Tag: The Adviser

YBR overhauls company, CEO to step down

Yellow Brick Road Holdings Limited has announced that it is to create a “much simpler business” by disposing of its head office wealth business functions and focusing on mortgages, which will see CEO Frank Ganis step down from his role. Via The Adviser.

In an update to the ASX, YBR revealed a new business strategy which would not include wealth advisory – but instead focus on mortgages, both through distribution and servicing, as its mortgage businesses “offer significant leverage to the market”.

Under the new structure, YBR would retain its franchise network (which currently consists of 115 branches and more than 140 accredited business writers) that has an underlying mortgage book of approximately $7.6 billion.

According to the company, the present value of the net trail commission receivable as of the end of the calendar year was around $15.7 million.

YBR will also retain Vow Financial aggregation, which reportedly has a network of 505 broker firms with more than 1,000 accredited brokers origination around $785 million in mortgage settlements per month.

The underlying mortgage book is reportedly around $39.8 billion with net trail commission receivable at $13.6 million.

The new YBR group will also retain its mortgage servicing arm, via the manufacture and servicing of mortgage originations through its existing Resi Mortgage Corporation business.

The Resi and Loan Avenue brands under this business have a current underlying mortgage book of around $1.8 billion and net trail receivable of $18.5 million, according to YBR.

The Resi sales team currently sources and services the mortgage distribution networks and mortgage funding entities and will reportedly undertake the credit function for the YBR group’s intended securitisation programme, when that comes to fruition.

This securitisation programme will be taken “in joint venture with a major US alternative asset manager” and intends to manufacture and fund mortgage products for YBR’s in-house and third-party distribution outlets.

According to YBR, the joint venture is “in the later stages of final due diligence and negotiation and documentation in this long and complex process with multiple parties”.

Speaking of the Resi business, YBR said: “This existing business allows us to more closely manage and track mortgage application and approval times and outcomes and assist in directing flow to the most appropriate funding sources and is an essential component of the mortgage value chain, particularly in the post Hayne Royal Commission period. It allows us to bring our distribution partners closer to the process of approving loans.”

Wealth business to be ‘disposed of, outsourced, or otherwise restructured’

In order to “concentrate its efforts” as a mortgage distribution, servicing and manufacturing group – and “reduce significantly the cost-to-income ratio of the business” – the YBR board has reportedly decided to commence a process to “dispose of,outsource or otherwise restructure the head office wealth business functions”.

This will therefore result in “a headcount reduction to the business overall”.

While YBR franchisees will still be able to distribute wealth products and give wealth advice to their existing and future clients, it is intended that this would be done under a separate Australian Financial Services Licence (AFSL) with one or more third parties.

“Going forward, the cost of maintaining YBR’s AFSL and associated compliance functions and liabilities would then no longer be borne by the YBR Group.

“The restructure of the wealth business is expected to significantly reduce our cost base allowing us to run a leaner and more cost-effective organisation,” the update reads.

However, YBR said that “there is no certainty that the securitisation initiative or the wealth restructure process will result in a definitive proposal or transaction, however YBR will continue to implement the operational improvements and the restructure of key operational roles.”

Given the changes, Group CEO Frank Ganis will step down from his role to take up a part-time position where he will “consult to the group on a number of initiatives, including “building [its] securitisation programme and funding partnerships, growing [its] brands, continue operational and customer service improvements, and industry advocacy”.

Executive chairman Mark Bouris will oversee the transition of the YBR Group to the “new, streamlined business structure”.

The move comes following a difficult year for the brokerage brand, with its unqualified audit-reviewed half-year report for the six months to 31 December 2018, reporting a net loss after tax (NLAT) of $34.15 million.

However, the company’s most recent financial results for the quarter ending 31 March 2019 (3Q19), recorded an operating cash surplus of $40,000, a $110,000 increase from a deficit of $70,000 in the previous quarter.

The increase was partly driven by a 5 per cent reduction in its operating cash outflows (excluding its branch and broker share of revenue), which declined from $8.4 million to $8 million.

The improvement in YBR’s cash position was also reported against a backdrop of falling home lending volumes, with settlements declining by 20 per cent in 3Q19, from $3.1 billion to $2.5 billion.

The group stated that its lending performance was “impacted by regulatory factors and the royal commission into banking and financial services”.

Its decision to offload its wealth business follows a spate of similar divestments, with several major banks – including CBA and ANZ – announcing in the past year that they would offload their wealth businesses and run “more simplified” banking businesses.

More Rate Cuts For New Mortgages

From The Adviser.

ANZ and Macquarie Bank have reduced their home loan rates by up to 60bps, with changes across both lenders effective from 10 May.

