ASIC welcomes approval of new laws to protect financial service consumers

ASIC has welcomed the passage of key financial services reforms contained in the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) legislation introducing:

  • a design and distribution obligations regime for financial services firms; and
  • a product intervention power for ASIC

The design and distribution obligations will bring accountability for issuers and distributors to design, market and distribute financial and credit products that meet consumer needs. Phased in over two years, this will require issuers to identify in advance the consumers for whom their products are appropriate, and direct distribution to that target market.

The product intervention power will strengthen ASIC’s consumer protection toolkit by equipping it with the power to intervene where there is a risk of significant consumer detriment. To take effect immediately, this will better enable ASIC to prevent or mitigate significant harms to consumers.

These reforms were recommended by the Financial System Inquiry in 2014 and represent a fundamental shift away from relying predominantly on disclosure to drive good consumer outcomes.  

ASIC Chair James Shipton said the reforms were a critical factor in the development of a financial services industry in which consumers could feel confident placing their trust.   

‘These new powers will enable ASIC to take broader, more proactive action to improve standards and achieve fairer consumer outcomes in the financial services sector. This will be a significant boost for ASIC in achieving its vision of a fair, strong and efficient financial system for all Australians,’ he said.

‘This will also provide invaluable assistance to ASIC as we all seek to rebuild the community’s trust in our banking and broader wealth management industries. And we note the overwhelming level of support this attracted from across the Parliament.’  

Mr Shipton also welcomed the amendments to the original legislation, which extended the reach of these reforms, providing a comprehensive framework of protection for most consumer financial products. It will also empower ASIC to intervene in relation to a wider range of products where ASIC identifies a risk of significant detriment to consumers.

How Complex Is Banking Change Really?

In the final part of my discussion with Ex-ANZ Director John Dahlsen, ahead of the closing date for submissions into the Senate Inquiry into Banking Structural Separation, we discussed the core questions, and what barriers really need to be overcome.

To make a submission, check out this link:

http://cecaust.com.au/Pass-Glass-Steagall/

There you will find a guide to make a submission, and some pointers to help develop your input.

See our earlier discussions

Structure is a dirty word“, “Beyond The Royal Commission” and
More on Bank Separation“.

US regulatory proposal would limit effects of large bank failures

Moody’s says on 2 April, the US Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency proposed a rule that would require US global systemically important bank (GSIB) holding companies and advanced-approaches banking organizations1 to hold additional capital against investments in total loss absorbing capacity (TLAC) debt. The additional capital required for investments in TLAC debt would reduce interconnectedness between large banking organizations and the systemic effect of a GSIB’s failure, a credit positive for the US banking system.

The credit-positive proposal would require companies to deduct from their regulatory capital any investment in their own regulatory capital instrument which includes TLAC debt, any investment in another financial institution’s regulatory capital instrument, and investments in unconsolidated financial institutions’ capital instruments that would qualify as regulatory capital if issued by the banking organization itself (subject to a certain threshold). The deductions intend to discourage banks from investing in the regulatory capital instruments of another bank and improve the largest banks’ resiliency to stress and ensure a more efficient bank resolution process.

The proposal also includes additional required disclosures about TLAC debt in bank holding companies’ public regulatory filings, which would increase transparency.

The TLAC rules were first proposed in 2015 and finalized in December of 2016. However, in 2016 when the TLAC rules were finalized, regulators needed more time to determine the rule’s regulatory capital treatment for investments in certain debt instruments such as TLAC issued by bank holding companies.

NAB predicts 2019 rate cuts

A big four bank has confirmed it is preparing for two rate cuts before the end of 2019, via Australian Broker.

Speaking at the NAB Budget Breakfast yesterday, NAB chief economist for markets, Ivan Colhoun, noted that the RBA has likely been stumped by the combination of the decreasing unemployment rate and slackening of GDP growth.

“The lower unemployment would say do nothing, but the slower GDP growth would say cut rates,” Colhoun explained.

