Tag: The Adviser

Rate Transparency Could ‘Diminish’ Broking Industry

From The Adviser.

The Bank of Queensland has told the Productivity Commission that greater visibility of mortgage rates could make the mortgage broker proposition less compelling for consumers.

Appearing before the Productivity Commission, the bank’s CFO, Anthony Rose, said that “greater transparency [could] see a diminished utilisation of the broker space”.

“We have seen that the broker market has certainly been beneficial in allowing the non-major banks compete in the mortgage space,” Mr Rose said.

Commission chairman Peter Harris acknowledged that smaller banks have been “assisted by the broker revolution and have saved the need to occupy branch space in [more] locations”.

“You’re saying, therefore, if the pricing impact did encourage more people to look for a branch, then the entities with the biggest branch network are advantaged by that,” Mr Harris said.

When asked whether the Bank of Queensland, which receives 25 per cent of its home loans through the third-party channel, has had to re-strategise in response to vertical integration, Mr Rose admitted that the bank has been monitoring aggregator ownership structures with concern.

“We thought that those that own aggregator networks should actually be required to publish the degree of flow relative to their market share for the public interest to understand whether is there anything to see here or not,” the CFO said.

“To be honest, the information that you’ve provided in your report is new information to us as well but doesn’t surprise us. It’s hard for us to access that information as well.”

Representatives from both the PC and the Bank of Queensland agreed that the lack of publicly available data has made it difficult to measure the actual impact aggregator ownership has had on the flow of mortgages in Australia, though Mr Harris has previously suggested that bank-owned aggregators control about 70 per cent of the mortgage broking market.

As such, the Bank of Queensland supports the PC’s proposed duty of care obligations, which would require the Australian Securities and Investments Commission to impose a clear legal duty on lender-owned mortgage aggregators to act in the best interests of the consumer.

“We do think that’s important because the degree to which major banks are getting flow of business over and above their natural market share is, in effect, market access that would have been available to the non-big four that is no longer available to us for whatever reasons that are driving that outcome,” Mr Rose said.

“It does appear that there is quite a trend towards an over-allocation of flow back into the proprietary products of the owned business, which I think is addressed by putting that duty of care obligation in.”

Are Mortgage Brokers Conflicted?

From The Adviser.

The financial services regulator has backed claims from the Productivity Commission that “there are conflicts of interest” in the way that home loans are sold through mortgage brokers “where some of those mortgage broking firms may be owned [by lenders] as well”.

Speaking at the Parliamentary Joint Committee on Corporations and Financial Services on Friday (16 February), the Australian Securities & investments Commission (ASIC) was asked a range of questions about conflicts of interest in the financial planning industry.

Touching on ASIC’s recently-released report regarding vertically-integrated institutions and conflicts of interest, deputy chair Peter Kell noted that while it “probably wouldn’t have come as a surprise to anyone to see that there would be some sort of bias towards internal or in-house products”, he added that ASIC’s question was to establish the extent of this and “whether that was associated, in some cases, with poor quality advice”.

He noted that financial planners, who are bound by a ‘best interests’ standards, are inherently conflicted – adding that some brokers are too.

Mr Kell said: “[T]here is an inherent conflict of interest — it’s not prohibited, but it’s a conflict of interest — when you have an entity which is a product manufacturer and a product distributor and when, at the end of the day, there is an obligation to act in the client’s best interest.

“The question is: how is that playing out in practice and how are those conflicts of interest being managed? That’s clearly one of the key aims of this report, to get a better picture around that.”

The deputy chair echoed claims made by the Productivity Commision in its draft report into competition in the Australian financial system, which argued that brokers who process loans through lender-owned aggregators could be facing conflicts of interest.

Mr Kell said: “All of us in one way or another have conflicts of interest in different parts of our professional lives.

“There are conflicts of interest that are there in the vertically integrated model [in financial planning] just like there are conflicts of interest, for example, that are there in the way that home loans are sold through mortgage brokers w[h]ere some of those mortgage broking firms may be owned [by lenders] as well.

