in “negative spill-overs for consumer demand”.

“The housing sector is cooling as lending conditions tighten, with prices easing back from recent highs,” Mr Hanlan added.

Furthermore, jobs growth has slowed and home building activity shrank by 5 per cent in 2017.

“We expect GDP growth to moderate to 2.7 per cent in the year to December 2018 and then slip to a below trend 2.5 per cent for December 2019.”

Synchronised global growth slowing, says NAB

From InvestorDaily.

The synchronised global economic growth that began in 2018 appears to be running its course, according to NAB.
‘Synchronised global growth’ was a favoured expression by economists and research houses at the end of last year, with each of the 45 major economies tracking upward growth.

“All the major engines of growth in the global economy are now synchronised in an upward trajectory for the first time since the end of the global financial crisis,” EY global IPO leader Martin Steinbach noted in late December.

But according to the latest economic summary note by NAB senior economist Gerard Burg, this global growth rate may have reached its peak.

“Global growth was marginally softer in Q1, driven by a modest slowdown in the advanced economies,” Mr Burg wrote.

Growth in the major economies was 2.2 per cent year-on-year in the first quarter of 2018, a small drop from the 2.4 per cent growth in the last quarter of 2017.

“Although this slowdown was modest, it points to a divergence in conditions across countries, which over recent years have displayed relatively synchronised growth.”

Source: NAB

Where growth in Italy, the UK and Japan had fallen in Q1, growth in the US had in contrast accelerated to nearly 3 per cent year-on-year, Mr Burg said.

“Early indicators of growth point to strong conditions in the second quarter, highlighting some upside potential to advanced economy growth in the short term.

“That said, as the impact of the fiscal stimulus from the large package of tax cuts at the start of this year fade, we expect growth to slow back towards potential as capacity constraints start to bite and monetary policy tightens,” he noted.

While economic growth in major emerging markets edged incrementally higher in Q1 to “almost 6 per cent year-on-year (from 5.75 per cent in Q4 2017)”, “mixed” underlying trends were at play.

While India continued to rebound with 7.75 per cent growth, China and Indonesia’s growth remained “relatively stable”, and Brazilian and Russian economic growth both dropped.

“While emerging market export volumes have remained comparatively strong (relative to the post-GFC period), growth appears to have slowed in March,” Mr Burg said.

“The risks associated with retaliatory trade actions in response to US trade policy fall more heavily on emerging markets (given the higher export share of GDP).”

Indeed, escalating trade tensions – particularly revolving around US’ tariffs – has led to an “uncertain” global trade environment.

“It appears that the current global upswing has peaked (or is near that point),” Mr Burg added.

“That said, despite signs, many short- and long-term interest rates have started to increase, or will do so over the forecast period”.

“Our forecasts still imply above trend growth in both 2018 and 2019 before easing back to the long-term average of 3.5 per cent in 2020.”

CBA sells stake in Chinese insurer

The Commonwealth Bank has agreed to sell its 37.5 per cent stake in Chinese insurer BoComm Life Insurance to a Japanese firm as reported in InvestorDaily.

CBA will sell its stake in BoComm Life Insurance Company to Japanese firm Mitsui Sumitomo Insurance Co for $688 million.

The sale will satisfy one of the conditions included in the sale of the CBA’s Australian and New Zealand insurance businesses to AIA.

CBA chief executive Matt Comyn said the transaction would be a further step in “simplifying and focusing” the bank’s portfolio.

“It follows the announcement of the proposed sale of the group’s life insurance businesses in Australia and New Zealand to AIA Group, and the strategic review of the group’s life insurance business in Indonesia,” Mr Comyn said.

The sale will be subject to the China Banking and Insurance Regulatory Commission’s regulatory approval process as well as Chinese merger clearance.

BoComm Life also plans to undertake a capital raise prior to the sale, to which the Commonwealth Bank’s pro rata contribution will be $235 million; however, this “will be separately reimbursed in full” by Mitsui Sumitomo upon completion of the sale, said CBA in a statement.

Equity markets a ‘house of cards’: FIIG

With US 10-year bond yields at a seven-year high, a relatively minor shock could be enough to trigger forced selling on equity markets, says FIIG via InvestorDaily.

The yield on 10-year US treasuries closed at 3.11 per cent overnight on Friday, a seven-year high that prompted speculation about a shift out of equities.

Speaking to InvestorDaily, FIIG NSW state manager Jon Sheridan said that if the 10-year holds at this level it will have broken the long-term secular downtrend in yields.

While he did not profess to be a “massive believer” in technical analysis, he said it is important to realise that many of the people trading in markets do.

And with high levels of margin debt and stretched valuations on the S&P 500 index, equity markets are looking like a “bit of a house of cards at the moment”, Mr Sheridan said.

“A strong gust, whatever that might be – it might be a geopolitical thing, or Facebook getting regulated, or Tesla raising capital – could break the fragile confidence,” he said.

“And then it all comes tumbling down and then you’ve got algorithmic selling, and margin debt being called and forced selling – all the waterfall effects that you don’t want to see if you’re an equity investor.”

There are three indicators that have Mr Sheridan worried about the future trajectory of the current US equity bull run.

First, the three-month US treasury bill is now above the yield on the S&P 500. In other words, he said, investors can get a higher (and risk-free) yield on three-month treasuries than they can get from the dividend yield of the stocks on the S&P 500.

Second, the 10-year treasury yield, at 3.11 per cent, is above the terminal US Federal Reserve funds rate of 2.75-3 per cent – something that has never happened before (at least “sustainably”).

“What that means is that if you think history will play out again, you should actually be a buyer of longer-dated bonds, because the chances are that yields aren’t going any higher from here. And in fact may even go lower,” Mr Sheridan said.

Finally, the spread between the US 10-year and 2-year yields has fallen to 51 basis points (down from 1 per cent a year ago, and from 2.62 per cent in December 2013).

When the spread goes negative (i.e, ‘inverts’) it means 2-year yields are higher than their 10-year counterparts.

“Every time since World War Two there has been a recession within 1 to 3 years from that inversion,” Mr Sheridan said.

“That’s the main signalling influence that the yield curve has in terms of the general economic outlook, and of course recession is terrible for stocks and property, because they’re risk-on assets,” he said.