At the high level, the greed driven attitudes of the industry are highlighted as leading to the poor practice and illegal behaviour. This was driven by high pressure sales tactics. As a result the community trust in the financial sector has been lost. Change is needed – and culture of the entities and their boards are at the heart of it.
Consumers must be treated honestly and fairly.
The Treasurer says it was a scathing assessment driven by greed and poor behaviour. The price paid was financial, but also hitting people directly. Trust needs to be restored, whilst keeping competition, and the flow of credit.
Consumers will benefit from better protection. It will raise accountability and governance, enhance regulation, and provide for effective remediation.
It does not remove the twin peaks model, (APRA and ASIC).
More than 20 referrals to the regulators for criminal charges. No individuals were named.
The report has 76 Recommendations covering a wide range of issues. The Government says its will “take action” on them all. (Does not mean full implementation).
Of note is the establishment of a new super regulator to sit across APRA and ASIC to gauge their effectiveness and clarify roles and responsibilities. The Federal Court will have extra responses to progress the referrals.
Mortgage brokers will have a best interests duty and trailing commission will be banned in due course (July 2020). In addition there is a recommendation to move to fee for service paid by customers though the Government is slowing any such change (a 3 year review in the view of the impact of competition).
There will be one account for new superannuation savers and fees to be banned from My Super accounts. Changes to the add on to insurance via a cooling off period.
A Compensation scheme of last resort.
Expansion of the BEAR cultural framework.
No changes to responsible lending – its all about policing and compliance.
Nothing on structural separation, or horizontal or vertical integration. So the industry structure remains untouched.
The legislative response seems muted, and delayed to kick the burden down the track, after the election.
So my take is some progress, but not as much as perhaps many will wish for….
ASIC says Commonwealth Financial Planning Limited (CFPL) has failed to provide ASIC with an attestation and with an acceptable Final Report from the independent expert, both of which were required under a Court Enforceable Undertaking (EU) entered into with ASIC in April 2018 in relation to CFPL’s fees for no service conduct.
As a result, CFPL is now required under the EU to immediately take all necessary steps to:
stop charging or receiving ongoing service fees from its customers; and
not enter into any new ongoing service arrangements with customers.
The EU, which commenced on 9 April 2018 and was varied on 20 December 2018, required CFPL to provide to ASIC by 31 January 2019:
a Final Report by the independent expert, Ernst & Young, on
whether CFPL had taken reasonable steps to remediate customers impacted
by CFPL’s fees for no service conduct and on the adequacy of CFPL’s
systems, processes and controls; and
to provide an attestation from a Commonwealth Bank ‘accountable
person’ under the Banking Executive Accountability Regime as to CFPL’s
remediation program, and the adequacy of CFPL’s systems, processes and
controls.
On 31 January 2019, Ernst & Young issued its second report under
the EU, identifying further concerns regarding CFPL’s remediation
program and its compliance systems and processes – including that there
remains ‘a heavy reliance’on manual controls, which ‘have a higher
inherent risk of failure due to human error or being overridden’. Ernst
& Young recommended CFPL address these issues within a further 120
days.
On the same day, CBA’s accountable person provided a written update
to ASIC on the remediation program and work being done in relation to
CFPL’s systems, processes and controls. Having regard to the concerns
raised by the independent expert and the contents of CBA’s written
update, ASIC considered that the notification did not meet ASIC’s
requirements under the EU for an acceptable attestation.
As a result, ASIC’s requirement under the EU that CFPL stop charging
or receiving ongoing service fees and not enter into any new ongoing
service arrangements, has been triggered. ASIC included this requirement
in the EU to ensure that if CFPL were not able to satisfy ASIC that the
fees for no service conduct would not be repeated, CFPL would have to
stop charging ongoing service fees so as to significantly reduce any
further risk to clients. Existing clients will continue to receive
services under their ongoing service agreements but will not be charged
by CFPL.
ASIC has received CFPL’s confirmation that it is complying with this
requirement to stop entering into new ongoing service agreements and to
cease charging existing clients fees under these agreements. This
requirement will continue until CFPL is able to satisfy ASIC that all of
the outstanding issues have been remedied. ASIC will be monitoring
CFPL’s compliance with this obligation.