“Some conflicts in remuneration have now been prohibited – that’s not what this is looking at. There are other conflicts in terms of the structure of businesses that are allowed. The key question is: are they being managed appropriately? Some of those conflicts might be associated with other sorts of benefits, which means you would say it’s better to manage them than to try and rule them out altogether.”

The new ASIC chair James Shipton said that “the same thing can actually [be] said with horizontal business loans”.

“There are conflicts that need to be managed both horizontally and vertically,” he added.

Difficult to get a yes or no’ on conflicted remuneration

When asked whether mortgage brokers should come under “conflicted remuneration laws”, Mr Kell said: “There’s been a lot of work done on this, so it’s difficult to get a yes or no answer, but we’ve obviously highlighted in our report that we think there are some aspects of the way that remuneration works in the mortgage-broking sector that would be better to take out of the sector because they raise unreasonable conflicts.”

For example, ASIC’s review into broker remuneration found that the current structure was generally sound, but suggested that lenders “move away from giving soft dollar benefits” to brokers as they “increase the risk of poor consumer outcomes and can undermine competition”.

At the Parliamentary Joint Committee on Corporations and Financial Services on Friday, ASIC was asked if it would seek to ban vertically-integrated models from financial planning.

Mr Kell said: “That wouldn’t really be our call. An interesting question might be whether the Productivity Commission will look at that issue. I think they’ve made a recommendation about ensuring greater transparency around ownership and ownership links – not just in this area but also in the mortgage-broking area.”

Mr Kell concluded by saying: “[I]n most of the areas we regulate we are not regulating for a particular business model. We are regulating for appropriate consumer outcomes and appropriate advice being provided or appropriate products getting into the right hands.”

This focus on ownership and conflicts of interest has been of increasing interest for the regulator, whose review into broker remuneration last year recommended that there be clearer disclosure of ownership structures within the home loan market to improve competition.

To reduce the impact of ownership structure, ASIC proposed that participants in the industry “more clearly disclose their ownership structures”.

However, the Productivity Commission has gone a step further by calling for a legal provision to be imposed by ASIC to require lender-owned aggregators to work in the “best interest” of customers.

Draft recommendation 8.1 reads: “The Australian Securities and Investments Commission should impose a clear legal duty on mortgage aggregators owned by lenders to act in the consumer’s best interests.

“Such a duty should be imposed even if these aggregators operate as independent subsidiaries of their parent lender institution, and should also apply to the mortgage brokers operating under them.”

Royal Commission updates online form

From The Adviser.

Following an article in The Adviser highlighting a ‘major flaw’ in the online form for the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, the commission has now updated the form to better reflect channel choice.

On Wednesday, The Adviser ran a story in which Queensland-based broker Nicki McDavitt warned that the figures cited by the initial hearing of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry could be wrong, after she identified what she called a “major flaw” in the commission’s online form.

The form asks users to identify the “nature of the dealings” in which misconduct took place.

However, the only option specifically relating to home loans fell under the category ‘mortgage broker’. Ms McDavitt therefore said that the commission’s figures on mortgage broker-related misconduct could be “false” as they may include information relating to bank branch home loans (and therefore be miscategorised).

However, the royal commission has today (14 February) updated the form to allow users to select ‘home loan/mortgage’ under the ‘personal finance’ option (see below). The mortgage broker option has also been updated to read ‘entity that arrange homed loan/mortgage’

Speaking to The Adviser following the change, Ms McDavitt said: “I’m absolutely thrilled. I’m thrilled that I was listened to and I’m thrilled that it has been changed.”

Ms McDavitt said the Royal Commission thanked her for bringing it to their attention as they had “not even realised that it was not even there” and brought it up with the web designers who changed it today (14 February).

“I said to [the contact]: ‘It does mean that those statistics that you have been flouting will be wrong’ and she acknowledged that it could be a risk, but said: ‘Thankfully we’ve caught it early’. And I said ‘yes’.”

The Adviser had asked the commission yesterday (13 February) for a comment on the issue and whether it would be changing the form, and received the following response: “The online submission process is working well and based on the number of submissions received to date, we are confident that those using the form have been able to identify correctly the nature of their dealings, including to identify home loans taken out with banks.

“We are also reviewing submissions as they come in to ensure that they are appropriately categorised.

