Tag: The Adviser

Cuts to Fuel Refinancing Rush

Sharp fixed and variable rate home loan reductions are set to trigger a spike in refinancing applications through the broker channel, according to Aussie CEO James Symond. Via The Adviser.

Last week, the Reserve Bank of Australia (RBA) lowered the official cash rate by 25 bps from 0.75 per cent to 0.5 per cent – marking the fourth cut since June 2019 when the easing cycle commenced.

This followed a sharp turnaround in sentiment ahead of the RBA’s monetary policy board meeting, with analysts initially expecting the central bank to keep rates on hold.

Developments in the domestic and global economy are likely to have altered the RBA’s tone, with weak local market indicators and the coronavirus (COVID-19) outbreak rattling market confidence.

A host of lenders, including the big four banks announced variable home loan rate reductions in response to the cut.

Bendigo and Adelaide Bank is the latest lender to announce variable rate reductions, passing on the full 25 bps to new and existing customers, effective 27 March.

Bendigo Bank has also cut small business and overdraft variable rates by the full 25 bps, also effective 27 March.

“In an environment experiencing historically low rates, we have carefully evaluated our responsibility to borrowers and communities with the impact lower rates have on depositors, our business performance and all other stakeholders,” Bendigo Bank’s managing director, Marnie Baker said.

“At the same time, many customer and communities are facing a long recovery from bushfires and drought and coupled with the still largely unknown economic impacts from COVID-19, this decision aims to further support our home loan and business customers and our many communities nationwide.”

Adelaide Bank’s head of third-party banking, Darren Kasehagen, added: “These changes will have a direct and positive impact [on] what is a most uncertain time for our home loan customers.”

“The decision allows customers to take advantage of the lowest variable home loan rates that have been available for some time.

“As always, we carefully considered the impact on all stakeholders and the overall cost of funding in arriving at this decision.”

Macquarie Bank and ING, which were among the lenders to drop variable rates by the full 25 bps, have also announced sharp reductions to their fixed rate home loans.

Macquarie has dropped two and three-year fixed rates to as low as 2.64 per cent for owner-occupied borrowers paying principal and interest (P&I) and with a loan-to-value ratio (LVR) of less than 70 per cent.

Owner-occupied P&I rates have also been reduced to 2.74 per cent for four and five-year fixed rates for borrowers with an LVR of less than 70 per cent.

Meanwhile, ING has slashed its fixed rates to as low as 2.49 per cent for owner-occupied P&I borrowers with the Orange Advantage product (3.89 per cent comparison rate).

ING’s investor fixed rates have dropped to as low as 2.74 per cent (4.44 per cent comparison rate).

In light of record-low mortgage rates, Aussie Home Loans CEO Mr Symond has called on borrowers to consider refinancing to save on their repayments.

“I expect many fixed and variable mortgage rates will fall below 3 per cent over the next month,” he said.

“Borrowers should be exploring the market for competitive rates and speaking with a reputable mortgage broker.

“A decision to see a mortgage broker could save borrowers thousands of dollars and years off their repayments over the life of the mortgage.”

Mr Symond added that he is expecting refinance rates to spike beyond 30 per cent of new flows – as currently experienced by Aussie’s broker network.

“Now is a great time to refinance and exploit the strong competition amongst lenders, but borrowers need to get sound, well-researched advice from a credible broker or lender before taking this step,” he concluded.

More Details On FHLDS

Via The Adviser.

The Commonwealth Bank of Australia has confirmed that brokers will be able to apply for CBA’s First Home Loan Deposit Scheme loans for their clients from 2 January 2020, while NAB has outlined that brokers will need to wait a while longer.

The federal government’s First Home Loan Deposit Scheme (FHLDS) is due to commence operations on 1 January 2020.

The scheme aims to allow up to 10,000 FHBs per year to get into the property market sooner, requiring just a 5 per cent deposit, yet still giving them access to competitive interest rates and waiving the need for lender’s mortgage insurance (LMI).

The government has agreed to guarantee the difference between the borrower’s 5 per cent deposit and the standard 20 per cent deposit required to take out a home loan without paying LMI.

The initial 27 lenders that will offer FHLDS loans have now been revealed, but questions have been raised regarding broker access to these loans.

It has previously been announced that the two major banks involved in the scheme, NAB and CBA, would be the first two lenders to start accepting applications for the scheme from borrowers, while the other 25 non-major lenders on the lending panel (mainly mutual banks and credit unions) will be accepting applications from 1 February 2020.