For its Breakfree discount package, ANZ has announced the following rate changes for owner-occupiers:

  • three-year owner-occupied principal and interest rates have been cut by 30bps to 3.69 per cent (4.94 per cent comparison rate)
  • five-year owner-occupied principal and interest rates have been cut by 20bps to 3.99 per cent (4.89 per cent comparison rate)
  • two-year owner-occupied interest-only rates have been cut by 20bps to 4.29 per cent (5.13 per cent comparison rate)
  • three-year owner-occupied interest-only rates have been cut by 60bps to 3.99 per cent (5.00 per cent comparison rate)
  • five-year owner-occupied interest-only rates have been cut by 59bps to 4.50 per cent (5.07 per cent comparison rate)

ANZ has also made the following changes for Breakfree investment loans:

  • two-year investment principal and interest rates have been cut by 6bps to 3.89 per cent (5.54 per cent comparison rate)
  • three-year investment principal and interest rates have been cut by 20bps to 3.99 per cent (5.44 per cent comparison rate)
  • five-year investment principal and interest rates have been cut by 26bps to 4.19 per cent (5.31 per cent comparison rate)
  • three-year investment interest-only rates have been cut by 30bps to 4.19 per cent (5.48 per cent comparison rate)
  • five-year investment interest-only rates have been cut by 4bps to 4.95 per cent (5.60 per cent comparison rate)

Meanwhile, Macquarie Bank has reduced variable and fixed mortgage rates by up to 51bps across its Basic and Offset packages.

The non-major’s variable rate changes are as follows:

  • cuts of between 7-21bps for variable home loans for owner-occupiers paying principal and interest and interest only, excluding loans with an LVR of less than 95 per cent
  • cuts of between 11-51bps for variable home loans for investors paying principal and interest and interest only, excluding loans with an LVR of less than 90 per cent

Macquarie’s fixed rate changes include:

  • cuts of between 10-20bps for one, two and three-year fixed rates for owner-occupiers paying principal and interest
  • a cut of 10bps for one-year fixed home loans for owner-occupiers paying interest only
  • a cut of 10bps for one-year fixed home loans for investors paying principal and interest
  • cuts of between 10-15bps for one, two and three-year fixed home loans for investors paying interest only

ANZ and Macquarie are among several lenders that have reduced rates across their fixed rate home loans over the past few months.  

Reflecting on the changes, comparison website Canstar’s finance analyst, Steve Mickenbecker, said lenders are preempting an expected cut to the official cash rate from the Reserve Bank of Australia (RBA).  

“Rate changes are running rife this week,” he said. “Macquarie and ANZ are joining the group of lenders reducing home loan rates ahead of the Reserve Bank curve.”

Mr Mickenbecker added: “The banks are anticipating an official cut to the cash rate in the coming months and are not waiting on the Reserve Bank to move.

“They are instead using this period to sharpen the pricing pencil to attract new business.”

However, the analyst noted that existing borrowers would need to wait for a cash rate adjustment before they too receive lower mortgage rates.

The RBA was expected to drop the official cash rate for the first time since August 2016 when its monetary policy board meeting was held last week.

However, the central bank opted to hold the cash rate at 1.5 per cent, with some analysts, including AMP Capital chief economist Shane Oliver, attributing the RBA’s decision to the current political environment, with the federal election looming.

Mr Oliver added that AMP has “pencilled in” a rate cut in June to offset the continued weakness in the housing market, flat inflation and slow economic growth.

Housing market plagued by ‘uncertainties’ as downturn continues

The fall in residential property values is “losing steam” but could be reinvigorated by changes in the political and economic landscape, according to CoreLogic, via The Adviser.

The latest Hedonic Home Value Index from Property research group CoreLogic has revealed that, in the month to 31 March 2019, national home values dropped by 0.6 per cent, driven by a 0.6 per cent drop across Australia’s combined capital cities and a 0.4 per cent fall across combined regional locations.

The sharpest reported fall was in Sydney (0.9 per cent), followed by Melbourne (0.8 per cent), Brisbane and Darwin (0.6 per cent), Perth (0.4 per cent) and Adelaide (0.2 per cent).

Hobart was the only capital city to report growth, with dwelling values rising by 0.6 per cent, while prices in Canberra remained stable.

Reflecting on the results, CoreLogic’s head of research, Tim Lawless, said that the downturn could be “losing some steam”, with the pace of falls slowing month-on-month.

However, Mr Lawless added that the scope of the downturn has become “more geographically widespread”, with monthly declines reported across six of Australia’s eight capital cities and across most “rest of state” regional locations.

Mr Lawless stated that the outlook for the housing market continues to be plagued by uncertainty related to the federal election, lending policies and domestic economic conditions.