ASIC has also been informed by CFPL that it is now in the process of
transitioning its ongoing service model to one whereby customers are
only charged fees after the relevant services have been provided. ASIC
will monitor CFPL’s transition to the new model.
Background
Under CFPL’s remediation program overseen by ASIC, CFPL has to date
reported to ASIC that it has paid approximately $119 million to
customers impacted by its fees for no service conduct.
In a research note published on Thursday, Morningstar analyst Chanaka Gunasekera said the most immediate near-term risk for AMP will be the royal commission’s final report, which the government will release after the market closes on Monday, 4 February; via InvestorDaily.
“We expect the report to be highly critical of AMP’s governance and conduct,” the analyst said.
“However, the key risk remains the potential for the royal commission
to recommend the dismantling of the company’s vertically integrated
wealth management business mode.
“While we think the most likely outcome is that a wholesale
separation of its advice, platform, product manufacturing and other
businesses will not be recommended, we nevertheless expect the
recommendations will lead to a reduction in the competitive advantage of
operating this vertically integrated model.”
In his interim report to the Royal Commission into Misconduct in the
Banking, Superannuation and Financial Services Industry, Commissioner
Hayne questioned vertical integration as it relates to financial advice.
“The one-stop shop has an incentive to promote the owner’s products
above others, even where they may not be ideal for the consumer,” Mr
Hayne said.
Morningstar also flagged the uncertainty around the strategy of AMP’s
new chief executive Francesco De Ferrari, who has just taken up the
reins and has been tasked with being a change agent for the group.
While the new CEO’s strategy will largely depend on Hayne’s final report, there are other risks at play.
“The political risks are heightened by the fact that a pseudo federal
election campaign has commended, with the poll expected by the middle
of May 2019,” Mr Gunasekera said.
Morningstar will review the outlook for Aussie wealth managers following the publication of the royal commission final report.
“From the perspective of banks, vertical integration always promised
the benefit of cross-selling opportunities (the opportunities for
cross-selling financial products to existing and new customers).
Evidence about platform fees and the provision of financial advice at
the royal commission posed significant questions about the aspects of
‘one-stop shop’ models in advice industry.
In particular, it invited attention to how the vertical integration
of the industry may harm clients by protecting platform entities
associated with advice licensees from competitive pressures.
The commissioner claimed that clients end up paying more for platform
services than other providers would charge for the same service.
In their response to the interim report, Australia’s largest
financial institutions acknowledged that conflicts of interest exist but
stressed that they can be managed effectively.
AMP’s submission argued that “there are many advantages of vertically
integrated structures and that no recommendation should be made by the
commission which would limit an entity’s commercial flexibility to adopt
a vertically integrated model, as and when it considers it appropriate
to do so.”
In an earlier submission to the royal commission, AMP outlined the
following benefits to consumers of a vertically integrated model:
– economies of scale which benefit consumers;
– potentially lowering the cost of advice;
– convenience of a relationship with a single financial institution;
– perceived safety in dealing with a large institution;
– having access to different forms of advice (e.g. phone, on-line, face to face);
– having trust in the institution; and
– that large institutions
stand behind the advice that authorised representatives provide to
customers and have the capacity to do so
The office of the Treasurer has revealed that the final report will not be released on Friday.
According to the release, the Australian Government will still
receive the final report of the Royal Commission into Misconduct in the
Banking, Superannuation and Financial Services Industry on Friday 1
February 2019.
However, it will not be released publicly until 4.10pm on Monday, 4
February. Following its release, the Treasurer will hold a press
conference at Parliament House.
The interim report was released in September, when Treasurer Josh Frydenberg released the report the same day.
During his speech at the time he called the report “frank and scathing” and thanked the commissioner for his work.
He said the Royal Commission was announced last year because “the culture, conduct and the compliance of the sector is well below the standard the Australian people expect and deserve”.
APRA has provided a justifying summary of their actions relating to home lending regulation, but warns that “many of the underlying structural risks associated with high household debt remain and will do so for some time”.
Despite this, they have chosen to keep the countercyclical capital buffer at zero. Housing credit growth is slowing, but there is nothing in this document to suggest APRA intends to loosen the requirements relating to home lending further – (unlike some of the commentators have been suggesting they should reduce the 7% floor rate).
So, as credit availability drives home prices, as we recently discussed, and underwriting is now in a new normal, we should expect more home price falls ahead. We discussed this is our recent video. And this before the Royal Commission reports!