Brokers can offer CBA FHLDS loans from 2 January

CBA customers will be able to apply for the scheme via the CBA website and call centres from 1 January. 

However, given that 1 January 2020 is a public holiday, CBA has confirmed that it will make FHLDS loans available to customers on 2 January, via all channels – including branch and broker. 

A Commonwealth Bank spokesperson told The Adviser: “We’re excited that, from 2 January 2020, customers will be able to apply for the First Home Loan Deposit Scheme with Commonwealth Bank through our home loan channels, including brokers. 

“As Australia’s largest lender, we help more Australians buy their first home than any other bank, and its exciting that we can help get more first home buyers into the market under the scheme.”

NAB to offer FHLDS loans online first

However, brokers wishing to write FHLDS loans via NAB will need to wait a while longer before applying, as the bank will be taking a “phased approach”.

According to the bank, eligible customers will be able to apply for the scheme through NAB via its website and call centres from 1 January 2020, as well as through “select direct and retail channels”.

No date has yet been released for full rollout of the FHLDS loans via broker or the wider branch network, but NAB has said it will update broker partners in January with how the phased approach is tracking.

A NAB spokesperson told The Adviser: “It has always been our intention to offer the scheme through the broker channel. However, given the short timeframe between being announced as a participant lender and the go-live date, we’ve needed to take a phased approach to implementation.

“We are working hard to implement the scheme in the broker channel, and across our branch network, as quickly as possible,” the spokesperson said.

The delay will be a blow to brokers looking to write FHLDS loans for their clients, especially given the fact that the scheme is capped at just 10,000 loans per year and the choice of lenders available to brokers is limited.

While Minister for Housing Michael Sukkar commented that the “composition of the panel should also enable strong activation of mortgage broker channels and promote choice for first home buyers”, many brokers have highlighted that many of the smaller/regional lenders (who are expected to take up 50 per cent of the 10,000 loans) are not members of their aggregator’s panel – and therefore brokers would not be able to write loans to these lenders unless they directly accredit with them.

For example, brokers operating under the larger broker groups – AFG, Aussie, Connective, Loan Market and Mortgage Choice – are unable to access more than half of the lenders chosen under the FHLDS, as they are not on the groups’ lender panel (according to the lender panels listed on the groups’ websites). 

These include: Australian Military Bank, Bank First, Bank of us, Community First Credit Union, Defence Bank, G&C Mutual Bank, Indigenous Business Australia, Mortgageport, People’s Choice Credit Union, Queensland Country Credit Union, Regional Australia Bank, The Mutual Bank or WAW Credit Union.

26 lenders announced for First Home Loan Deposit Scheme

Twenty-six additional lenders have been appointed to the initial panel of the government’s First Home Loan Deposit Scheme, including major bank, Commonwealth Bank. Via The Adviser.

The National Housing Finance and Investment Corporation (NHFIC) has announced its full panel of lenders taking part in the federal government’s First Home Loan Deposit Scheme (FHLDS).

Following on from the announcement that NAB had been chosen as the first major lender for the panel, CBA has been named as the second major bank to offer loans under the scheme, along with 25 non-major lenders.

The participating lenders will have the ability to write loans for first-home buyers (FHBs) who have saved deposits as little as 5 percent, with the government set to guarantee the rest of the deposit under the FHLDS.

CBA and NAB will reportedly be able to issue up to 50 per cent of the 10,000 annual guaranteed loans provided per financial year, according to the NHFIC Investment Mandate.

The two major banks will be accepting applications for the scheme from 1 January 2020.

The other 50 per cent of guaranteed loans will be written by the other non-major lenders on the NHFIC lending panel.

The non-majors will be taking applications from 1 February 2020.

The full list of lenders on the panel, along with NAB and CBA, are as follows:

  • Australian Military Bank
  • Auswide Bank
  • Bank Australia
  • Bank First
  • Bank of us
  • Bendigo Bank
  • Beyond Bank Australia
  • Community First Credit Union
  • CUA
  • Defence Bank
  • Gateway Bank
  • G&C Mutual Bank
  • Indigenous Business Australia
  • Mortgageport
  • MyState Bank
  • People’s Choice Credit Union
  • Police Bank (including the Border Bank and Bank of Heritage Isle)
  • P&N Bank
  • QBANK
  • Queensland Country Credit Union
  • Regional Australia Bank
  • Sydney Mutual Bank and Endeavour Mutual Bank (divisions of Australian Mutual Bank Ltd)
  • Teachers Mutual Bank Limited (including Firefighters Mutual Bank, Health Professionals Bank, Teachers Mutual Bank and UniBank)
  • The Mutual Bank
  • WAW Credit Union

Applications for the scheme will begin on 1 January 2020, and can be made either directly to participating lenders, or via the broker channel. The NHFIC will not be taking any direct applications.