Specific reference was made to the federal Labor opposition’s proposals to limit negative gearing to new housing and halve the capital gains tax discount to 25 per cent.

“Federal elections generally cause some uncertainty, which is likely amplified more so this time around considering the potential for a change of government, which will also involve significant changes to taxation policies related to investment,” he continued.

“No doubt, some prospective buyers and sellers are delaying their housing decisions until after the election; however, there is no guarantee that certainty will improve post-election, considering the impact of a wind back to negative gearing and halving of the capital gains tax concession is largely unknown.”

Mr Lawless said that he expects Labor’s proposed changes to exacerbate the downturn in the housing market.

“It seems a reasonable assumption that removing an incentive from the market would result in some downwards pressure on activity and prices for a period of time,” he said.

Credit availability was also cited as a source of continued uncertainty, with Mr Lawless pointing to the fall in the value of housing finance commitments, particularly in the owner-occupied space – as reported by the Australian Bureau of Statistics.

“The value of owner-occupier lending is around 2.6 times the value of investor lending, so the substantial drop in owner-occupier mortgage commitments perhaps explains why the housing downturn is becoming more widespread,” he said.

“The value of owner-occupier housing finance commitments (excluding refinancing) was down 17.1 per cent compared with January last year and investment credit was 24.6 per cent lower.”

Mr Lawless said that monetary policy movements could help stimulate credit demand but noted that tighter lending standards would limit the effect of lower interest rates.   

“While any cuts to the cash rate may not be passed on in full, a lower cost of debt will provide some positive stimulus for the housing market,” he said.

“Arguably, this stimulus won’t be as effective as previous interest rate cuts due to the high serviceability buffer applied to borrowers, whereby lenders are still required to assess serviceability at a mortgage rate of at least 7 per cent despite mortgage rates which are now available around the 4 per cent mark or even lower.”

According to CoreLogic’s research, the national median home price currently sits at $524,149, with the median value across the country’s combined capital cities at $597,860, and $376,728 across combined regional locations.

Shadow treasurer says government has ‘got it wrong’ on trail

In a clear stance on Labor’s trail position, Chris Bowen MP has said that the government’s response to the banking royal commission has “got it wrong”, particularly in regard to its “backflip” on removing trail from next year; via The Adviser.

Speaking at the AFR Banking & Wealth Summit on 26 March, Chris Bowen, shadow treasurer and federal member for McMahon, reaffirmed the Australian Labor Party’s stance on trail commission payments to mortgage brokers.

In the final report for the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, commissioner Kenneth Hayne recommended that “changes in brokers’ remuneration should be made over a period of two or three years, by first prohibiting lenders from paying trail commission to mortgage brokers in respect of new loans, then prohibiting lenders from paying other commissions to mortgage brokers”.

Following the release of the report, the Coalition government’s official response initially suggested that it would seek to ban trail for new loans from 1 July 2020, but Treasurer Josh Frydenberg announced earlier this month that government would instead postpone any decision on removing trail until after a review of mortgage broker remuneration has been undertaken in three years’ time.

Meanwhile, the Labor Party’s response called for the removal of trail for new mortgages from 1 July 2020 and for a standardised upfront commission as a proportion of the loan amount. It suggested that commissions should be capped at 1.1 per cent “so that banks can’t offer brokers incentives to choose their products”.

‘A big tick to a big flick’

Speaking at the AFR Banking & Wealth Summit today, Mr Bowen slammed the government for its “backflip” on trail commissions, stating that they continued to “get it wrong” on the royal commission recommendations.

He said: “I’m normally not too partisan at these events, I normally steer away from political commentary – at least through much of my speech, but given we are at the business end of the term, with the federal election less than 50 days away, I’m sure you’ll appreciate some plain speaking.

“The choice is between an opposition prepared to make big calls, and get those calls right, versus a government that has got the big calls wrong.”

Mr Bowen outlined that commissioner Hayne was “very clear” in his observations, which he said included the observations that “the interest of customers was relegated to second place far too often; too often, consumers were being left in the dark about how products or services are acquired and delivered; and too often, financial services entities were breaking the law and not held to account for their actions”.

“Those actions that were revealed through the royal commission had given the entire sector a bad name,” Mr Bowen said.

“They needed, and need, to be dealt with. These are systemic failures in our financial services industry when it comes to providing community standards and expectations.”

Emphasising that the government had previously called the royal commission a “populist whinge”, “regrettable”, a “reckless distraction” and a “QC’s complaints desk”, Mr Bowen added: “They got the big call wrong. And they also continue to get it wrong now, in terms of the recommendations.

“That’s probably most clear in relation to mortgage brokers.”