“We are committed to ensuring that the information on our website is clear and easy to understand, so we will continue to review and improve the website going forward.”

The heads of both the mortgage broker associations had spoken to The Adviser this morning, both highlighting that they would be raising this issue of the online form error with the royal commission.

Speaking to The Adviser after the change, the executive director of the FBAA, Peter White, welcomed the change, but added that he believed the bank branches “still get off lightly, as the grouping/sections for arranging loans is highlighted separately for brokers, whereas the bank branches are not identified separately but rather in the cluster titled ‘Personal Financial’”.

He added: “This should read as ‘Personal Banking’ or the like, and then have the itemisation in brackets following it.”

Industry body urges big banks to drop rates

From The Adviser.

The head of the Finance Brokers Association of Australia has called on the big banks to drop home loan rates.

FBAA executive director Peter White recently welcomed moves from non-banks to drop interest rates, but he stated that he’s “disappointed” that major banks haven’t followed suit.

“It is good to see the non-banks, second-tier and small lenders supporting home borrowers,” Mr White said this week.

“But at the same time, it is disappointing the big banks like ANZ seem disinterested in trying to work with borrowers by doing the opposite and putting their rates up.”

The FBAA executive warned banks not to “stab borrowers in the back” with “unjustified” rate rises and out-of-cycle interest rate changes.

“We hope in 2018 the big banks remember where their profits come from, and that is borrowers,” the executive director added.

However, Digital Finance Analytics principal Martin North told The Adviser that he expects the banks to increase, not decrease, rates, adding that a rate reduction wouldn’t be “feasible”.

“It’s not really feasible to cut rates in this situation when in fact I think we’re going to see rates rising,” Mr North said.

“Many borrowers can get extremely low rates at the moment, so I’m not sure there’s a need to slash rates further, and I’m not sure the banks will be able to because they’ve got margin compression going on behind the scenes.”

The economist believes that major banks are opting to “selectively” discount rates for specific borrowers as a way to “protect their margins”.

“[When] the interest-only books were repriced, that gave large banks, in particular, a bit of a war chest to be able to discount deeply, to offer new loans to targeted new customers. And that’s what’s playing out at the moment,” Mr North added.

“The fact is that the majors have tended to protect their margins and selectively discount loans to new customers.”

Mr North also advised borrowers to “shop around” to avoid the high rates offered by the major lenders.

The principal said: “A lot of the non-banks and also some of the customer-owned players have better rates than the majors, so if you are looking for a loan, shop around and go to some of those guys to get a better rate.”

1 in 3 mortgages being rejected

From The Adviser.

One Sydney-based BDM and former mortgage broker says that one in three clients are unable to obtain a loan as a result of credit tightening policies implemented by lenders.

Speaking to The Adviser, former eChoice broker and Mortgage Pros North Strathfield BDM Hank Hong said that an increasing number of his clients’ loan applications are being rejected.

“It’s [credit tightening] affected servicing and how much you can actually lend based on incomes,” Mr Hong said.

“Certain offers that they put into place, higher living expenses, certain buffer rates, have reduced what [clients] can borrow.

“In the last 12 months, I would say one in three deals that come into my hands weren’t able to [get] service[d] and weren’t able to get the funds they were after.

“Two to three years ago, it was maybe one in five or one in six clients.”

The BDM added that borrowers, who have previously obtained unsuitable loans, are now struggling to manage their mortgage repayments.

“Existing clients are coming back because they’re not being able to service the loans that they were initially approved for because of the tightening of the service calculations,” the broker continued.

“Going back two years ago, people were getting million-dollar loans — $1 million to $1.5 million — with just $80,000 incomes or combined incomes of $150,000.

“They were on fixed rates of 3.99 per cent on interest-only loans, which they could afford, but when these fixed rates come off and the interest-only comes off, those clients are going to struggle to make the P&I repayments because they haven’t adapted to a lifestyle of paying principal and interest.”

Mr Hong believes that credit policy changes were “justified”, but he argued that lenders have “gone too far” and should “backtrack”.

“If they were trying to go 100 per cent, they’ve probably gone 150 or 160 per cent and they need to backtrack maybe 30 per cent,” Mr Hong said.