According to the NHFIC, members of the panel have been chosen on the basis of competitiveness of offerings, geographic reach, customer care, and their ability to meet the deadline for the implementation of the scheme.

Further, the NHFIC and federal Minister for Housing and Assistant Treasurer Michael Sukkar have stated that members on the lending panel, will not be able to charge eligible customers higher interest rates than equivalent customers outside the scheme.

Additional lenders may be “periodically” added to the panel after the scheme has launched, according to the NHFIC.

Panel will ‘enable strong activation of mortgage broker channels’

Commenting on the news, the federal Minister for Housing and Assistant Treasurer, Michael Sukkar, commented: “The Morrison Coalition Government is committed to helping make home ownership a reality for more Australians and to get them into the property market sooner.

“Today, the government welcomes confirmation from the National Housing Finance and Investment Corporation (NHFIC) that 27 lenders have been selected, from a wide pool of applicants, to form the initial panel offering guarantee-backed loans under the First Home Loan Deposit Scheme.

“The National Australia Bank (NAB) and Commonwealth Bank of Australia (CBA), together with 25 non-major lenders have been appointed as participating lenders in the Scheme.

“Importantly, all lenders have committed not to charge eligible customers higher interest rates than equivalent customers outside of the scheme,” he said.

Mr Sukkar continued: “The scheme has been warmly welcomed by major industry peak bodies, and the composition of the initial lending panel reflects the industry’s confidence in the Morrison Coalition Government’s plan to assist first home buyers.

“Further, the scheme has been deliberately designed to ensure strong representation of smaller lenders on the panel. This will promote competition between the large and small banks, and ensure the Scheme has broad geographic reach, including in regional and remote communities.

“The composition of the panel should also enable strong activation of mortgage broker channels and promote choice for first home buyers,” he concluded.

APRA’s MySuper Heatmap Is A Nightmare

From the excellent James Mitchell, at The Adviser. If the prudential regulator was hoping to provide clarity on MySuper products it has failed miserably.

Call me ignorant, but when APRA announced the launch of its MySuper heatmap, I didn’t envision downloading an Excel spreadsheet and navigating multiple tabs in order to decipher what the hell I was looking at. If this monstrosity is intended to be fit for public consumption then the average Australian better have a financial adviser by their side, if for no other reason than to decode the thing. 

Fortunately, the team who put the spreadsheet together included a “user guide” on tab 4 (see below). Crikey!

There is also a colour legend and a glossary of definitions for terms such as “strategic asset allocation” and “net investment return”. 

My fear is that the average Australian super member looking to compare funds will struggle to comprehend what APRA’s heatmap actually means. Particularly when you consider what the financial literacy of an average Australian actually looks like. 

Back in August, Compare the Market and Deloitte Access Economics released the second edition of The Financial Consciousness Index, which measures the extent to which Aussies are conscious or aware of their ability to affect and change their own financial outcomes, encompassing their willingness to act, and the extent to which they are able to participate in financial matters.

Australians scored 48 per cent on average on the index, which means they are just into the “conscious” band and out of the “it’s a blur” band.

Meanwhile, ASIC’s 2018 Financial Capability initiative noted that two in three Australians don’t understand the investment concept of diversification and only 35 per cent know what their super balance is. 

With this in mind, it’s difficult to fathom how APRA’s overly complex Excel spreadsheet is going to translate, let alone be used as a guide, to everyday Australians. 

FSC CEO Sally Loane warned against the misuse of the thing and said it should not be used to rank superannuation products. 

“It is really important to understand that the heatmaps are a point-in-time analysis, which is a useful tool for APRA in its supervision activities, but it doesn’t tell the whole story when it comes to members’ retirement outcomes,” Ms Loane said. 

“Particularly for life cycle products, which adjust investment strategies over a person’s lifetime, the headline numbers in the heatmap don’t reflect the actual experience of a member in that fund, and could be misleading if viewed in isolation.”

The FSC noted that the heatmap may tell you that other funds have had higher returns over five years, but if you’re close to retirement you might be far more concerned with how your fund is managing the risks of a market downturn to safeguard your retirement savings.

Some of the heatmap’s other failings are that it doesn’t tell you how your super has performed over your lifetime, it can’t tell you whether your fund invests in accordance with your ethical and philosophical beliefs, and it doesn’t tell you what additional services they offer to help you manage your savings. 