The Australian Prudential
Regulation Authority (APRA) has announced its decision to keep the
countercyclical capital buffer (CCyB) for authorised deposit-taking
institutions (ADIs) on hold at zero per cent.
The CCyB is an additional amount of capital that APRA can require
ADIs to hold at certain points in the economic cycle to bolster the resilience
of the banking sector during periods of heightened systemic risk. APRA reviews
the buffer quarterly. It has been set at zero per cent of risk-weighted assets since
it was introduced in 2016.
In its annual information paper on the CCyB released today, APRA
outlined the core economic indicators that contributed to the decision,
including:
moderate growth in housing and business credit over 2018;
a decline in higher-risk categories of new housing lending, including interest-only loans, investor loans and lending at high loan-to-value ratio (LVR) levels; and
continued strengthening in ADIs’ capital positions as they move to implement the requirements of “unquestionably strong” capital ratios.
Also influencing APRA’s judgement that a zero per cent CCyB
setting remained appropriate has been the impact of measures that APRA has
taken since 2014 to address systemic risks related to residential mortgage
lending standards.
In a separate but related information paper also released today,
APRA detailed its objectives for its interventions in the residential mortgage
lending market in recent years, which were aimed at reinforcing sound mortgage
lending standards and increasing the resilience of the banking sector in the
face of heightened risks. These risks included an environment of rising
household debt, subdued wage growth, rising house prices, and an erosion of
bank lending standards at a time of historically low interest rates. Concerned
that the banking sector may be increasing its vulnerability to future shocks,
APRA’s response was to undertake a program of work to strengthen and embed
sound lending policies and practices, particularly in relation to borrower
serviceability, supported by temporary benchmarks to incentivise lenders to
moderate the growth in lending to investors and the volume of interest-only
lending.
Some of the key findings within the paper include:
ADIs have lifted the quality of their lending standards, with improvements in policies and practices across the industry;
During the period in which the adjustments were occurring (2015-2018), the growth in total credit for housing was stable;
The composition of credit for housing, however, changed notably: the rate of growth of lending to investors fell considerably, and the proportion of loans written on an interest only basis roughly halved (although, given the high starting point, one in five loans is still made on an interest-only basis);
Although APRA did not introduce measures to specifically target lending with high loan-to-value (LVR) ratios, there has been a moderation in high LVR lending in recent years;
Initially, ADIs sought to adjust lending practices without resorting to interest rate increases. Ultimately, however, interest rates were used to help manage demand for credit. The pricing differential that has emerged between owner-occupied and investor loans, and between amortising and interest-only loans, is often seen to be a product of the APRA benchmarks, but is also reflective of changes to capital requirements that will likely see differential pricing for higher risk lending continue into the future; and
APRA’s actions revealed a number of system and data deficiencies within ADIs that constrained their ability to adjust their practices. In addition, smaller ADIs tended to find it more difficult to manage quantitative-based constraints. That said, the period in which the benchmarks were in place saw small ADIs increase their market share slightly, partly reflecting APRA’s approach, which provided more flexibility for smaller ADIs.
Chairman Wayne Byres said that after the announcement of the
removal of the investor and interest-only benchmarks last year, it was
appropriate for APRA to review the impact of its regulatory actions, and
reflect on whether their objectives had been achieved.
“APRA could have chosen to utilise the countercyclical capital
buffer as a means of building resilience in the banking system. However, APRA
took the view that the better course of action was to address, through targeted
measures, the underlying concern – the erosion in lending standards driven by
strong competitive pressures amongst housing lenders.
“APRA’s assessment is that, collectively, its interventions
achieved the necessary objective of strengthening lending standards and
reducing a build-up of systemic risk in residential mortgage lending. The
review provides some valuable insights on the impact of the measures, which
have necessarily involved some trade-offs and judgement in the process of
strengthening the resilience of the banking sector.
“Importantly, while the temporary lending benchmarks are being
removed, the changes we have made to lift lending standards are designed to be
permanent, continuing to support the resilience of the banking system and
ultimately the protection of bank deposits,” Mr Byres said.
In conjunction with the other agencies on the Council of Financial
Regulators, APRA will continue to closely monitor economic conditions, and will
adjust the CCyB if future circumstances warrant it. Separately, APRA is also
considering setting the buffer at a non-zero default rate as part of its
ongoing review of the ADI capital framework.