Mr Bowen elaborated: “A few days after the royal commission was handed down, the government told us that they were implementing the royal commission recommendation on trail commissions and said the royal commission recommendation was getting a ‘big tick’. No nuance, no discussion, just simply that this would be implemented.

“Now the reasons given by the commissioner on this issue were clear: The chief value of trail commissions to the recipient, to put it bluntly, is that they are money for nothing, [he said].

“And these are not new issues. The Productivity Commission found trail commissions have the effect of aligning the broker’s interests with those of the lender, rather than those of the borrower. The case was clear.”

Mr Bowen therefore called the government’s change in stance on trail as “a backflip with triple pike”.

“Just weeks after giving a recommendation a big tick, it was given the big flick,” he said, noting that it took “just 35 days to backflip on a major reform of phasing out trailing commissions for mortgage brokers”.

However, the shadow treasurer said that “there was, and is, a strong case for thinking carefully about the royal commission recommendation and ensuring we protect competition in banking. That’s exactly what we did,” he said.

“We consulted with mortgage brokers, we consulted with banks and financial institutions – particularly the smaller ones.

“We came up with a different way of removing conflicted remuneration for mortgage brokers. We announced that we would have legislated a flat upfront commission rate to avoid mortgage brokers’ advice being conflicted by the rate of the commission offered,” he said.

Mr Bowen concluded: “It’s one thing to achieve the objectives of the royal commission recommendation in another way, as Labor has done; it’s another thing to completely abrogate any policy action, as the Treasurer has done.

“When we make big calls – and we’ve made quite a few of them – we stick to them, fight for them, and seek to mandate for them, which is what we’ll be doing, presumably, on the 11th of May [for the federal election].

“We will implement 75 recommendations of the royal commission in full. The government cannot say that and already we are seeing consumer groups being very concerned that the government is already walking away from other recommendations,” he said.

Broking industry continues engagement with ALP

While the shadow treasurer has reaffirmed the party’s stance on trail commissions, the broking industry continues its work in engaging and educating ALP members on the benefits of trail.

Indeed, just last week, a group of nearly 100 representatives from the mortgage industry met shadow assistant treasurer and federal member for Fenner, ACT, Dr Andrew Leigh, at the QT Hotel in Canberra for the Future of Mortgage Lending forum, organised by AFG in partnership with Connective and Mortgage Choice, in which the need for trail was hotly discussed.

Speaking to The Adviser about the event last week, AFG’s Mark Hewitt said that the purpose of the meeting was to have a town hall type discussion with economist-turned-politician Dr Leigh, and to outline how Labor’s plans to remove trail for new loans from next year could impact borrower outcomes.

“We wanted to get the point across to Dr Leigh about the unintended consequences of abolishing trail and the impacts that could have on the brokers’ ability to provide an ongoing service to their clients,” Mr Hewitt said. 

“Labor’s focus was very centred on talking about them being the first to move on commissions, but the sentiment in the room was definitely around the abolition of trail and why it was not a good idea. 

“What was particularly impressive to me was the care and concern that the brokers in the room had for their customers and also their concern about the unintended consequences of having their remuneration front-loaded in the way that Labor is proposing.” 

He continued: “We were talking about the impacts that the removal of trail might have on brokers’

to provide ongoing service to clients and also the fact that the model without trail doesn’t provide any incentive for an ongoing customer relationship.” 

Mr Hewitt told The Adviser that Dr Leigh “was very receptive to the messages in the room and was very impressive and engaging”. 

“It takes a fair bit of courage as well, as he was the only person in the room who thought that abolishing trail was a good idea, but he stood by the party line while still engaging and being respectful to the counter arguments,” Mr Hewitt said.

“We were very pleased with how it went because it’s a continuing conversation – and it was a two-way conversation, hearing both sides, which is what we wanted to achieve,” AFG’s general manager for broker and residential added.

Near-prime the ‘fastest-growing sector’ of lending

The lending landscape has changed dramatically over the past year, with near-prime lending becoming the fastest-growing sector and lenders beginning to see the rise of “super prime” borrowers; via The Adviser.

Given the reduced risk appetites from the banks following the banking royal commission and an increasing trend from the majors to “simplify” their offerings, the non-bank lenders have taken a growing proportion of market share as more borrowers fall outside of the credit policies and brokers turn to non-banks for more specialised products for their clients.

Speaking on The Adviser Live webcast yesterday (21 March) for the Leadership Series – the Changing Lending Landscape, leading non-bank representatives outlined how the lending market was changing and what brokers can do to ensure they are across all the changes and offering solutions to their clients.

One of the themes from the webcast was the rapid rise of near-prime borrowers, given the reduced number of exceptions that some banks are willing to accept.

Aaron Milburn, director of sales and distribution at Pepper, revealed that the fastest-growing segment of the lending market was near-prime borrowers.

