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Last Friday the Treasury released a draft bill which would ban cash transactions above $10,000. But I discuss the real story, with the CEC‘s Robbie Barwick. It has more to do with negative interest rates than may first appear.
Email: blackeconomy@treasury.gov.au with the subject line:
Submission: Exposure Draft—Currency (Restrictions on the Use of Cash) Bill 2019
Deposit Bail-In is something which we have been discussing in recent times, not least because of the overt example now active in New Zealand under the Open Banking Resolution, the mandate from the G20 and the Financial Stability board and the implementation in several other countries in response to this.
In Australia, the situation has been unclear, since the 2018 bill was passed on the voice.
Treasury and politicians keep denying there is any intent to bail-in deposits to rescue a failing bank, but then divert to a discussion of the $250k deposit insurance scheme which first would need to be activated by the Government, and second only once a bank has failed. It is irrelevant to bail-in.
Bail-in is where certain instruments could be converted to shares in a bank to buttress its capital in times of pressure to attempt to stop a bank failing, and so would reduce the risk of a Government bail-out using tax payer funds. They will use private funds (potentially including deposits, which are unsecured loans to a bank), instead.
So, today we release an opinion from Robert H. Butler, Solicitor. This was addressed to the Citizens Electoral Council of Australia, and is published with their permission. The key finding is simply that:
Whilst not beyond doubt, it is my opinion that the provisions of the Act do provide for a power of bail-in of bank deposits which did not exist prior to the passing of the Act.
This means that unless the law is changed to specifically exclude deposits (any side of politics going to volunteer to drive this?), bank deposits are not unquestionably free from the risk of bail-in. And we have the view that the vagueness is quite deliberate, and shameful.
Time to pressure our members of Parliament, and raise this issue during the expected election ahead.
Here is the full opinion:
I have been asked to provide an opinion as to whether the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Act 2018 (“the Act”) creates a power of bail-in by Australia’s banks of customers’ deposits.
At a minimum, the Act empowers APRA to bail in so-called Hybrid Securities – special high-interest bonds evidenced by instruments which by their terms can be written off or converted into potentially worthless shares in a crisis.
However, the Act also includes write-off and conversion powers in respect of “any other instrument”. The Government has contended that these words do not extend to deposits, on the basis that the power only applies to instruments that have conversion or write-off provisions in their terms, which deposit accounts do not. However, the reference to “any other instrument” would be unnecessary if the power only applied to instruments with conversion or write-off provisions; moreover, banks are able to change the terms and conditions of deposit accounts at any time and for any reason, including on directions from APRA to insert conversion or write-off provisions, which would thereby bring them within the specific terms of the write-off or conversion provisions of the Act.
The issue could now be simply resolved by Government passing a simple amendment to the Act to explicitly exclude deposits from being bailed in.
Bail-in is one of the 3 alternative actions which can be taken in respect of a distressed bank.
The alternatives are:-
Liability limited by a scheme, approved under Professional Standards Legislation
The provisions of the Act as they affect bail-in require a consideration of the issue in 3 different sets of circumstances, and the provisions of the Act need to be considered separately in relation to each such set of circumstances.
Those 3 sets of circumstances are:-
The ASX describes Hybrid Securities as “a generic term used to describe a security that combines elements of debt securities and equity securities.” Whilst there are a variety of such securities, in short they are securities issued by banks which permit the amounts secured by the security to be converted into shares or written off at the option of the bank in certain circumstances.
The Act provides specifically for Hybrid Securities. Section 31 adds “Subdivision B-Conversion and write off provisions” to the Banking Act 1959 and inserts a definition Section 11CAA which provides that “conversion and write off provisions means the provisions of the prudential standards that relate to the conversion or writing off of:
The Act also inserts Section 11CAB which provides:
“(1) This section applies in relation to an instrument that contains terms that are for the purposes of the conversion and write off provisions and that is issued by, or to which any of the following is a party:
(a) an ADI;
……
…..
…..
Under the Basel Accord, a bank’s capital consists of Tier 1 capital and Tier 2 capital which includes Hybrid Securities.