That said, he pointed out the significant change in the final paragraph of the reserve bank’s announcement earlier this week which said the RBA is now “monitoring” monetary policies, a notable shift from the last several years.

According to Calhoun, “[NAB] thinks they will cut interest rates twice in the second half of this year.”

Jonathan Pain, independent economist and author with decades of international finance experience, also weighed in on the matter.

“I agree with NAB that the RBA is going to cut rates. I think they’re going to be very aggressive this time around,” he said.

“If we didn’t have this election in May, I think the RBA would already have been cutting rates. The final sentence of the reserve bank statement opened the door for a rate cut at their next meeting, in my view.”

However, there was a key difference in the predictions of the two financial leaders.

Pain said, “NAB is going for two rate cuts, from 1.5% to 1%. I’m going for four rate cuts by the end of this cycle.” The economist sees the rate settling at 0.5% in two years’ time.

The divergence stems from the two leaders’ views on what banks would do with a cut in rates.

After clarifying that he’s not personally involved in making the decision, Colhoun stated that he “expects rate cuts to be passed on” to NAB customers as long as “funding pressures stay lower.”

Pain disagreed stating, “Banks always want to protect their margins.”

“One of the reasons I’m going for a 1% cut in rates in the next two years is because I don’t think the banks will fully pass it on. I think they’ll pass on about 60-65%.

“Does it matter? Absolutely. The majority of mortgages in Australia are of a variable rate nature, so the cash rate that the reserve bank sets is very important for us from a business perspective and from a mortgage prospective,” he concluded.

Mortgage Stress Builds Again as Debt Grows

Digital Finance Analytics (DFA) has released the March 2019 mortgage stress and default analysis update.  It’s the continuing story of pressure on households as ongoing wages growth is not offsetting costs of living, and mortgage repayments and total debt continues to rise.

Note: Later in the month we will release mapping showing the percentage of households in stress across postcodes (as opposed to the number estimated to be in stress). We generally avoid this data view because a raw percentage calculation can easily be distorted by postcodes with low counts of borrowing household, but then we have had several requests for this alternative view.

The latest RBA data on household debt to income to December rose to 189.6[1], and remains highly elevated. Plus, the housing debt ratio continues to climb to a new record of 140.2, according to the RBA.  This shows that household debt to income is still increasing.

This is confirmed by the latest financial aggregates recently released by the RBA, with owner occupied lending still growing significantly faster than inflation at 5.9%.

This high debt level, in the context of broader financial pressure, helps to explain the fact that mortgage stress continues to rise. Across Australia, more than 1,044,666 households are estimated to be now in mortgage stress (last month 1,036,214), another new record. This equates to more than 31.6% of owner-occupied borrowing households. In addition, more than 27,775 of these are in severe stress. We estimate that more than 66,700 households’ risk 30-day default in the next 12 months, up 800 from last month. This is as the impact of flat wages growth, rising living costs and higher real mortgage rates hit home.  Bank losses are likely to rise a little ahead.

Our analysis uses the DFA core market model which combines information from our 52,000 household surveys, public data from the RBA, ABS and APRA; and private data from lenders and aggregators. The data is current to the end of March 2019. We analyse household cash flow based on real incomes, outgoings and mortgage repayments, rather than using an arbitrary 30% of income.

Households are defined as “stressed” when net income (or cash flow) does not cover ongoing costs. They may or may not have access to other available assets, and some have paid ahead, but households in mild stress have little leeway in their cash flows, whereas those in severe stress are unable to meet repayments from current income. In both cases, households manage this deficit by cutting back on spending, putting more on credit cards and seeking to refinance, restructure or sell their home.  Those in severe stress are more likely to be seeking hardship assistance and are often forced to sell.

The forces continue to build, despite reassurances that household finances are fine. This is because we continue to see an accumulation of larger mortgages compared to income whilst costs are rising, and incomes remain static.  Housing credit growth is running significantly faster than incomes and inflation and continued rises in living costs – notably child care, school fees and electricity prices are causing significant pain. Many households are depleting their savings to support their finances.  