The former managing director and co-founder of Vault Lending Solutions recently revealed to The Adviser that he has departed the company after being “poached” by Mortgage Pros North Strathfield.

Mr Hong co-founded Vault Lending Solutions in March 2017 in partnership with Matthew Porfida, who will now take over as sole director of Vault Lending Solutions.

APRA Mortgage Curbs Permanent?

Calls to reduce the current regulatory restrictions, for example on investor and interest only loans, will probably fall on deaf ears. Last year, the Bank of England confirmed that its own version of APRA lending curbs will become a “structural feature” of the British housing market, forcing Australian economists to begin questioning whether APRA’s macro-prudential measures could be permanent. This from the excellent James Mitchell via The Adviser.

A leading mortgage professional has criticised the prudential regulator for not providing a clear time frame for its macro-prudential measures or explaining what it is ultimately looking to achieve.

Speaking to The Adviser on a recent Elite Broker podcast, Intuitive Finance managing director Andrew Mirams said that he can’t see the complexities in the mortgage market easing up “anytime soon”.

Australian banks are still required to limit their investor mortgage growth to 10 per cent, while interest-only loans can only account for 30 per cent of new lending.

“Late last year, [APRA chairman] Wayne Byres came out and said these are all temporary measures,” Mr Mirams said. “But he’s never articulated to anyone about how temporary or what measures might change in the future or what their actual outcome.

“I think a lot of the things they’ve done, they’ve got right. An investor getting a 97 per cent interest-only loan just didn’t make sense. You’re just putting people at risk should the markets move, and we all know markets move at different times.

“But they haven’t articulated what they were trying to achieve, what sort of timeline and what outcomes they are hoping to get. I think that would help all of us manage client expectations. Because all of us will have lots of clients that are getting frustrated with being told ‘no’. And you can’t really give them an outcome of what or when they might be able to move again.”

In October last year, Mr Byres spoke at the Customer Owned Banking Convention in Brisbane, where he indicated that the regulator would like to start scaling back its intervention, provided that banks can continue to lend responsibly.

“We would ideally like to start to step back from the degree of intervention we are exercising today,” Mr Byres said.

“Quantitative benchmarks, such as that on investor lending growth, have served a useful purpose but were always intended as temporary measures. That remains our intent, but for those of you who chafe at the constraint, their removal will require us to be comfortable that the industry’s serviceability standards have been sufficiently improved and — crucially — will be sustained.”

Macro-prudential measures are a relatively new instrument but have becoming increasingly popular across the globe. In addition to Australia, lending curbs are also being used in the UK, New Zealand and Hong Kong.

Last year, the Bank of England confirmed that its own version of APRA lending curbs will become a “structural feature” of the British housing market, forcing Australian economists to begin questioning whether APRA’s macro-prudential measures could be permanent.

AMP Capital chief economist Shane Oliver believes that APRA’s measures, or at least some of them, will become permanent.

“I suspect that, as time goes by, they will likely become a permanent feature because of the control over risky behaviour that they allow over and above that achieved by varying interest rates and because the regulatory framework necessary to administer them will become more entrenched,” Mr Oliver said.

Mr Oliver believes that APRA’s mortgage curbs may be seen as increasingly attractive from a social policy perspective, in that they can “tilt lending away from non-first home owner-occupiers”.

There are other reasons why APRA’s measures are likely to remain.

“Poor affordability and high household debt levels, neither of which are likely to go away quickly,” Mr Oliver said.

Credit conditions ‘the tightest they’ve been in 15 years’

From The Adviser.

Members of the industry have challenged the assertions of a professor of economics regarding the state of the current lending market and broker remuneration, with one broker stating that it’s harder than ever to get a loan.

In an opinion piece for The Australian Financial Review, a professor of economics at UNSW Business School, Richard Holden, warned that Australia is “blithely repeating” the US housing market “mistakes” that led the housing “implosion” and global financial crisis.

According to Mr Holden, there are several “markers” that point to this, including lenders that “let you borrow a lot compared to your income”, “risky” mortgage structures and, most notably, mortgage broker commissions and incentives.