The Section 11CAB provisions mean that any law which would otherwise prevent the conversion or write-off of Hybrid Securities does not apply unless a particular legislative provision specifically provides that it does apply. One of the principle types of legislation that this provision would be directed towards is consumer legislation, particularly those provisions which allow a Court to set aside or vary agreements if a party has been guilty of false or misleading conduct – this is precisely the sort of argument which could be raised in the circumstances referred to by outgoing Australian Securities and Investments Commission (ASIC) Chairman Greg Medcraft in an exchange with Senator Peter Whish-Wilson in the hearings of the Senate Economics Legislation Committee on 26 October 2017: Mr Medcraft said: “There are two reasons we believe a lot of the retail investors buy these securities. One is they don’t understand the risks that are in over 100-page prospectuses and, secondly – and this is probably for a lot of investors – they do not believe that the government would allow APRA to exercise the option to wipe them out in the event that APRA did choose to wipe them out.“
When Senator Whish-Wilson raised the spectre of “bail-in”, Mr Medcraft confirmed: “Yes, they’ll be bailed in. The big issue with these securities is the idiosyncratic risk. Basically, they can be wiped out – there’s no default; just through the stroke of a pen they can be written off. For retail investors in the tier 1 securities – they’re principally retail investors, some investing as little as $50,000 – these are very worrying. They are banned in the United Kingdom for sale to retail. I am very concerned that people don’t understand, when you get paid 400 basis points over the benchmark [4 per cent more than normal rates], that is extremely high risk. And I think that, because they are issued by banks, people feel that they are as safe as banks. Well, you are not paid 400 basis points for not taking risks…” He emphasised: “I do think this is, frankly, a ticking time bomb.“
The over-riding intention behind Sections 11CAB(2) and 11CAB(3) is to deal with issues arising from the examples in the comments of Graeme Thompson of APRA in an address on 10 May 1999 when he said: “… APRA will have powers under proposed Commonwealth legislation to mandate a transfer of assets and liabilities from a weak institution to a healthier one. This is a prudential supervision tool that the State supervisory authorities have had in the past, and it has proved very useful for resolving difficult situations quickly. We expect the law will require APRA to take into account relevant provisions of the Trade Practices Act before exercising this power, and to consult with the ACCC whenever it might have an interest in the implications of a transfer of business.” The new Sections 11CAB(2) & (3) mean that APRA does not need to consider those issues (or any other) in relation to conversion and write-off of Hybrid Securities.
Whether or not bail-in of other than Hybrid Securities is implemented by the Act has been the subject of debate and concern since the Bill which led to the Act became public. The principal area of concern is whether or not the bail-in regime was extended by the Act to deposits made by customers with banks.
The central issue is the wording of the definition in Section 11CAA quoted above and what “any other instrument” means. “Instrument” is not defined in the Act but a “financial instrument” is defined by Australian Accounting Standard AASB132 as “any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.” As confirmed by the Reserve Bank, a deposit with an ADI bank comes under such a definition – it is a contract with terms and conditions as to the deposit being set by a bank, accepted by a depositor on making a deposit and creating a financial asset (a right of repayment) and a financial liability in the bank (the obligation to repay).
Deposits are created by “instruments” and are governed by the terms and conditions of those instruments.
The intent of the reference to “any other instrument” in Section 11CAAAA is assisted by the Explanatory memorandum which accompanied the Exposure Draft and which states:
“5.14 Presently, the provisions in the prudential standards that set these requirements are referred to as the ‘loss absorption requirements’ and requirements for ‘loss absorption at the point of non-viability’. The concept of ‘conversion and write-off provisions’ is intended to refer to these, while also leaving room for future changes to APRA’s prudential standards, including changes that might refer to instruments that are not currently considered capital under the prudential standards.”
Section 11AF of the Banking Act provides that APRA can determine Prudential Standards which are binding on all ADIs. These standards are in effect regulations which have the force of legislation by virtue of the authorisation in the Banking Act. That Section provides, inter alia:
“(1) APRA may, in writing, determine standards in relation to prudential matters to be complied with by: (a) all ADIs; …..”
Banks are ADIs.
The various Prudential Standards issued by APRA are accordingly headed with the phrase: “This Prudential Standard is made under section 11AF of the Banking Act 1959 (the Banking Act).”
That power then leads into the issue of APRA using this authority to expand the meaning of “capital” the subject of conversion or write-off, to encompass deposits if deposits are not already covered by the reference to “any other instrument”.
That these provisions as to conversion and write-off are not limited to Hybrid Securities is confirmed in Section 11CAA itself as quoted above. The provisions extend to “any other instrument” by sub-section (b) of that Section and must relate to instruments other than those referred to in sub-section (a), i.e. other than “Additional Tier 1 and Tier 2 capital” (being instruments which themselves contain an explicit provision for conversion or write-off). All instruments that the Act refers to as to being able to be converted or written off “in accordance with the terms of the instruments” come under the definition of “Additional Tier 1 and Tier 2 capital” – “any other instruments” is not only an entirely unnecessary addition if the Act is intended to apply only to instruments with conversion or write-off terms, its very broad language must be intended to encompass some other instruments (“which are not currently considered capital” as stated in the Explanatory memorandum) and that could extend to instruments relating to deposits.
If Section 11CAA thus extends to instruments relating to deposits then APRA can as the Prudential Regulator issue a Prudential Requirement Regulation or a Prudential Standard for the writing-off or conversion of deposits.
APRA already has a power to prohibit the repayment of deposits by ADIs, a power which already verges on the writing off of those deposits. The Banking Act Section 11CA provides:
“(1) … APRA may give a body corporate that is an ADI … a direction of a kind specified in subsection (2) if APRA has reason to believe that:
…..
….
(h) there has been, or there might be, a material deterioration in the body corporate’s financial condition; or
….
(k) the body corporate is conducting its affairs in a way that may cause or promote instability in the Australian financial system.
…..