“If you have concerns about whether your super fund is right for you, talk to your fund or speak to a financial adviser,” Ms Loane said. 

Ms Loane said that while the FSC hoped APRA would continue to refine its MySuper heatmap methodology, the proposal to extend the exercise to choice products was highly problematic.

“The broad variety of choice products in the market, the complexity and bespoke nature of platforms and wraps where individuals choose their investment strategies, and the lack of direct comparable data, [make] it extremely difficult to translate heatmapping beyond MySuper and we urge APRA to not only be cautious in proceeding with this exercise but to engage deeply with industry,” she said.

BOQ, Virgin Money Trim Serviceability Rates

Ironic really, that on the day ASIC released its updated lending guidance, BOQ have lowered their interest rate floors for home loan serviceability assessments.

BOQ has reduced its floor rate for mortgage serviceability assessments from 5.65 per cent to 5.35 per cent, with the changes also applicable to its subsidiary Virgin Money.  Via The Adviser.

The changes will apply for all new home loan applications submitted from Monday, 9 December.

The interest rate buffer will remain unchanged at 2.50 per cent.

BOQ noted that serviceability rates will vary depending on the credit product under assessment, with the interest rate applicable determined as follows:  

  • For variable principal and interest home loans, the actual rate will be applied as the interest rate for serviceability.
  • For interest-only and fixed rate home loans, the revert rate will be applied as the interest rate for serviceability.

BOQ added that applications submitted prior to Monday, 9 December, that have not been approved will be assessed using the new serviceability rates.

BOQ has joined the Commonwealth Bank, Auwside Bank, Heritage Bank and Westpac in revising its serviceability rates twice in response to the Australian Prudential Regulation Authority’s (APRA) changes to its home lending guidance.

In early July, the prudential regulator scrapped its requirement for a 7 per cent interest rate floor and raised its recommended buffer rate from a minimum of 2 per cent to 2.5 per cent.

APRA chair Wayne Byres said the regulator’s amendments were “appropriately calibrated”, stating that a serviceability floor of more than 7 per cent was “higher than necessary for ADIs to maintain sound lending standards”.

Analysts have partly attributed the rebound in home lending activity over the past few months to APRA’s changes.

According to the latest data released by the Australian Bureau of Statistics, the value of new home lending commitments rose 1.1 per cent (in seasonally adjusted terms) in September, following on from a 3.8 per cent rise in August.

New lending commitments are now up 5.6 per cent (seasonally adjusted) when compared with September 2018, the first positive year-on-year result seen since mid-2018.

Is a cashless society worth it?

As the country continues its inexorable march towards a cashless society, it’s important to remember the downsides. Via The Adviser.

Australia has been just a few years away from being a cashless society for a couple of decades now, but it will eventually get there. Legislation currently before the Senate aims to ban transactions over $10,000 in a bid to hinder the black economy. From there, it’s not difficult to imagine that the ubiquity of digital payment systems – and efforts the by government – will see hard cash disappear at some point in the future. 

One of the supposed benefits of a cashless society is that it cuts down on crime, the logic being that if there’s less cash to steal, less cash is stolen. Laundering dirty money is also harder, as every transaction is logged in some form or another. 

But a cashless society comes with a number of negatives that might well outweigh the positives. 

“As payments move online, there would be an increased risk of crimes such as identity theft, account takeover, fraudulent transactions and data breaches, due to the higher volume of cashless transactions and more points of exposure for the average consumer,” Dr Richard Harmon, managing director of financial services at Cloudera, told Investor Daily.

“Hackers and other criminals now have new ways to get access to accounts and to potentially set up synthetic accounts to facilitate more sophisticated money laundering activities.”

And that’s just the risk posed by hackers. According to the UK’s access to cash report, a cashless society could heighten the risks of financial abuse. Elderly people, who might lack understanding of digital technology, would be particularly vulnerable. Couples with joint bank accounts are also at risk – money can be tracked and controlled by one person. These issues are already of great concern, but they’d be even worse in a cashless society. 

That’s not to mention that digital systems rely on topnotch digital infrastructure, something that Australia doesn’t exactly have in spades. That infrastructure also has to be more or less impervious to cyber attacks, which may be carried out by state-sponsored actors with an interest in crippling a country’s entire financial system. In the face of that existential threat to the economy, a little bit of money laundering doesn’t seem so bad. 

A cashless society could also make things worse for workers and the most vulnerable. It’s only a short jump from cashless to “cashier-less”, and a cashless society would have to deal with an explosion of unemployed low-skill individuals. 