Mr Milburn said: “Near-prime lending in our industry is the fastest-growing sector of it. A lot of near-prime [deals] used to be a major bank deal with a credit exception on it, effectively, [but] that’s all tightened up now.

“So the near-prime space is our fastest-growing sector of lending at Pepper and as an industry. We see that only growing because we see no relaxation of credit policy at the majors… You think about the gig economy, you think about people that are Uber drivers, or they do Airtasker jobs at the weekend and they have been doing that for a prolonged period of time and they can prove that. Why shouldn’t they use that income? We see that sort of area growing and that is our fastest-growing area.”

Mr Milburn noted that the growing near-prime category was not just expanding in the residential space but in the commercial space too.

He said: “We’ve recently started in the commercial real estate lending

, and Mal Withers has come in to run it for us, and the near-prime sector of that credit policy, or that product, is growing substantially fast as well.”

Mr Milburn elaborated that the near-prime commercial borrower may be a commercial client who has “a small default” or a “bump in the road in the past and is trying to get back on their feet”.

“We think that customer base is bankable, as we do in the near-prime residential space, and we don’t think they should miss out, so that is an area of growth for us as well,” he said.

Building on this, Cory Bannister, VP-chief lending officer at La Trobe Financial, said that the lender had to “re-categorise” its borrower segments in the current environment, given the changing borrower make-up.

He elaborated: “We’ve even had to re-categorise almost how we determine what’s prime and near-prime. Now, when we look at it, we look at ‘super prime’, which we would say is probably what the banks are looking at now.

“Prime, which is probably the loans that would have been bankable all day, every day, which have probably slipped out [of major bank’s appetites] and near-prime is the old traditional space, and specialist sits at the end of that.”

Mr Bannister concurred that the near-prime sector was a “growing sector” but added that these were not necessarily applications that have serious credit defaults or infringements, but instead borrowers who may have had a “change of circumstances” such as a variable income or variable employment.

Looking to the future, both Mr Milburn and Mr Bannister, as well as Matt Bauld, general manager, sales and business development at Prospa, agreed that the non-bank sector would continue to flourish with the support of the broker space.

Mr Bannister concluded that he believed broker market share could reach 66 per cent in the next year, adding: “I think we will see the non-bank market share continue to grow… I think you’re seeing more of the bank simplification strategies playing out, more products being exited, [so] non-banks are doing more of the lifting now to try and provide more solutions.

“The overall credit tightening, I don’t see that being retraced any time soon, that zero exceptions policy is starting to bite.”

“I think it will be some time before we see the major banks’ credit policies change. I think it’s going to increase the broker market share and increase the non-bank market share,” he said.

Mr Milburn agreed, stating: “I think non-bank share will continue to grow… the near-prime market, whether that be residential or CRE, is going to continue to grow out because the major banks aren’t moving their credit policy in line with the changing world… The number of exceptions to that major bank policy now are reducing. So near-prime, near near-prime or super prime, those sections will continue to grow out because the majors aren’t willing to see individuals as individuals.”

Mr Milburn continued to suggest that several banks “do not have a near-prime product, they do not have a specialist product and they are not there for when customers go into times of hardship. We are. And that’s the beauty of the non-bank space, we are there for Australians who are undervalued and underserved by the major banks, and we will continue to grow that out.”

Speaking from an SME lender perspective, Mr Bauld added that non-banks would also grow in this space as brokers continue to diversify into this space.

Mr Bauld said: “We have literally scratched the service of a $20-billion-plus market, so there is massive room for continued growth, that’s why we absolutely implore brokers to look at this space and think ‘OK, how do we get involved?’ We will absolutely help them get involved…

“[So], there is a massive opportunity for the intermediated market, but they have to seize it. They really have to future-proof their business. And if they do, there is a huge and massive opportunity ahead,” he said.

Treasurer Delays Trail Abolition Date

Treasurer Josh Frydenberg has said that the government will look at reviewing the impacts of removing trail in three years’ time rather than abolishing it next year as originally announced, following concerns regarding competition, via The Adviser.

In an announcement on Tuesday (12 March), Treasurer Josh Frydenberg said that “following consultation with the mortgage broking industry and smaller lenders, the Coalition government has decided to not prohibit trail commissions on new loans but rather review their operation in three years’ time”.

The review, to be undertaken by the Council of Financial Regulators and the Australian Competition and Consumer Commission (ACCC) will therefore look at both the impacts of removing trail as well as the feasibility of continuing upfront commission payments.

Both the abolition of trail and upfront commissions were recommended by commissioner Hayne in his final report for the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

While the government had initially said in its official response to the final report that it would ban trail commission payments for new mortgages from 1 July 2020, the Treasurer has now said that the removal on trail will instead be reviewed in three years’ time.