(2) The kinds of direction that the body corporate may be given are directions to do, or to cause a body corporate that is its subsidiary to do, any one or more of the following:
….
…..”
This provision was inserted into the Banking Act in 2003 by the Financial Sector Legislation Amendment Act (No 1).
It is not known whether this power has been exercised by APRA. Relevantly Graeme Thompson in the address referred to above said: ” … Particularly in the case of banks and other deposit-takers that are vulnerable to a loss of public confidence, APRA may prefer to work behind the scenes with the institution to resolve its difficulties. (Such action can include arranging a merger with a stronger party, otherwise securing an injection of capital or limiting its activities for a time.)“
It is a relatively small step to then convert or write-off what the ADI has been prohibited from repaying or paying out.
It might be argued that APRA’s powers in existing Sections of the Act are not absolute and are subject to various qualifications and limitations arising out of their context within the Act or the balance of the Section or Sections of the Act in which they appear. To avoid such an interpretation, Section 38 of the Act inserts 2 new sub-sections to Section 11CA in the Banking Act:
“(2AAA) The kinds of direction that may be given as mentioned in subsection (2) are not limited by any other provision in this Part (apart from subsection (2AA)).
(2AAB) The kinds of direction that may be given as mentioned in a particular paragraph of subsection (2) are not limited by any other paragraph of that subsection.”
APRA has already adopted the need for certain capital to be capable of conversion or write-off, regardless of laws, constitutions or contracts which may affect such decisions, the Explanatory Statement for Banking (Prudential Standard) Determination No. 1 of 2014 stating:
“The Basel Committee on Banking Supervision (BCBS) has developed a series of frameworks for measuring the capital adequacy of internationally active banks. Following the financial crisis of 2007-2009, the BCBS amended its capital framework so that banks hold more and higher quality capital (Basel III). For this purpose, the BCBS established in Basel III more detailed criteria for the forms of eligible capital, Common Equity Tier 1 (CET1), Additional Tier 1(AT1) and Tier 2 (T2), which banks would need to hold in order to meet required minimum capital holdings.
Basel III provides that AT1 and T2 capital instruments must be written-off or converted to ordinary shares if relevant loss absorption or non-viability provisions are triggered.
Banking (prudential standard) determination No. 4 of 2012 incorporated the Basel III developments into APS 111 with effect from 1 January 2013. …”
Even if the words “any other instrument” in Section 11CAA do not encompass deposits, there is a further issue in relation to the implementation of bail-in of deposits revolving around the issue of the documents/instruments issued by banks in opening accounts and accepting deposits from customers.
The documentation issued by each Australian bank when opening such an account, has a provision which enables the Bank to change the terms and conditions from time to time without the consent of the customer. The specifics of the power vary from bank to bank but each fundamentally contain such a power. Some examples of various clauses are set out in Appendix 1.
If APRA as the Prudential Regulator issued a Prudential Requirement Regulation or a Prudential Standard requiring a bank to insert a provision into its documentation/instruments relating to deposit-taking accounts providing for the bail-in of those deposits – their write-off or conversion – then those provisions would then clearly come within the specific provisions of conversion or write-off within the Act and the deposit the subject of the account could be bailed-in immediately.
Such a directive could be issued by APRA in accordance with the secrecy provisions in the Australian Prudential Regulation Authority Act1998 and be implemented with little or no notice to the account holder.
Whilst not directly relevant to an interpretation of the provisions of the Act, there are a number of unusual and concerning aspects to its introduction, passing and intentions.
As noted above, the issue could now be simply resolved by Government passing a simple amendment to the Act to explicitly exclude deposits from being bailed in i.e. written off or converted into shares.
Whilst not beyond doubt, it is my opinion that the provisions of the Act do provide for a power of bail-in of bank deposits which did not exist prior to the passing of the Act.
Yours faithfully,
Philip Gaetjens, Secretary to the Treasury addressed the Senate Estimates today on the budget. We are being helped by super-high iron ore prices, but downside risk sits in the household sector, and especially, the falls in property and household consumption.
The Budget forecasts an underlying cash surplus in the 2019-20 financial year of $7.1 billion, the first surplus since 2007-08. It is then forecast to increase to a surplus of $11 billion in 2020-21, with sustained surpluses projected into the medium term. The fiscal outlook continues to benefit in particular from commodity prices that have remained at elevated levels, coupled with continued growth in resource exports, which both support further expected improvement in company tax collections in 2018‑19 and 2019-20.
Ongoing strength in iron ore and metallurgical coal prices since the MYEFO and a consequent delay in the assumed phase down in these prices have contributed to a higher terms of trade in 2018‑19. The Budget prudently assumes a return to more sustainable levels over the next four quarters. Nominal GDP growth is expected to be 3¼ per cent in 2019-20, ¼ of a percentage point lower than at the MYEFO, and 3¾ per cent in 2020-21. In contrast to the upgrade in the terms of trade, growth in real GDP and domestic prices have been revised down, reflecting data since MYEFO, including the weaker‑than‑expected December quarter 2018 National Accounts released on 6 March.