The professor wrote: “A remarkable 55 per cent of all new mortgages come through a broker. And those brokers get paid based on how many dollars of home loans they write.

“Their incentives are thoroughly misaligned with both borrowers and lenders — just as was the case in the US a decade ago. There are also high-powered incentives for those originating loans with banks, creating more moral hazard.”

The claims have been dismissed by the executive director of the Finance Brokers Association of Australia (FBAA), Peter White, who told The Adviser that he believed Mr Holden’s analysis “shows absolute ignorance, to the nth degree, of what actually happened in the US. It had nothing to do with brokers. Brokers are a distribution channel. What caused the US GFC was that the wholesale corporate bond market was getting greedy on low-doc lending and then had bonds that they wouldn’t sell. It had nothing to do with brokers whatsoever.”

Mr White added that broker remuneration and incentives had been the subject of several reviews in recent years, and that the professor’s comments, therefore, “don’t make any sense whatsoever in the context of the current market”.

Touching on Mr Holden’s comments about there being a “moral hazard”, the FBAA head said: “Australia is globally known as being one of the most regulated countries in the world and it ensures that any potential risk is mitigated and looked at to ensure that there is no moral question.

“Bonus incentives have been looked at to try and remove any risks, and that is what we’ve done. These are things that were done in the past, it’s not current. So, he is not up to speed with what is happening in the current reality of the current market.

“Drawing these analogies to the US market and pointing some line to brokers and their payment and incentives is just garbage.”

Several brokers also contacted The Adviser to voice their opposition.

Credit conditions ‘the tightest they’ve been in 15 years’

Speaking to The Adviser, Smartline mortgage broker Ian Simpson said that he “deeply disagreed” with a number of Mr Holden’s assertions.

Mr Simpson said that the comparison to the US subprime market was “wrong” because low-doc lending pre-subprime in the US constituted more than half of lending and did not require verification of income, whereas Australia has less than 5 per cent low-doc loans, and it largely used alternative income verification.

He continued: “I completely refute both of the broker allegations. There has been an exhaustive review and analysis of the whole broker remuneration model etc and what they have discovered is that brokers actually have very little influence on the amount a borrower can borrow. In 99 per cent of cases, we look at a customer’s scenario, a borrower’s situation and assess income, how much deposit they have, fixed liabilities etc and work out, based on their current situation, how much they could borrow. But the amount that the client borrows is not dictated by us; it’s dictated by their situation.

“Within the broker community, I’d say that 90 per cent of brokers have a long-term concern of their clients (in every industry around 10 per cent do), because if you don’t have a concern for the long-term health and welfare of the client, you don’t actually have a business. And given all the levels of compliance and continued education and scrutiny, you’re not thinking about getting a few extra dollars in commission now at the detriment of your client. Your client needs always come first, and their best interests come first, because our business are only built on happy clients and long-term relationships.”

The Smartline broker added that the lending market, rather than being loose, was actually tighter now than he had seen it for more than a decade.

“Australian lending standards are probably the tightest lending standards that I have seen in my 15 years of being a broker,” Mr Simpson said.

“I’ve never seen such a gargantuan gap between interest rates and servicing rates, but that is not necessarily a bad thing. Borrowing money is hard. Banks are asking more questions than they ever used to ask — it’s a daily challenge getting loans approved.

“Credit conditions are tight, the tightest I have seen them ever. And now with the Royal commission, banks are going to be asking more and more questions, not less and less.

“So, from a remuneration point of view, we’re working as hard as we ever had for our money. And from a systemic point of view, the market is healthy, and if the regulators weren’t, there then the housing market would be putting the financial system at risk.

“Just because the US housing market went up and then had an almighty housing crash does not mean that we are going to have one here in Australia. I don’t believe that at all, considering the house price growth in the last 12 months has risen [by] 3 per cent. That’s hardly a market out of control.”

ACCC Report into Mortgage Pricing Includes ‘Some Surprises’

From The Adviser.

The chairman of the Australian Competition and Consumer Commission has revealed that there will be some “surprises” in the upcoming draft report into how the banks price residential mortgage products.