“Mortgage brokers are critically important for competition and delivering better consumer outcomes in the mortgage market. Almost 60 per cent of all residential mortgages are settled by mortgage brokers,” Mr Frydenberg said on Tuesday.

“There are 16,000 mortgage brokers across Australia – many of which are small businesses – employing more than 27,000 people. The government wants to see more mortgage brokers, not less,” he said. 

The Treasurer added that ASIC’s 2017 review of broker remuneration “did not identify trail commissions as directly leading to poor consumer outcomes and did not recommend the removal of trail commissions”.

“Only the government can be trusted to protect the mortgage broking sector and ensure that competition is strengthened so consumers get a better deal,” he said.

Mr Frydenberg added that the government was “taking action on all 76 recommendations contained in the final report” of the banking royal commission and had already announced a number of new measures that will be brought in, including:

  • a best interests duty that will legally obligate mortgage brokers to act in the best interests of consumers;
  • a new requirement that the value of upfront commissions be linked to the amount drawn down by consumers;
  • a ban on campaign and volume-based commissions; and
  • a two-year limit on commission clawbacks.

“These changes will address conflicts of interest in the industry by better aligning the interests of consumers and mortgage brokers,” Treasurer Frydenberg said.

Labor proposes new bank levy to fund financial rights lawyers

The Australian Labor Party has announced that it will introduce a new levy on ASX100-listed banks to hire more financial rights lawyers and financial counsellors to help victims of financial misconduct, via The Adviser.

Earlier this week, a joint release from opposition leader Bill Shorten, shadow minister for financial service Clare O’Neil and shadow assistant minister for families and communities, senator Jenny McAllister, announced that Labor would look to establish a $640-million Banking Fairness Fund “to revolutionise the services available to Australians in financial difficulty”.

A levy would be placed on the four major banks (ANZ, CBA, NAB, and Westpac) as well as ASX100-listed lenders AMP, Bank of Queensland, Bendigo and Adelaide Bank, Macquarie Bank, and Suncorp Bank to raise $160 million per year for the fund.

On Monday (25 February), the party said it would look to utilise $320 million of the Banking Fairness Fund over the next four years to expand the number of financial counsellors from 500 to 1,000, according to the party.

These new financial counsellors would provide “advocacy, support and advice” to an additional 125,000 Australians each year and help victims of banking and financial service provider misconduct pursue “fair compensation” through AFCA.

Meanwhile, on Tuesday (26 February), Ms O’Neil released a joint announcement with shadow attorney general and shadow minister for national security Mark Dreyfus outlining that the fund would also provide $30 million a year (totalling $120 million over four years) to “expand the financial rights legal assistance sector from 40 lawyers to 240 lawyers across Australia”.

The release reads: “The 200 extra financial rights lawyers will assist victims of bank and financial service provider misconduct by providing legal advice and running complex cases in court and through the Australian Financial Complaints Authority (AFCA).

“When Australians face a fight with their banks, Labor will make sure they are not fighting alone.”

According to the Labor Party, the extra lawyers would be able to service an additional 150,000 Australians per year. Currently, the ALP estimates that around 240,000 Australians are in need of financial rights legal advice every year, but suggested that the sector is currently “only able to service about 30,000 people”.

Labor added that the 200 new lawyers could help more Australians bring claims through AFCA. This builds on Labor’s previously announced plans to quadruple the compensation cap for consumers from $500,000 to $2 million for consumers and remove the $5,000 sub-cap for non-financial loss, should they be brought into power following the upcoming general election.

The Banking Fairness Fund has been proposed by Labor as a means of supporting victims of misconduct and meeting one of the suggestions put forward by Commissioner Hayne in his final report for the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry that there be “careful consideration” of how “predictable and stable funding for the legal assistance sector and financial counselling services” could be best delivered, given the “clear” need for it.

Commissioner Hayne wrote in his report: “The legal assistance sector and financial counselling services perform very valuable work. Their services, like financial services, are a necessity to the community. They add strength to customers who are otherwise disadvantaged in disputes with financial services entities.”

He continued: “[T]here will likely always be a clear need for disadvantaged consumers to be able to access financial and legal assistance in order to be able to deal with disputes with financial services entities with some chance of equality of arms.”

The Labor Party said: “The banking royal commission is a once-in-a-generation opportunity to give Australians the ability to stand up for their rights against the big banks and their well-funded legal teams.

“Labor will make sure that Australians don’t miss out on that opportunity. Labor is proud to support the hardworking financial rights legal assistance sector.”

UBank Lifts Mortgage Rates

The second wave of out-of-cycle mortgage rate hikes has continued, with another lender announcing increases of up to 20 basis points, via The Adviser.