As I noted in my last statement to the committee, the path to returning the budget to surplus has been a long one and reflects the long lasting fiscal impacts of financial shocks and economic transitions that occur as an economy rebalances. The long run of deficits has also left Australia with substantially higher public debt levels. The improved fiscal outlook now enables a greater focus on public debt reduction to improve Australia’s position to meet future domestic and international challenges.
In the Budget, gross debt is expected to be 27.9 per cent of GDP in 2019-20, falling to 25 per cent of GDP at the end of the forward estimates and further to 12.8 per cent of GDP by the end of the medium term. Net debt is also expected to decline in each year of the forward estimates and the medium term, falling from 18 per cent of GDP in 2019-20 to a projected zero per cent by 2029-30.
The economic data released since MYEFO were a bit weaker than had been expected, which I highlighted in my address to the committee in February. The December quarter 2018 National Accounts data confirmed the slowing in momentum in the real economy in the second half of 2018, although this followed two quarters of strong growth earlier in the year.
Spending by the household sector, on both consumption goods and housing, has moderated. We also know that housing prices have been declining over the past year and a half. Falls in residential building approvals since late 2017 are expected to flow through to lower dwelling investment over the coming years. Consumption of discretionary items has been particularly soft, including for those components that relate to housing market conditions, such as household furnishings and motor vehicles. While the pick‑up in growth in retail sales in February was welcome, it followed a number of weak outcomes.
In contrast, non-mining investment has continued to grow at a solid pace and spending by the public sector, including on services, such as health and education, as well as on infrastructure, has been growing above its long-run average rate. Mining investment is expected to grow in 2019-20 for the first time in around seven years.
Despite some weakness in the real economy, there has been continued strength in the labour market. Employment growth was above its long-run average over the year to February, and the unemployment rate is now 4.9 per cent, a rate last recorded in June 2011. The participation rate is close to its record high.
Growth in real GDP is forecast to be 2¾ per cent in 2019-20 and 2020-21. This is around Australia’s estimated potential growth rate. Growth overall is expected to be supported by accommodative monetary policy settings and the Australian dollar, which is one-third lower than its 2011 peak against the US dollar.
Household consumption, business investment, and public final demand are expected to contribute to growth over the forecast period. Dwelling investment is expected to detract from growth over the forecast period, particularly in 2019-20.
Solid economic growth is expected to continue to support employment growth, which is forecast to be 1¾ per cent through the year to the June quarter 2020 and the June quarter 2021. Consistent with positive employment prospects, the participation rate is forecast to be 65½ per cent and the unemployment rate is expected to be 5 per cent across the forecast period. As economic growth strengthens and spare capacity in the labour market continues to be absorbed, wage growth is expected to pick up.
Before moving onto the global economic outlook, I would like to take a moment to emphasise the importance of business liaison in formulating Treasury’s economic forecasts. In the lead-up to the Budget, Treasury conducted business liaison with a range of stakeholders, including banks, mining companies, industry bodies, economists, state and territory governments, representative organisations and small businesses. These consultations provide detailed forward-looking insights on the economic outlook, which directly inform our deliberations on the economic forecasts. Our business liaison activity also substantially benefits from Treasury’s state office presence in Sydney, Melbourne and Perth.
Moving now to the global economic outlook, since MYEFO there has been some deterioration in the outlook for global growth, particularly in the euro area and economies outside of Australia’s major trading partners. Reflecting this, forecasts for global growth have been downgraded. Nonetheless, growth in Australia’s major trading partners is forecast to continue to be robust, at 4 per cent in each of the forecast years. Labour market conditions continue to be strong and inflation remains relatively contained in most major advanced economies compared with historical experience.
The United States economy continues to grow solidly. Wage growth has picked up and inflation has increased slightly, closer to the target rate. Growth in China is moderating, reflecting weaker domestic demand as authorities address risks in the financial system and trade pressures weighing on business confidence. With help from targeted macroeconomic policies, China is expected to achieve the authorities’ target of 6.0 to 6.5 per cent growth this year. ASEAN-5 economies continue to perform solidly, with domestic demand and favourable demographics supporting growth.
As outlined in the Budget, there is a high degree of global uncertainty, which appears to be weighing on measures of global confidence amid a range of economic and geopolitical risks. These risks include continued concerns about trade protectionist sentiment, high levels of debt in a range of countries, including in Europe, and Brexit risks, although Australia’s trade is oriented more towards Asia than Europe. In the near term, there is also uncertainty about how quickly activity in some countries will bounce back from temporary factors that weighed on growth in the second half of 2018.
The federal government has announced a $600 million fighting fund to support the recommendations of the financial services royal commission, via InvestorDaily.
Buried on page 167 of the hefty 2019 Federal Budget are the Hayne-related expenses to be incurred by Treasury over the next five years.