The countercyclical capital buffer information paper, and the
review of APRA’s prudential measures for residential mortgage lending
risks can be viewed on the APRA website at https://www.apra.gov.au/information-papers-released-apra.
Central Banking Publications has
named the Bank Financial Strength Dashboard as ‘Initiative of the Year’ in its
annual awards.
In announcing the award, Central Banking commented that very few
central banks have opened up their financial system to public scrutiny to quite
the same level as the Reserve Bank of New Zealand.
They said that by revealing key
metrics on the banking sector in a visual format that can be taken in at a glance,
the Reserve Bank has hit on a simple method of boosting discipline among banks.
Reserve Bank Governor Adrian Orr
said the award was a great honour.
“We aspire to be a ‘Great Team, Best
Central Bank’ and the award recognises a significant step towards that goal,”
Mr Orr said.
“Awareness among consumers and
investors is an important aspect of ensuring a sound financial system. The Dashboard
is designed to make it easy to access and understand the financial position of
New Zealand banks. By keeping the public informed about risks to the sector,
banks themselves are held to greater market discipline.
“The Dashboard
has proven very popular, with more than 10,000 visits per quarter since its
launch and we believe this has significantly broadened the audience for
prudential disclosures.
“It is the result of huge effort and
dedication from many people in our organisation and the sector at large. I
congratulate them all and encourage people to use the Dashboard
when making banking decisions,” Mr Orr said.
Background
Central Banking Publications is a
financial publisher owned by Incisive Media and specialising in public policy
and financial markets, with emphasis on central banks, international financial
institutions and financial market infrastructure and regulation.
Central Banking Publications was
founded in 1990, and makes a number of annual awards to central banks and
market participants over a range of categories. This is the sixth year of the
awards.
The Reserve Bank previously won the
‘Initiative of the year’ award in 2016 for its enterprise risk management
system. It has also won ‘Central Bank of the Year’ in 2015 and Reserve Bank
senior adviser Leo Krippner won the award for ‘Economics in Central Banking’ in
2017.
Judging was by the Central Banking
Awards Committee, which is made up of the Central Banking Editorial Team and
Editorial Advisory Board, comprising former senior central bank governors from
around the world.
The awards will be presented at a gala dinner in
London on 13 March.
I discussed the Treasurer’s comments today, that the banks should be
lending more, on ABC News 24. It came directly after a package on his
announcement.
Could new innovators create a wave of disruption in the banking sector? APRA’s new rules provides an on-ramp and players are already appearing. The high penetration of mobile devices offers potential, perhaps. This from Investor Daily.
On Tuesday (18 December), the prudential regulator announced that
Xinja Bank Limited has been officially authorised as a restricted
deposit-taking institution (RADI).
Xinja is only the second Australian neobank to receive this status.
Volt Bank was granted a RADI in May, literally days after APRA finalised
the framework, which was created in response to the government’s push
for greater innovation and new entrants to the banking industry.
However, as its name suggests, a restricted ADI licence has
significant limitations. A RADI is really a stepping stone on the
journey to acquiring a full banking licence. It allows neobanks like
Xinja and Volt to conduct limited banking capabilities for a maximum
period of two years while they develop their capabilities and resources.
It also gives them time to raise the significant levels of capital
required to meet APRA’s demands for a full banking licence.
RADI’s must hold a minimum $3 million in capital, or 20 per cent of
adjusted assets, and can only hold $2 million worth of customer
deposits. When you consider that Australia’s largest bank, CBA, holds
more than $150 billion in customer deposits, you get an idea of the
competitive dynamics at play here.
However, the royal commission has severely damaged the reputations of
the incumbent banks like CBA and customers are arguably more open to
alternative offerings. Neobanks like Volt and Xinja could be poised to
capture a decent share of the banking sector – provided they have their
ducks in a row.
Volt, led by former NAB and Barclays executive Steve Weston, is
arguably the frontrunner in the race to obtain the much-coveted full
banking licence. The speed at which Volt was able to secure a RADI is
worth noting. Investor Daily understands that the group has been working
tirelessly to secure a banking licence as soon as possible.