Meanwhile, those who lack access to banks – or prefer not to use them – are also at risk. 

“Let me highlight that one of the concerns about becoming a cashless society – at least as we transition into this state – is the ability for the underbanked or unbanked to have sufficient access to function properly as they would within a cash-based system,” Dr Harmon said.

“This would be a key concern from a societal perspective.”

The idea of a cashless society is promising. But hidden in that promise are a number of caveats that any country – let alone Australia – would be foolish to ignore.

Broker Best Interests Duty Bill Released

The final best interests duty bill for mortgage brokers has been tabled in Parliament, outlining the role brokers need to take when helping a borrower from 1 July 2020. From The Adviser.

The amended Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers (2019 Measures)) Bill 2019 has been tabled in Parliament today (28 November).

The key features of the new law are:

  • mortgage brokers must act in the best interests of consumers in relation to credit assistance in relation to credit contracts;
  • where there is a conflict of interest, mortgage brokers must give priority to consumers in providing credit assistance in relation to credit contracts;
  • mortgage brokers and mortgage intermediaries must not accept conflicted remuneration;
  • employers, credit providers and mortgage intermediaries must not give conflicted remuneration to mortgage brokers or mortgage intermediaries; and
  • the circumstances in which these bans on conflicted remuneration apply are to be set out in the regulations.

Notably, the duty to act in the best interests of the consumer in relation to credit assistance is a principle-based standard of conduct that applies across a range of activities that licensees and representatives engage in.

As such, what conduct satisfies the duty will depend on the individual circumstances in which credit assistance is provided to a consumer in relation to a credit contract.

The duty does not prescribe conduct that will be taken to satisfy the duty in specific circumstances. Instead, it is the responsibility of mortgage brokers to ensure that their conduct meets the standard of “acting in the best interests of consumers” in the relevant circumstances.

However, the new duty will mean that there could be circumstances where the mortgage broker may not have acted in a consumer’s best interests even if the responsible lending obligations were complied with. For example, even if a home loan product is ‘not unsuitable’, recommending it to the consumer might not be in the consumer’s “best interests”, the accompanying documentation reads.

The penalty for breaking this duty for both credit representatives and licensees is 5,000 penalty units.

Examples of the duty in action – white label called in question

In the explanatory materials, there are examples of steps that may need to be taken for this new duty. These include:

  • prior to recommending any home loan product or other credit contract to a consumer based on consideration of that consumer’s particular circumstances, the mortgage broker may need to consider a range of products (including the features of those products), form a view about which products are in the consumer’s best interests and then inform the consumer of the range and the options it contains;
  • any recommendations made would be expected to be based on consumer benefits, rather than benefits that may be realised by the broker; that is, a broker should not recommend a loan by prioritising factors that cannot be substantiated as delivering benefits to that particular consumer (such as the broker’s relationship with the lender), over factors and features which affect the cost of the product or are more relevant to the consumer;
  • in cases where critical information is not obtained when inquiring about a consumer’s circumstances, the broker could be expected to refrain from making a recommendation about a loan where there is a consequent risk that the loan will not be in the consumer’s best interests.

Interestingly, the new duty also outlines that “a broker would not suggest, from their aggregator’s panel of lenders, a white label home loan that has the same features as a branded product from the same lender, but with a higher interest rate, because it would not be in the best interests of the consumer to pay more for an otherwise similar product”.

The explanatory materials go on to outline that during a periodic review, a broker “would not suggest that the consumer remain in a credit contract without considering whether this would be in the consumer’s best interests”.

“For example, it may be a breach of the duty if the broker suggested the consumer remain in their current home loan when they could refinance to a cheaper product as the broker did not want to incur the consequent liability to the lender when their commission payments were clawed back,” it reads.

Helping consumers understand their decision implications

The materials also outline that there may be situations where the consumer does not properly understand the implications of different choices and so the broker may have to assist them to understand why a particular loan is or is not in their best interests, which could inform the brokers’ actions.

An example given is if a consumer asks the broker if they should take out an interest-only home loan on a property they are looking to buy. The home loan will have a higher interest rate than a principal and interest home loan. The broker helps the consumer to understand the difference in cost of the two home loans, and other differences in the way in which they operate, including that the consumer will only build equity if the property’s value increases or they make additional repayments, and the implications of moving to higher repayments at the end of the interest-only period.

Another example is if a consumer asks the broker if they should take out a home loan with an offset account as they have heard this can save them money, even though the interest rate is slightly higher. The broker helps the consumer to understand what is in their best interests, based on the difference between the higher interest rate and the savings that consumer could reasonably expect through utilisation of the offset account.