Probability of default extends our mortgage stress analysis by overlaying economic indicators such as employment, future wage growth and cpi changes.  Our Core Market Model also examines the potential of portfolio risk of loss in basis point and value terms. Losses are likely to be higher among more affluent households, contrary to the popular belief that affluent households are well protected.  This is shown in the segment analysis below:

Stress by the numbers.

Regional analysis shows that NSW has 286,890 households in stress (286,469 last month), VIC 283,753 (278,091 last month), QLD 185,282 (185,424 last month) and WA has 141,199 (139,142 last month). The probability of default over the next 12 months rose, with around 12,600 in WA, around 12,400 in QLD, 16,700 in VIC and 17,700 in NSW.  

The largest financial losses relating to bank write-offs reside in NSW ($1.1 billion) from Owner Occupied borrowers) and VIC ($1.49 billion) from Owner Occupied Borrowers, though losses are likely to be highest in WA at 3.1 basis points, which equates to $1,045 million from Owner Occupied borrowers. 

A fuller regional breakdown is set out below.

Here are the top postcodes sorted by number of households in mortgage stress.

Handling Mortgage Stress

Households who are in financial difficulty should not ignore the signs. Though many do. And trying to refinance to solve the problem often ends up just postponing the inevitable. 

We think there are some simple steps households can take:

Step one is to draw up a budget, so you can see where the money is coming and going. From our research, only half of households have any budget. This means you can then make decisions about what is most important, and what can be foregone. Select and prioritise.

Step two is to talk with your lender, as they have a legal obligation to assist is case of hardship. Yet many households avoid having that conversation, hoping the problem will cure itself. I have to say, in the current low-income growth, high cost environment, that is unlikely.  And remember rates are likely to rise at some point.

Step three. Work out what would happen if mortgage rates rose by say half or one percent. Pass that across your budget and examine the impact. Then you will really know where you stand. Then plan accordingly.


[1] RBA E2 Household Finances – Selected Ratios December 2018

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Trade Surplus Climbs to $4.8bn, a Record High

This is all about the Iron Ore price, thanks to Brazil. Fortunate yes, planned no!

The ABS reported that

  • In trend terms, the balance on goods and services was a surplus of $4,348m in February 2019, an increase of $395m on the surplus in January 2019.
  • In seasonally adjusted terms, the balance on goods and services was a surplus of $4,801m in February 2019, an increase of $450m on the surplus in January 2019.

This from Westpac.

The trade surplus rose to $4.8bn in February, up from a revised $4.35bn.

That exceeded expectations (market median $3.7bn and Westpac $3.8bn).

Exports: exceeded expectations, +0.2% vs a forecast -0.9%. The key surprise, the expected pull-back in gold failed to materialise.

Imports: were softer than anticipated, -1.1% vs a forecast +1.1%

Additional detail

Export earnings have been boosted by higher commodity prices, particularly for coal and iron ore. In February, metal ore export earnings (including iron ore) jumped by $1.0bn to $9.6bn, a record high – as anticipated. The spot iron ore price soared to US$85/t in the month as global supply was dented by the tailings dam tragedy in Brazil. Coal exports fell sharply, down $0.8bn on weaker volumes. Gold exports, up $1.4bn in January, held at high levels in February, down only $140mn.

Comments

The trade balance has strengthened from a $2.9bn surplus on average in the December quarter to a $4.6bn on average surplus in the March quarter. The bulk of this improvement likely reflects higher commodity prices. The lift in prices is boosting Australia’s national income, which is flowing through to higher tax revenues – providing governments with additional fiscal flexibility, as evident in recent budget updates. However, despite this, wages growth remains sluggish.

Retail Trend Turnover Rises 0.2 per cent In February

Australian retail turnover rose 0.8 per cent in February 2019, seasonally adjusted, according to the latest Australian Bureau of Statistics (ABS) Retail Trade figures. This follows a rise of 0.1 per cent in January 2019.