The word on the street is that Volt could be given full ADI status by
the end of the year after it brought in KPMG’s corporate finance team
to facilitate a capital raise of around $40 million.
Anyone looking to make a bet on whether or not a brand-new challenger
bank can succeed in a market as oligopolistic at Australia’s needs to
consider two things: how willing customers are to try them out and if
they have succeeded in other markets.
The customer demand is clearly there. The royal commission has
provided the perfect platform for neo-banks tell their story, which is
the antithesis of what we heard from the banks during the Hayne inquiry.
A quick look at Volt’s website shows the bank is tapping directly
into the complaints of Australian banking customers and addressing them
head-on.
“We’ll always give you honest recommendations to protect your money and your data,” the company promises.
“We’ll remove speed bumps and will use the best available tech to make things easy and simple.
“We’ll suggest ways to save you time and money, both when you borrow and when you spend.”
Where incumbents have been slammed for predatory lending tactics and
high credit card fees, neobanks are looking at ways to harness
technology to provide a disciplined approach to lending, saving,
spending and investing money. Responsibility is high on their agenda.
I’ve heard that one potential Volt Bank feature will allow customers to
set parameters that lock them out of their account for a 24-hour period
if they know they’ll be in a situation where spending could get out of
control, like a pub or casino.
Challenger banks have made significant inroads in the UK, which is
always a good market to follow for clues about what will happen in
Australia. Our British cousins were a few years ahead of us on mortgage
reform, macro prudential measures and the rise of the neobank.
Groups like Aldermore, Atom Bank, Metro Bank and Monzo have cropped
up since the GFC. Metro Bank launched in 2010, when the shocks of the
financial crisis were still being felt by many, and became the first new
‘high street’ bank to launch in Great Britain in over 100 years.
From a standing start less than a decade ago, the bank has grown
customer deposits to over £11.7 billion ($20.6 billion) and recorded
£16.4 billion ($28.8 billion) in asset in FY17.
While Metro Bank competes directly with the UK’s high street
incumbents like HSBC and Santander, Australia’s neo-banks will offer a
completely digital service.
With more and more Australians using their smartphone for everyday
banking, a simplified customer-friendly approach to financial services
could be the winning ticket for groups like Volt and Xinja. Particularly
as the majors face the challenging task of transforming from large,
slow-moving machines to nimble, more efficient operators.
The Australian Prudential Regulation Authority’s (APRA) macro-prudential easing on interest-only residential mortgages is unlikely to meaningfully affect loan growth, as tighter underwriting standards have become the most effective constraint on riskier types of lending, says Fitch Ratings.
The restriction that interest-only loans cannot exceed 30% of new mortgages, which APRA will remove from 1 January 2019 for most banks, was put in place in March 2017 as part of the regulator’s efforts to contain banking-sector risk amid rising house prices and high and increasing household debt. The cap initially had a strong impact, but banks have collectively been operating well below the limit over the previous year due to stronger underwriting standards. This partly reflects the regulatory focus on risk control and mortgage underwriting – with APRA strengthening serviceability testing, for example – while banks have also become more cautious as market conditions have toughened.
The benchmark will be removed for banks that have provided assurances on
maintaining the strength of their underwriting standards, which was
also a requirement for the removal of a cap on investor loan growth in
April 2018. Most banks have provided these assurances.
Some
banks could take advantage of the cap removal to gain market share in a
slow credit-growth environment, but we expect no more than a small
uptick in overall interest-only lending. Lending standards should
continue to curb the pace at which interest-only loans are made
available by banks. The weak housing market, especially in Sydney and
Melbourne, is also a headwind to interest-only lending, as it will
dampen investor demand and speculative buying. We forecast nationwide
house prices to drop by 5% yoy in 2019.
Fitch expects Australian
banks to continue tightening control frameworks and underwriting
standards, especially around expense testing and income verification,
which should support the quality of new mortgages. APRA plans to review
banks’ risk controls and interest-only lending as part of a broader
assessment of lending standards next year.
The interest-only
lending cap is the last macro-prudential measure outstanding. Fitch
maintains a negative outlook on Australia’s banking sector, as bank
returns are likely to fall further in the near term on slowing mortgage
credit growth – especially in the residential mortgage segment – further
remediation and compliance costs associated with inquiries into the
financial sector, higher wholesale funding costs and rising
loan-impairment charges.