Comments from Frydenberg

At the second reading this afternoon (28 November), Treasurer Josh Frydenberg said: “[T]he bill introduces a best interests duty for mortgage brokers that will ensure that consumers’ interests are prioritised when a mortgage broker provides credit assistance, as regulated by the National Consumer Credit Protection Act 2009. In practice this will mean that, in accordance with Commissioner Hayne’s recommendations, a duty will apply in relation to the provision of consumer credit assistance and not business lending.

“The government is also reforming mortgage broker remuneration, and the bill provides for a regulation making power to this end. The regulations will require the value of upfront commissions to be linked to the amount drawn down by borrowers instead of the loan amount; ban campaign and volume based commissions and payments; and cap soft dollar benefits.

“Further, the period over which commissions can be clawed back from aggregators and mortgage brokers will be limited to two years, and passing on this cost to consumers will be prohibited.

“After careful consideration, the government decided to delay consideration of aspects of Commissioner Hayne’s recommendations for mortgage brokers—namely moving to a borrower-pays remuneration structure. We will be doing a review with the Council of Financial Regulators and the Australian Competition and Consumer Commission (ACCC). That will be carried out in three years time.

“Implementation of these reforms, as recommended by the royal commission, is a critical component of restoring trust and confidence in Australia’s financial system and is part of the Morrison government’s plan for a stronger economy.”

The government will also introduce the Financial Sector Reform (Hayne Royal Commission Response – Stronger Regulators (2019 Measures)) Bill 2019. The Bill implements a further four additional commitments the Government announced at the time of responding to the Royal Commission and will ensure that ASIC can effectively enforce existing laws.

“The government is taking action on all 76 recommendations contained in the Final Report of the Royal Commission and, in a number of important areas, is going further. Restoring trust in Australia’s financial system is part of our plan for a stronger economy,” Mr Frydenberg said.

Big bank CEOs Deny ‘Loyalty Tax’ Accusations

The chief executives of the big four banks have doubled down in defence of their mortgage pricing decisions after being accused of profiting off a “loyalty tax” imposed on customers. Via The Adviser.

Appearing before the House of Representatives standing committee on economics on Friday (15 November), NAB chairman Philip Chronican and ANZ CEO Shayne Elliott denied that the banks have been “profiting from inertia” by charging existing mortgage customers higher rates in a lower rate environment.

Deputy chair of the committee and Labor MP Andrew Leigh accused the banks of imposing a “loyalty tax” on existing borrowers, which do not receive rate discounts offered to new customers.  

In response, NAB chairman Philip Chronican said there were a range of factors influencing the bank’s pricing decisions, adding that the level of discounting on a particular loan was determined by the characteristics of the credit contract.   

“On our variable rate mortgage products, we charge different rates for different products for a whole range of reasons,” he said.

“The overwhelming majority of our variable mortgage rate customers, in fact, 97 per cent, have discounts below the standard variable rate, and each of those discounts are set with reference to the riskiness of the loan, the size of the loan, and the combination of business that the customer brings in. 

“The discount is for the life of the loan, unless of course the customer, at their discretion, comes back and wants to reunite with us or refinance with another organisation if they can get a better deal.”

Mr Chronican said that in light of cuts to the cash rate, the bank has offered existing customers reviews of their home loans.

“We offer all of our customers a review of their mortgage and have called all of our customers over the past 12 months, asking if they’d like a review of their mortgage,” he said.

“In the month of October alone, 15,000 customers took advantage of that and we increased the discount on those.”

However, deputy chair of the committee Andrew Leigh pressed Mr Chronican, asking: “Why is it that customers have to respond to a request for a review rather than simply receiving the same rate as a new customer would get? Aren’t you profiting from inertia?”

To which Mr Crhonican responded: “It doesn’t exactly feel like that. It’s a competitive market to get new business. 

“We are accurately conscious that we want to retain our customers, but as I’ve explained, the differences are not as great as many people make them out to be.

“We compete at a point of time to get a customer, and we quote a discounted rate to get them and be competitive.”

He conceded: “We are conscious that overtime, those rates become uncompetitive, but [it’s] hard to have an individual negotiated rate if everybody has to get the same rate.”

Meanwhile, ANZ CEO Shayne Eliot flatly rejected claims that the bank has been charging a loyalty tax, also citing competitive pressures.

“I don’t accept the concept of loyalty tax. What we do is we competitively priced our products every day to offer the best price that we can for the services that we provide,” he said.