The inquiry into how the major banks price their mortgage is the first undertaking of the ACCC’s new Financial Sector Competition Unit, which is tasked with undertaking regular inquiries into specific competition issues across the financial sector.

Starting with the $1.2 million inquiry into residential mortgage product pricing, the ACCC is aiming to understand how the banks affected by the major bank levy explain any changes or proposed changes to fees, charges or interest rates in relation to residential mortgage products.

The inquiry relates to prices charged until 30 June 2018.

Speaking to The Adviser in May 2017, ACCC chairman Rod Sims said: “The purpose of this inquiry is to provide customers with greater understanding on how the major banks price their mortgage products and increase transparency around any changes or proposed changes to fees, charges or interest rates in relation to these products.”

In comments made to The Australian Financial Review and confirmed by the ACCC, Mr Sims noted that the commission’s draft report into mortgage pricing will be released in February or March and will contain “some surprises”.

Mr Sims said: “We were asked by the Treasurer to do an inquiry much like we are doing with gas and electricity… to get prices down and the market working as it should,” Mr Sims said.

“We will be bringing out a draft report in February or March which will provide more transparency on how the banks make their interest rate decisions and how the market structure and the level of competition in the banking sector impacts those decisions… that will be quite an important report… there are some surprises.”

While details of these surprises have not been revealed, there have been some suggestions that the banks could be passing on the cost of the government’s new major bank levy and macro-prudential measures to customers. AFG CEO David Bailey last year warned that “history suggests the big banks will undoubtedly pass this new cost on”.

Mr Bailey said: “The extent to which they are able to pass this levy on will depend on how strong our regulators are with the new supervisory powers also announced on budget night.”

The corporate watchdog has also previously warned that the big banks could be in breach of the ASIC Act over the reasons given for hiking interest rates.

However, some major bank heads, such as NAB chief executive Andrew Thorburn, have said that the major bank tax will “impact millions of everyday Australians” as any tax ”cannot be absorbed”. Likewise, Westpac CEO Brian Hartzer said that “the cost of any new tax is ultimately borne by shareholders, borrowers, depositors and employees.”

Mortgage Stress to Trigger Rise in Defaults, says Analyst

From The Adviser.

Defaults are expected to rise this year amid new data which reveals that almost a million Australians are under mortgage stress.

Digital Finance Analytics (DFA) has released its mortgage stress and default analysis for the month of December, revealing that over 921,000 households (29.7 per cent) are under “mortgage stress”, with 24,000 households under “severe mortgage stress”, up by 3,000 from the previous month.

DFA principal Martin North has predicted that more Australians will default on their debts in 2018, with an estimated 54,000 households at risk of 30-day debt defaults in the next 12 months.

“My own view is that we’re going to see default debts rise in 2018,” Mr North told The Adviser. “I can’t see any argument to suggest that it’s going to be different unless income starts to move up in real terms.

“I know that Treasury is forecasting a very positive outlook for wage growth over the next couple of years, [but] I can’t see where that’s coming from at the moment. My own view is that we’re going to see mortgage stress rising and that will actually have a knock-on effect on defaults. So, I’m forecasting defaults will be higher later into the year than they were at the end of last year.”

The data analyst attributed rises in mortgage stress to the “loose” lending standards of previous years.

“Over the last four or five years, lending standards have been a bit too loose,” Mr North said.

“We’ve got a lot of people now who, if they applied for the same mortgage two or three years ago, they wouldn’t now get that mortgage because effectively the affordability criteria has been tightened, the income standards have been tightened, all of the dimensions have been tightened.”

Mr North also urged Australians to keep a budget, and he warned that household accumulation of unsecured debt could further perpetuate mortgage stress.

“There’s an alignment between mortgage stress and rises in other forms of debt,” the principal said.

“What we’re finding is that there’s an accumulation of other debt categories around people with mortgage stress, so it’s part of the problem.”

Despite acknowledging the negative impact that a future rate rise imposed by the Reserve Bank of Australia (RBA) would have on mortgage stress, Mr North believes that the central bank needs to increase its cash rate to ease “systematically structural risk” caused by a high debt ratio.