The government will provide $606.7 million over five years from 2018-19 to facilitate its response to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
The package comprises a suite of measures that fulfil the government’s commitment to take action on all 76 of the recommendations of the Royal Commission’s Final Report, including:
• Designing and implementing an industry funded compensation scheme of last resort for consumers and small business ($2.6 million over two years from 2019-20);
• Providing the Australian Financial Complaints Authority with additional funding to help establish a historical redress scheme to consider eligible financial complaints dating back to 1 January 2008 ($2.8 million in 2018-19);
• Paying compensation owed to consumers and small businesses from legacy unpaid external dispute resolution determinations ($30.7 million in 2019-20);
• Resourcing the Australian Securities and Investments Commission (ASIC) to implement its new enforcement strategy and expand its capabilities and roles in accordance with the recommendations of the Royal Commission ($404.8 million over four years from 2019-20).
• Resourcing the Australian Prudential Regulation Authority (APRA) to strengthen its supervisory and enforcement activities which will support its response to key areas of concern raised by the Royal Commission, including with respect to governance, culture and remuneration ($145.0 million over four years from 2019-20);
• Establishing an independent financial regulator oversight authority, to assess and report on the effectiveness of ASIC and APRA in discharging their functions and meeting their statutory objectives ($7.7 million over three years from 2020-21);
• Undertaking a capability review of APRA, which will examine its effectiveness and efficiency in delivering its statutory mandate, as well as its capability to respond to the Royal Commission ($1.0 million in 2018-19);
• Establishing a Financial Services Reform Implementation Taskforce within the Treasury to implement the Government’s response to the royal commission, and co-ordinate reform efforts with APRA, ASIC and other agencies through an implementation steering committee ($11.2 million in 2019-20); and
• Providing the Office of Parliamentary Counsel with additional funding for the volume of legislative drafting that will be required to implement the Government’s response to the Royal Commission ($0.9 million in 2019-20).
The cost of this measure will be partially offset by revenue received through ASIC’s industry funding model and increases in the APRA Financial Institutions Supervisory Levies and from funding already provisioned in the Budget.
Lower taxes
Handing down the Federal Budget 2019-2020 in parliament last night, Mr Frydenberg said that the budget would restore the nation’s finances without raising taxes.
“The budget is back in the black and Australia is back on track,” the treasurer said, announcing that the coalition delivered a $7.1 billion surplus.
“Over the last year the interest bill on national debt was $18 billion,” he said. “We are reducing the debt and this interest bill, not by higher taxes, but by good financial management and growing the economy.”
The government has announced immediate tax relief for low- and middle‑income earners of up to $1,080 for singles or up to $2,160 for dual income families to ease the cost of living.
The coalition will also be lowering the 32.5 per cent rate to 30 per cent in 2024-25, increasing the reward for effort by ensuring a projected 94 per cent of taxpayers will face a marginal tax rate of no more than 30 per cent.
“The Australian Government is lowering taxes for working Australians and backing small and medium‑sized business, while ensuring all taxpayers, including big business and multinationals, pay their fair share,” the treasurer said.
Superannuation
The Government will allow voluntary superannuation contributions (both concessional and non-concessional) to be made by those aged 65 and 66 without meeting the work test from 1 July 2020. People aged 65 and 66 will also be able to make up to three years of non-concessional contributions under the bring-forward rule.
Those up to and including age 74 will be able to receive spouse contributions, with those 65 and 66 no longer needing to meet a work test.
“This measure is estimated to reduce revenue by $75.0 million over the forward estimates period,” the treasurer said.
“Currently, people aged 65 to 74 can only make voluntary superannuation contributions if they self-report as working a minimum of 40 hours over a 30 day period in the relevant financial year. Those aged 65 and over cannot access bring-forward arrangements and those aged 70 and over cannot receive spouse contributions.”
The government will make permanent the current tax relief for merging superannuation funds that is due to expire on 1 July 2020.
“This measure is estimated to have an unquantifiable reduction in revenue over the forward estimates period,” Mr Frydenberg said.
Since December 2008, tax relief has been available for superannuation funds to transfer revenue and capital losses to a new merged fund, and to defer taxation consequences on gains and losses from revenue and capital assets.
The tax relief will be made permanent from 1 July 2020, ensuring superannuation fund member balances are not affected by tax when funds merge. It will remove tax as an impediment to mergers and facilitate industry consolidation, consistent with the recommendation of the Productivity Commission’s final report into the superannuation industry.
The treasurer said consolidation would help address inefficiencies by reducing costs, managing risks and increasing scale, leading to improved retirement outcomes for members.
The government will also reduce costs and simplify reporting for superannuation funds by streamlining some administrative requirements for the calculation of exempt current pension income (ECPI).
The Government will allow superannuation fund trustees with interests in both the accumulation and retirement phases during an income year to choose their preferred method of calculating ECPI.
The Government will also remove a redundant requirement for superannuation funds to obtain an actuarial certificate when calculating ECPI using the proportionate method, where all members of the fund are fully in the retirement phase for all of the income year.
This measure will start on 1 July 2020 and is estimated to have no revenue impact over the forward estimates period.
FSC has mixed feelings
The Financial Services Council (FSC) welcomed the government’s superannuation changes to reduce red tape and improve access to voluntary contributions.