“Given the nature of our products, you will no doubt be referring to that there is a difference between what is known as the front book and the back of book; the pricing that we charge a new customer today versus the customer yesterday, or previously.

“But we don’t impose a tax. It’s an outcome of a highly competitive well-functioning market.”

When asked if it was “unusual” to charge customers different prices for the same product, Mr Elliott said: “Well, it’s not the same product, with respect. A mortgage today is not the same as a mortgage tomorrow or week ago.

“We price mortgages on the day based on the environment they’re in, the cost of funds on that day, the risk environment on that day and the competitive environment on that day, so I’m not sure that they are equivalent products.”

Scrutiny over the pricing behaviour of the big banks recently intensified following their failure to pass on the RBA’s full 25 basis point cuts to the cash rate.

This triggered Treasurer Josh Frydenberg to commission the Australian Competition and Consumer Commission (ACCC) to conduct a Home Loan Price Inquiry. The inquiry will review pricing behaviour from 1 January 2019 to examine:

  • the differences between advertised rates and the prices actually charged or paid;
  • the differences between rates paid by existing customers and those paid by new customers (front and back book pricing behaviour);
  • pricing decisions in response to changes to the official cash rate; and
  • factors preventing customers from switching to cheaper home loans.

In exploring these matters, the ACCC will consider consumer decision making and biases, information used by consumers, and the extent to which lenders may contribute to consumers paying more than they need to for home loans.

Bank Class Actions Mounting

Class action lawyers are having a field day following the Hayne royal commission. A top litigation funder reveals how taking Aussie companies to court has become big business, via The Adviser.

Maurice Blackburn Lawyers was the first to file a class action against a big four bank following the publication of the royal commission final report in February. The law firm filed a class action against Westpac over alleged breaches of the bank’s responsible lending laws. 

But Maurice Blackburn is now reconsidering after ASIC lost its infamous “red wine and Wagyu steak” case against Westpac last month. 

Meanwhile, embattled wealth giant AMP is facing multiple class actions in light of the extensive misconduct uncovered by the royal commission. AMP advisers are now preparing their own class action against the group. 

Neill Brennan, the co-founder and managing director of litigation funder Augusta Ventures, believes class action lawsuits improve the regulatory regime. 

“Two of the bigger regulators, the ACCC and ASIC both favor class actions. From an ASIC perspective with shareholder class actions, it acts as a policeman to some extent. So, if there are breaches of rules such as continuous disclosure, ASIC can intervene, obviously, but it’s from a regulatory perspective cheaper for an individual group of shareholders to bring an action on their behalf, for themselves,” Mr Brennan explained. 

“Similarly, for the ACCC, there are kind of three prongs to how they regulate. There are obviously penalties that they impose. There are jail terms that can be imposed for cartel activity, et cetera. But also, if there are damages brought by individuals or by groups, that helps with the ACCC control of competition as well. So, from a regulatory perspective, class actions are beneficial.”

In May, Augusta Ventures announced that it would be funding a class action against AMP. 

Herbert Smith Freehills partner Jason Betts said the focus of class actions has largely been about governance issues and corporate malfeasance.

“When we started this journey 25 years ago, I think people thought this will be more a story about traditional products liability, manufacturing defects, or mass disaster, mass tort accidents, natural disasters,” he said. 

“That hasn’t been the story, I think largely because the cost of prosecuting these claims is significant, and in Australia, these claims relied largely but not exclusively on litigation funders to support them. And funders have, again, largely but not exclusively focused on corporate malfeasance.

When you talk about the big cases in Australia at the moment, they are predominately directed toward corporate governance issues like continuous disclosure, like misrepresentation in respect of financial parameters, earnings guidance, impairments, financial calibrated cases.”

We don’t have a lot of guidance in this country on how the law will determine those issues at the moment. Statistically speaking, these corporate governance cases settle. And so we’re in unusual state of opaqueness around how this regime will look in five or 10 years’ time.

Mr Betts said that statistically most corporate governance cases settle. He said Australia’s class action culture, which is very strong, is much like America’s. With a few cost differences. 

“We’ve got a high rate of adult share ownership. We’ve got the high focus on corporate governance issues generally. We don’t have guidance from the law. We’ve got an entrepreneurial funding market, different to really the rest of the globe,” he explained. 

“All of these doctrinal challenges that that raises, there couldn’t be a more interesting time to sort of think about the future of class action litigation.”

Betting on the outcomes of a legal dispute is a risky game. As a litigation funder, Mr Brennan said the stakes are higher for class actions where limited information is available. 