NAB-owned lender UBank has announced that it has increased interest rates on its fixed rate investor home loan products by 20 basis points, effective for new loans issued as of 14 January. 

The lender’s investor mortgage rate increases are as follows:

  • A rise of 20bps on its 1-year UHomeLoan fixed rate with interest-only terms, from 3.99 per cent to 4.19 per cent
  • A rise of 20bps on its 3-year UHomeLoan fixed rate with interest-only terms, from 3.99 per cent to 4.19 per cent
  • A rise of 20bps on its 5-year UHomeLoan fixed rate with interest-only terms, from 4.49 per cent to 4.69 per cent

UBank is the latest lender to increase its home loan rates, after the Bank of Queensland (BOQ) and Virgin Money announced rate increase of up to 18bps and 20bps, respectively.

Both BOQ and Virgin Money attributed their decisions to lift home loan rates to the sustained rise in wholesale funding costs.

The out-of-cycle interest rate rises have prompted calls from some market analysts for a cut to the official cash rate form the Reserve Bank of Australia (RBA) amid weakening housing market conditions and a rise in mortgage stress.

Speaking to The Adviser’s sister publication, Mortgage Business, principal of Digital Finance Analytics (DFA) Martin North said that he expects mortgage stress to continue mounting in the short to medium term, particularly off the back of out-of-cycle interest rate hikes.

NSW Government to Help Combat Mortgage Stress

An online legal service designed to support borrowers tackling mortgage stress has been launched by the NSW government, via The Adviser.

NSW Attorney-General Mark Speakman has announced the launch of LawAccess NSW, a website designed to offer free legal services to help borrowers overcome mortgage stress and settle rates debts with local councils without being drawn into court proceedings.

According to the government, the LawAccess NSW website provides two interactive guided pathways to match people with the information they need to resolve issues “before they spiral out of control”, with another four pathways on other topics to be released later this year. 

“This service is arriving at a crucial time for families facing mortgage stress. The online pathways are convenient and easy to use, with users only needing to answer a few simple questions to get reliable legal information and practical solutions tailored to address their situation,” Mr Speakman said. 

“For example, the mortgage stress pathways provide information on budgeting, seeking a ‘hardship variation’ to a loan and tips on avoiding ‘quick fix’ pitfalls that could ultimately cause greater financial pain.”

The government stated that the launch of the LawAccess NSW website is part of the NSW government’s $24 million Civil Justice Action Plan, which it said is “harnessing technology and innovation to make it faster and easier for people to navigate courts and resolve legal problems”. 

 “The Civil Justice Action Plan has huge potential to reduce stressful and costly legal headaches – particularly for small businesses that are the engine room of the NSW economy,” Mr Speakman added. 

“While criminal matters tend to dominate the media news cycle, 85 per cent of legal problems in NSW relate to civil law. So, it’s vital we address these civil issues faced by almost 2.4 million people in this state every year.” 

ANZ CEO weighs in on the HEM debate

The use of the Household Expenditure Measure to assess serviceability was initially less common for broker-originated loans, but such is no longer the case, ANZ chief Shayne Elliott has revealed, via The Adviser.

Appearing before the financial services royal commission in its seventh and final round of hearings, ANZ CEO Shayne Elliott was questioned over the bank’s use of the Household Expenditure Measure (HEM) to assess home loan applications.

In round one of the commission’s hearings, ANZ general manager of home loans and retail lending practices William Ranken admitted that the bank did not further investigate a borrower’s capacity to service a broker-originated mortgage.

In his interim report, Commissioner Kenneth Hayne alleged that using HEM as the default measure of household expenditure “does not constitute any verification of a borrower’s expenditure”, adding that “much more often than not, it will mask the fact that no sufficient inquiry has been made about the borrower’s financial position”.

Counsel assisting the commission Rowena Orr QC pointed to a review of ANZ’s HEM use by consultancy firm KPMG upon the Australian Prudential Regulation Authority’s (APRA) request.

The KPMG review found that 73 per cent of ANZ’s loan assessments defaulted to the HEM benchmark.

Mr Elliott noted that since the review, ANZ has taken steps to reduce its reliance on HEM, with the CEO stating that the bank plans to reduce the use of HEM for loan assessments to a third of its overall applications.

When asked if there was a disparity between the use of HEM through the broker channel and branch network, Mr Elliott revealed that prior to the bank’s move to reduce its reliance on the benchmark, the use of HEM was less prevalent for broker-originated loans.

“Perhaps surprisingly, when we did the review, when we were talking about the mid-70s [percentage], the branch channel actually had slightly higher usage or dependency on HEM as opposed to the broker [channel].