“The expansion of the work test exemption, spouse contributions and bring-forward arrangements will provide workers nearing retirement greater flexibility to make additional super contributions if they are able. The electronic requests for release of super and simplification of exempt current pension income calculations are sensible and welcome,” FSC chief executive Sally Loane said.
“The FSC also supports the tax relief for merging super funds, as this will help the superannuation industry consolidate to reduce costs and improve member outcomes.”
However, the FSC is disappointed this is not part of a comprehensive product rationalisation scheme, despite this being a longstanding government commitment.
“A lack of reform in this area means consumers are locked into older, more expensive products,” Ms Loane said.
The FSC is pleased to note the Budget has largely kept the superannuation settings unchanged. However, Ms Loane said the council is disappointed the government has failed to reform non-resident withholding tax for managed funds in the Asia Region Funds Passport.
“This means Australia will remain uncompetitive in our region, and Australia will not be competing with Asian funds on a level playing field.
“The withholding tax on managed funds raises little money, but harms our competitiveness within Asia, putting Australia’s fund managers at a major competitive disadvantage in the region.”
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:
“These changes will address conflicts of interest in the industry by better aligning the interests of consumers and mortgage brokers,” Treasurer Frydenberg said.
The Morrison government wants next year’s election to be about economic management.
So understandably, it’s using the improved bottom line in the Mid Year Economic and Fiscal Outlook (MYEFO) to talk up its economic credentials.
But the numbers in MYEFO show it has failed to hit many of its own targets.
The government’s overarching fiscal objective is to deliver budget surpluses: not just in one year but on average over the economic cycle.
MYEFO indicates the government is expecting a $5.2 billion deficit in 2018-19 (0.3% of GDP).
It will be the 11th consecutive deficit for the Commonwealth budget.
Deficits have averaged $33.2 billion (2.1% of GDP) over those 11 years.
Yes, a $4.1 billion surplus is forecast for next year, with surpluses projected to reach $19 billion (0.9% of GDP) by 2021-22.
But so big have the recent deficits been, that even if everything goes well and the fiscal position continues to improve, the budget would need to be in surplus for decades to produce a surplus on average over each year, far longer than what most economists consider a typical economic cycle.
A related fiscal target is that budget surpluses will build to at least 1% of GDP as soon as possible.
Despite revenue windfalls from income and company taxes (discussed below), the government is still forecasting it won’t reach that 1% of GDP surplus target until 2025-26.
Policy decisions in this year’s budget and MYEFO – including income and company tax cuts, additional funding for independent and Catholic schools, and changes to the GST formula to placate Western Australia – have weakened the bottom line in 2021-22 by $10.5 billion.
Hardly the actions of a government in a hurry to deliver a sizeable surplus.
Verdict: Fail.
The government’s policy is also to maintain strong fiscal discipline by controlling expenditure, with a falling payments-to-GDP ratio its measure of success.
Whether it has met the target depends on the starting year. Governments payments are forecast to reach 24.9% of GDP in 2018-19, up from 23.9% in 2012-13 before the Coalition took office.
The government prefers the starting point of its first year in office 2013-14 where payments were 25.5% of GDP.
Either way, payments in 2018-19 remain above the 30-year historical average of 24.7% of GDP.
While the government projects that spending will fall slightly further to 24.6% of GDP by 2021-22, this relies on spending growth across the government’s major programs falling substantially compared to the previous four years – without major policy changes to help facilitate the fall.
Verdict: Debateable pass.
In last year’s budget, the government introduced a new target of capping tax collections at 23.9% of GDP.
Why 23.9%? That was the average level of tax during the final two terms of the Howard/Costello government.
While the Coalition is understandably keen to follow the lead of one of its most electorally successful governments, that was also a period where tax collections were historically high.
Tax collections are projected to reach 23.8% of GDP in 2022, on the back of stronger than forecast personal income tax and company tax receipts.
Verdict: Pass.
Since becoming prime minister, Scott Morrison has sent mixed signals about whether his government will adhere to the longstanding budget rule that all new spending proposals be matched with budget savings.
At the MYEFO press conference, Finance Minister Matthias Cormann said it was a “matter of balancing competition priorities”.
Here’s the straight answer – the net effect of policy changes announced in MYEFO are an additional $12.2 billion in spending over four years.
In other words, the government has not offset new spending with cuts to other spending programs. The Turnbull government similarly failed to offset its new spending in 2017-18 (although it succeeded in prior years).
There have been some reductions in spending because of improvements in the economy. The government claims these reductions offset its recent spending announcements. But genuine offsets come from policy changes, not economic good luck.
Verdict: Fail.
This objective is key to the government’s fiscal conservative credentials.
If it has some economic good luck, it commits to use the proceeds for budget repair rather than new spending or tax cuts.
This rule has been irrelevant for most of the past decade, because almost every budget had revenue collections falling short of forecast.
But the Morrison government is in the middle of a mini revenue boom – revenue collections were higher than forecast in both the 2018-19 budget and MYEFO.