“A funder walks into a situation at the start where legal merit is judged but not obviously absolutely clear. It’s prior to disclosure, prior to witness statements, prior to a lot of information, so you’re making a call with limited information,” he said.

“Then you have question marks over whether or not the case will actually be run, because of multiplicity [of] hearings. And then when it comes to the end of it, the court can actually obviously step in and say, ‘Well, we think the funding commission should be X instead of Y,’ and that’s a hindsight decision. 

“The risks that a funder faces are large, and if it all goes wrong, the money is nonrecourse, so the funder’s not going to be paid anything. And so, the risks a funder faces need to be commensurate with the rewards that they’re going to achieve in a competitive environment.”

NSW Mortgage Arrears Higher In July – S&P

Australian prime home loan arrears fell in July in all states except NSW and South Australia, but they remain above their five-year average, new data from Standard & Poor’s has shown, via The Adviser.

The Standard & Poor’s Performance Index (SPIN) for Australian prime mortgages dropped to 1.49 per cent in July 2019, down from 1.51 per cent a month earlier, S&P Global Ratings’ recent RMBS Arrears Statistics: Australia report showed.

According to the data, which measures the weighted average of residential mortgage loans that are more than 30 days past due in publicly and privately rated Australian RMBS transactions, prime arrears typically drop in spring and are expected to decline during the third quarter of the year.

However, while the arrears index dropped month-on-month, the data showed that arrears were 11 basis points higher than they were in July 2018 and remain above their five-year average of 1.25 per cent.

Looking at arrears on a national level, arrears improved in six states and territories, with NSW and South Australia showing an uptick in arrears.

NSW saw an increase to 1.29 per cent, while South Australia saw arrears rise to 1.54 per cent in July 2019.

Western Australia recorded the largest drop in arrears during July, with the rate decreasing 14 basis points to 2.91 per cent.

According to S&P, the majority of this improvement was for loans 30-60 days in arrears. Loans more than 90 days in arrears, however, continued to increase in the western state.

Owner-occupier arrears improved in July, falling by 3 basis points to 1.71 per cent.

However, investor arrears remained mostly unchanged in July, falling by 1 basis point to 1.46 per cent from the previous month. 

According to S&P, this partly reflects the “generally tighter lending conditions for investors in the current environment”.

“We expect arrears to continue to decline as the recent rate cuts filter through. These improvements are likely to be seen in the earlier arrears categories, which are more sensitive to interest-rate movements. We expect longer-dated arrears to remain elevated in a softer economic environment,” S&P analysts stated.

“Recent rises in housing finance approvals could bolster refinancing conditions, which started to improve in July, rising 5.4 per cent in seasonally adjusted terms. This will help to stabilize arrears and prepayment rates if the current momentum continues because refinancing is a common way for borrowers to self-manage their way out of arrears.”

RBA on the rising arrears rate

The level of mortgages past due has been noted in recent months, with the Reserve Bank of Australia’s head of financial stability, Jonathan Kearns, noting in June that the number of people in arrears on their home loans had reached the highest level recorded since the global financial crisis.

In an address to the 2019 Property Leaders’ Summit in Australia in June, Mr Kearns discussed the factors contributing to the continual rise in home loan arrears.

Mr Kearns claimed that “cyclical upswings” in arrears were attributable to weak economic conditions, which include falling or stagnant wages and softness in the housing market – which may inhibit some borrowers from selling their property to ease their mortgage burden.

The head of financial stability also acknowledged that tighter lending standards can conversely impact a borrower’s ability to meet their mortgage repayments, pointing to previous restrictions on interest-only lending, which prevented borrowers from rolling over the interest-only period.

Mr Kearns also conceded that tighter serviceability measures may prevent distressed borrowers from refinancing their loan, cited by S&P as one of the factors contributing to the rise in delinquencies.

However, Mr Kearns pointed to internal data collected by the Reserve Bank, which suggested that the application of tighter lending standards has been “effective” in improving credit quality.

Mr Kearns said at the time that he expected the overall arrears rate to continue rising, but he claimed the trend would not pose a significant threat to financial stability.

“To the extent that we can point to drivers of the rise in arrears, while the economic outlook remains reasonable and household income growth is expected to pick up, the influence of at least some other drivers may not reverse course sharply in the near future, and so the arrears rate could continue to edge higher for a bit longer,” he said.

“But with overall strong lending standards, so long as unemployment remains low, arrears rates should not rise to levels that pose a risk to the financial system or cause great harm to the household sector.”