“[That] actually is counterintuitive,” he added. “I think it would be reasonable to expect that if [ANZ] knows these customers, one might expect to use HEM less.”

Mr Elliott attributed the disparity to the higher proportion of “top-ups” for existing loans through the branch network, noting that ANZ’s home loan managers would be more likely to “shortcut the process” through the use of the HEM benchmark.

However, the CEO said that according to the latest data that he’s reviewed, the branch network’s reliance on HEM is lower than in the broker channel.

“[It’s] changing as we speak,” he said.

“As in the latest data I saw, the branch network is now lower in terms of its usage or reliance on HEM versus the broker channel. And that’s because we are in, if you will, greater control of that process in terms of our ability to coach and send signals to our branch network.”

However, he added that the use of the benchmark for broker-originated loans is “coming down rapidly” in line with the bank’s overall commitment to reduce its reliance on HEM.

Flat-fee ‘credible alternative’ to commission-based model

Further, as reported on The Adviser’s sister publication, Mortgage Business, Mr Elliott told the commission that a flat fee paid by lenders to brokers is a “credible alternative” to the existing commission-based remuneration model.

When asked by Ms Orr about his view on broker remuneration, Mr Elliott said that a flat fee paid by lenders is a “credible alternative” to the current commission-based model.

In a witness statement provided to the commission, Mr Elliott said that there’s “merit in considering alternative models for broker remuneration to ensure that the current model remains appropriate and better than any alternative”.

Reflecting on his witness statement, Ms Orr asked: “Is that because you accept that there’s an inherent risk that incentives might cause brokers to behave in ways that lead to poor customer outcomes?”

The ANZ CEO replied: “There is always that risk. [The] term incentive is to incent behaviour. Therefore, it can be misused or it can cause unintended outcomes if the broker is apt to be led by their own financial reward.”

Mr Elliott acknowledged that “no system’s perfect” and that a “fixed fee is also capable of being misused and leading to unintended outcomes”.

However, he added: “It is just my observation that there is at least some data on this from other markets, most notably in northern Europe. It seems a model that’s worth looking at.”

Mr Elliott continued: “I’m not suggesting it’s necessarily an improvement. It just feels like a credible alternative.”

The ANZ CEO compared a flat-fee model in the broking industry to the financial planning industry.

“The service is the work you are paying for, and perhaps the fee should not necessarily be tied to the outcome.

“I think that’s not an unreasonable proposition.”

However, the ANZ chief noted the negative implications of a flat-fee model, stating that with lenders ultimately passing on costs to consumers, the model would be a “major advantage” to higher income borrowers.

“The difficulty with the fixed fee, if I may, is it essentially is of major advantage to people who can afford and have the financial position to undertake large mortgages,” he said.

“[A] subsidy would be paid by those least able to afford it, and it runs the risk of making broking a privilege for the wealthy.”

There’s ‘merit’ in a fees-for-service model

Ms Orr also asked Mr Elliott for his view regarding a consumer-pays or “fees-for-service” model.

The QC asked whether such a model would address some of the concerns expressed by Mr Elliott about a flat-fee model.

Mr Elliott said that if a fee is paid by borrowers, it would be “uneconomic” for people seeking a loan to visit a broker, repeating that using a broker would become a “service for the wealthy”.

Ms Orr then asked the CEO for his thoughts on a Netherlands-style fees-for-service model, supported by Commonwealth Bank CEO Matt Comyn, in which both branches and brokers would charge a fee for loan origination.

Mr Elliott replied: “There’s merit in looking at that, [but] it still is an imposition of cost that would otherwise not have been there.”

Mr Elliott added that there would be “new costs” associated with a Netherlands-style model, noting that borrowers seeking a “top-up” for an existing loan would need to pay an additional fee.

In response, Ms Orr alleged that under the current commission-based model, costs are also “filtered back down” to consumers.

To which Mr Elliott replied: “In general terms, yes. Not necessarily in direct terms like that fee I charge you as a borrower, [and] at ANZ, we have, for some time, disclosed [commissions]. So, when you do get a mortgage through a broker, we do advise the customer what we have paid that broker. So, it is disclosed to them.”

The ANZ CEO also said that under a fees-for-service model, consumers could be incentivised to take out larger loans to avoid paying a fee if they wish to top up their loan.

Conversely, Mr Elliott added that if a flat fee is paid by lenders, some brokers may be incentivised to encourage clients to borrow less and “come back for more top-ups so that they get more fees”.

Mr Elliott reported that top-ups on existing loans make up 30 per cent ($17 billion) of total volume settled by ANZ.

The ANZ chief also told Ms Orr that he doesn’t believe a move to introduce an alternative remuneration model would be “hugely successful” without regulatory intervention.