Company tax collections are higher largely due to strong commodity prices. Income tax collections are up and government spending is down because of improvements in the economy.
So has the government used this chance to show off its fiscal prudence?
Not exactly. It will spend around $11.8 billion of this windfall, give away another $19.3 billion in tax cuts and bank just over half of it ($35.2 billion) to the bottom line.
And in the shadow of an election, we can almost certainly expect further spending. The $9 billion in decisions taken but not announced – potentially a pre-election warchest – suggests that more tax cuts could also be on the way.
Verdict: Fail.
The challenge in assessing budget management is separating good luck from good management. Governments will always seek to take credit for economic upswings that boost the bottom line.
Fiscal targets are there to keep them on the straight and narrow.
An objective assessment of the government’s performance against its own key targets suggests its good news budget is more mirage than magnificent management.
Authors: Danielle Wood, Program Director, Budget Policy and Institutional Reform, Grattan Institute; Kate Griffiths Senior Associate, Grattan Institute
A welcome move, the shadowy Council Of Financial Regulators has started publishing minutes of its quarterly meetings. However, group think, and self-interest is all over it. Specifically the comments about tighter credit, and the need to continue to lend (to keep the debt bomb ticking a bit longer! Also how does independence of the RBA work in this context?
They noted that non-ADI lending for housing has been growing significantly faster than ADI housing lending and there is some evidence that non-ADI lending for property development is also increasing quickly.
As part of its commitment to transparency, the Council of Financial Regulators (the Council) has decided to publish a statement following each of its regular quarterly meetings. This is the first such statement.
The statement will outline the main issues discussed at each meeting. From time to time the Council discusses confidential issues that relate to an individual entity or to policies still in formulation. These issues will only be included in the statement where it is appropriate to do so.
The Council of Financial Regulators (the Council) is the coordinating body for Australia’s main financial regulatory agencies. There are four members: the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC), the Australian Treasury and the Reserve Bank of Australia (RBA). The Reserve Bank Governor chairs the Council and the RBA provides secretariat support. It is a non-statutory body, without regulatory or policy decision-making powers. Those powers reside with its members. The Council’s objectives are to contribute to the efficiency and effectiveness of financial regulation, and to promote stability of the Australian financial system. The Council operates as a forum for cooperation and coordination among member agencies. It meets each quarter, or more often if required.
At each meeting, the Council discusses the main sources of systemic risk facing the Australian financial system, as well as regulatory issues and developments relevant to its members. Topics discussed at its meeting on 10 December 2018 included the following:
Representatives of the Australian Competition and Consumer Commission and the Australian Taxation Office attended the meeting for discussions relevant to their responsibilities.
In a statement issued today, Treasurer Scott Morrison said the reform will represent the “most significant increases in maximum civil penalties in twenty years”.
These increases are right, as before the financial impact of poor behaviour was very low However, do not be misled, changing penalties will not address the fundamental cultural, structural and economic issues which have combined to deliver a finance sector which is simply not fit for purpose.
We need a removal of incentives from the advice sector (mortgage brokers included). Actually we need unified regulation across credit and wealth sectors (the current two regimes are an accident of history).
We need structural separate and disaggregation of our financial conglomerates. We need a realignment of interests to focus on the customer – which by the way is not at odds with shareholder returns, as customer focus builds franchise value and returns in the long term.
We need cultural reform and new values from our finance sector leaders. (Executive Pay should come under the spot light).
We need a reform of the regulatory structure in Australia, because they are captured at the moment at least by group think, and their interests are aligned too closely to the finance sector. This must include ASIC, APRA, RBA and ACCC. All have bits of the finance puzzle, but no one is seriously accountable.
But there is a more fundamental issue. We have relied on overblown credit, and superannuation sectors, as a proxy for high quality economic growth. This inflated housing and lifted household debt.
We need a fundamental economic reset, because reforming financial services alone won’t solve our underlying issues.
Here are the changes:
The government will increase penalties under the Corporations Act to:
- “For individuals: (i) 10 years’ imprisonment; and/or (ii) the larger of $945,000 OR three times the benefits;
- For corporations: (i) the larger of $9.45 million OR (ii) three times benefits OR 10% of annual turnover.
“The Government will expand the range of contraventions subject to civil penalties, and also increase the maximum civil penalty amounts that can be imposed by courts, to the maximum of:
- the greater of $1.05 million (for individuals, from $200,000) and $10.5 million (for corporations, from $1 million); or
- three times the benefit gained or loss avoided; or
- 10% of the annual turnover (for corporations).
“In addition, ASIC will be able to seek additional remedies to strip wrongdoers of profits illegally obtained, or losses avoided from contraventions resulting in civil penalty proceedings.”
The Treasury released a request for submission relating to the thorny issue of digital exclusion, and specifically the fact that some companies, in a drive to digital first, are starting to charge consumers to continue to receive paper bills, for services such as utilities. There is already legislation in some other countries to protect consumers from this.
The Treasury suggest a range of options:
As we discussed last week, they suggest 1.2 million households are digitally excluded by not having access to the internet.