“The RBA [has] a really tricky situation because we’ve got mortgage lending growing at three times income growth — 6 per cent annual mortgage growth lending and 2 per cent income growth — so, that’s an unsustainable position.

“If they do lift rates, essentially that’s going to put more households under pressure.

“[But] my own view is that the next rate will be up, [and] it won’t be for some months — probably in the second half of 2018 — and I think it’s predicated on what happens to wages.”

Concluding, Mr North said: “I can’t see any logic for driving rates lower, and the challenge is that they should be putting rates higher than they probably will because of the problem with debt overhanging in the system we’ve got at the moment.”

Australian Property A Target For Money Laundering

An OECD report “Implementing The OECD Anti-Bribery Convention” was released this week and focused on Australia. This is part of the OECD Working Group on Bribery. Real Estate is in the spotlight, because sources in the banking and accounting sectors are warning that Australian real estate is at “significant risk” of being used for money laundering.

Among a raft of recommendations, is one saying Australia should be:

Taking urgent steps to address the risk that the proceeds of foreign bribery could be laundered through the Australian real estate sector. These should include specific measures to ensure that, in line with the FATF standards, the Australian financial system is not the sole gatekeeper for such transaction.

Here is a summary from The Adviser:

“Australia has stepped up its enforcement of foreign bribery since 2012, when the OECD Working Group on Bribery last evaluated Australia’s implementation of the OECD Anti-Bribery Convention, with seven convictions in two cases and 19 ongoing investigations,” the OECD said.

“However, in view of the level of exports and outward investment by Australian companies in jurisdictions and sectors at high risk for corruption, Australia must continue to increase its level of enforcement.”

The OECD report highlighted that one possible means of improving detection is through an increased focus on the proceeds of crime in financial flows back into Australia, particularly those involving the residential real estate sector.

It noted that Aussie property is “very attractive to foreign investors and is at ‘significant risk’ for money laundering”, according to a number of sources, including the 2015 Financial Action Task Force (FATF) Mutual Evaluation Report of Australia.

“Several participants at the onsite from civil society and the private sector also highlighted the significant risk of laundering foreign corrupt proceeds in the Australian real estate sector, including representatives from civil society, the banking sector and an international accounting and auditing firm.”

The review team noted the views of J.C. Sharman, an Australian academic and international AML/CFT and anti-corruption expert, on the Australian AML/CFT system’s failure to counter the flow of corrupt proceeds from abroad into the Australian real estate sector.

According to the report, Professor Sharman attributes the gap to a “lack of willingness” to take action rather than a lack of capacity, stating that Australia has some of the most powerful AML/CFT laws in the world.

He provides several examples where banks or AML/CFT authorities have failed to act on suspicious payments, and information from interviews with Australian bankers that believed the Commonwealth Government did not take seriously enough the issue of inward flows of corrupt proceeds.

Under Australian law, real estate agents, accountants and auditors, members of the legal profession and other Designated Non-Financial Business Professionals (DNFBPs) are not subject to AML/CFT obligations.

However, the OECD noted that Australia is currently considering the expansion of AML/CFT reporting obligations to real estate agents, lawyers, conveyancers, accountants, high-value dealers and trust and company service providers.

“This follows a statutory review of the AML/CFT regime (completed in April 2016), which recommended a cost-benefit analysis be undertaken (completed in June 2017),” the report said.

“The government is currently considering the report, which will inform any decision about the regulation of these sectors for AML/CFT purposes.”

FIRB to play a bigger role

The OECD believes that Australia’s Foreign Investment Review Board (FIRB) could potentially play a greater role in detecting and reporting suspicious transactions in the real estate sector, and leverage available information from the ATO, AUSTRAC and AFP to act on suspicious transactions relating to foreign investments.

The report explained: “Pursuant to the applicable legislative framework, the Treasurer is empowered to prohibit a foreign purchase of Australian property if satisfied that it would be contrary to the national interest, which includes considerations such as national security, competition, impact on the economy and character of the investor.

“The FIRB routinely consults with government agencies, including ASIC, AFP and Immigration and Border Protection, about applications. The ATO also meets regularly with these agencies to ensure that a cohesive, whole of government approach, is maintained.”