The Keep Me Posted Lobby Group (who contacted me after last week’s post) advocates there should a ban on paper billing fees.
“We clearly stated Keep Me Posted’s position to support a total ban on all billing fees, which is option 2 of the consultation paper,” said Kellie Northwood, Executive Director, Keep Me Posted.
To add weight to be debate we wanted to make two points.
FIRST – the Treasury estimate understates the number of households who are digitally excluded and so more would be potentially hit by excess bill charges.
SECOND – we believe option 2 – ban fees is the right option.
We use data from out rolling 52,000 household surveys across Australia.
The result suggests that it is not just access to the internet which is an issue, but there are some households who just are unwilling or unable to use the internet. In fact the Treasury’s estimate of the number of households impacted is understated.
We segment households, digitally speaking into three group.
We also use our master household segmentation, which is based on multi-factorial geo-demographic and behaviourial analysis, though based on our rolling 52,000 household survey.
The results show that Digital Luddites are predominately in the older and less wealthy households, including Stressed Seniors, those living in the disadvantaged fringe areas around our major cities, those in a rural setting, and those from non-English speaking ethnic backgrounds. Count up all the Digital Luddites and it comes to 27% or 2.6 million households.
We can examine the splits by age bands, and confirm that older households are more likely to be in this group.
Analysis by income band highlights that significantly more are in the lowest income range, including many on pensions and Government support.
We were able to examine the barriers which were driving households into the Luddite group. We found that whilst 7% (around 170,000) are likely to migrate to digital channels, if slowly; 36% (around 911,000) households did not have access to the internet, or usable device; 17% (around 430,000) had no inclination to go digital, even if they could; 22% did not have the technical capability – could not operate a smart phone, did not know how to get to connect to the internet – (around 557,000); and 18% (around 463,000) did not have the physical capability (thanks to disability or other factors).
Stripping back the analysis to a financial capability (did they have the funds to purchase a device, internet access etc), then we estimate 54% of Luddites were impacted by these economic factors, or 1.36 million households.
We believe therefore the Treasury estimate of the number of households impacted by digital exclusion is understated. This adds more weight for intervention.
Companies are clearly able to save money if they can stop sending out paper versions of statements, and rely on customers to receive online notification and then retrieve their statements. This economic driver is understood, though most often the initiate will be dressed up as “environmentally friendly”, or “more convenient”. It appears though that savings are not passed back to consumers directly, but flow into general funds.
Our research suggests that a considerable number of households are unable to go digital. Thus they risk having additional fees and charges imposed on them, with no mitigating option. This is in effect a price rise. Whilst education, and communication to households may assist some, many are not able to migrate. These are the least wealthy, older and more exposed households. This is not equitable.
In some cases it appears charges for bills are significantly higher than the incremental charge based on an estimate of what the incremental cost should be, and in any case, experience from the banking sector highlights suggests it is difficult to get a definitive incremental estimate of the cost of a bill. We think restricting the acceptable charge to cost to recovery, is complex, cannot be audited, and offers too much wriggle room.
We cannot support the differentiation between essential and non-essential services, not least because the threshold would potentially vary by household circumstance, and we cannot see a justification for charging for paper billing in some circumstances, but not others.
Therefore charges for paper billing should be banned.
Companies would be welcome to offer discounts to those receiving electronic delivery (although the ACCC may have to ensure that overall costs of service are not lifted to facilitate the subsequent discounting!)
We will be making this submission to Treasury.
The Treasury has released exposure drafts for further reform for the Pay Day (SACC) and consumer lease sector (FINALLY)!
The exposure draft of the National Consumer Credit Protection Amendment (Small Amount Credit Contract and Consumer Lease Reforms) Bill 2017 (the Bill) introduces a range of amendments to the Credit Act to enhance the consumer protection framework for SACCs and consumer leases. The amendments contained in the Bill are to be complemented by amendments to the Credit Regulations, which will be consulted on separately at a later date.
The new SACC and consumer leasing provisions will promote financial inclusion and reduce the risk that consumers may be unable to meet their basic needs or may default on other necessary commitments. The Bill implements the Government’s response to the Review of the Small Amount Credit Contract Laws (the Review) that was conducted by an independent panel chaired by Ms Danielle Press. The Review was publicly released in March 2016. The Government’s response to the Review was released by the Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP, on 28 November 2016.
The Draft Bill implements the Government’s response to the Review. This includes:
- imposing a cap on the total payments that can be made under a consumer lease;
- requiring small amount credit contracts (SACCs) to have equal repayments and equal payment intervals;
- removing the ability for SACC providers to charge monthly fees in respect of the residual term of a loan where a consumer fully repays the loan early;
- preventing lessors and credit assistance providers from undertaking door-to-door selling of leases at residential homes;
- introducing broad anti-avoidance protections to prevent SACC loan and consumer lease providers from circumventing the rules and protections contained in the Credit Act and the Code; and
- strengthening penalties to increase incentives for SACC providers and lessors to comply with the law.
Deadline for submissions is 3rd November 2017.