The trend estimate rose 0.2% in February 2019. This follows a rise of 0.2% in January 2019, and a rise of 0.2% in December 2018. This a more reliable indicator. Compared to February 2018, the trend estimate rose 2.9 per cent, and is higher than average wages growth.

ABS Director of Quarterly Economy Wide Surveys, Ben Faulkner said: “There were improved results across most industries with rises in food retailing (0.8 per cent), department stores (3.5 per cent), household goods retailing (1.1 per cent) and clothing, footwear and personal accessory retailing (1.6 per cent). Other retailing (0.0 per cent) and cafes, restaurant and takeaway services (0.0 per cent) were relatively unchanged. The rise this month follows subdued results in December 2018 (-0.4 per cent) and January 2019 (0.1 per cent).”

In seasonally adjusted terms, there were rises in Queensland (1.4 per cent), New South Wales (0.6 per cent), Victoria (0.8 per cent), Western Australia (0.6 per cent), South Australia (0.7 per cent), the Australian Capital Territory (1.7 per cent) and the Northern Territory (1.4 per cent). There was a fall in Tasmania (-0.7 per cent).

The trend estimate for Australian retail turnover rose 0.2 per cent in February 2019, following a 0.2 per cent rise in January 2019. Compared to February 2018, the trend estimate rose 2.9 per cent.

Online retail turnover contributed 5.6 per cent to total retail turnover in original terms in February 2019, which is unchanged from January 2019. In February 2018, online retail turnover contributed 5.1 per cent to total retail.

The Never-ending Rivers Of Debt

In the latest RBA data series (E2) we get an update on household debt to income and debt to asset ratios, and they are ALL moving in the wrong direction. This is to December 2018.

The household debt to income moved higher to a new record of 189.6, and housing debt to income to a new record of 140.2.

The change in trajectory from 2014/5 is significant, as lending standards were weakened, and interest rates cut (forcing home prices higher).

The interest payments to income also rose, thanks to bigger mortgages, slightly higher interest rates, and little income growth.

But in contrast, the asset values are falling, so the asset to income ratios are falling. Housing assets in particular are dropping.

All pointing to a higher burden of debt on households. And remember only one third, or there about, have a mortgage, so in fact the TRUE ratios are much much worst. But the trends do not lie in relative terms, and by the way these are extended ratios compared with most western economies. We are drowning in rivers of debt!

Federal Budget: And Finance

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.” 

The Budget Smoke And Mirrors

The Treasurer Josh Frydenberg has given his budget speech tonight, and he said that for the first time in 12 years the federal budget has returned to surplus.

His first budget includes billions of dollars for tax cuts, major road upgrades and health care. But actually, it is due to return to surplus in the NEXT financial year, and project small surpluses in subsequent years.

He is also spending big ahead of the election, so yes this is political (and in some regards intimating Labor’s policies in places) . This is a “boots and all” approach to try and gain election ground. Reminds me of Howard and Costello!

Net debt is forecast to be $360 billion next financial year, but the Coalition is promising to eliminate it by 2030 if it retains government (if the aggressive assumptions and no slow-down occurs in that time).

But it forecasts lower wages growth, then a jump back to higher rates (why?) and the same is true of economic growth at 2.75% next year, then higher later. Plus a promise for another 1.25 million jobs in the next 5 years (what type of jobs?).

“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

The Budget forecasts surpluses in each year over the forward estimates, reaching as high as $17.8 billion in 2012-22.

But the budget recognizes a number of risks locally and internationally and is under-funding the NDIS by $3 billion in the next two years.

“The residential housing market has cooled, credit growth has eased and we are yet to see the full impact of flood and drought on the economy.”

The mantra though the speech was that the budget would restore the nation’s finances without raising taxes.

“We are reducing the debt and this interest bill, not by higher taxes, but by good financial management and growing the economy.”

The truth is the budget may go into surplus next year thanks to very high iron ore export prices to China. This was lucky, and is explained by supply disruption from other sources lifting prices.

He makes the point that Australia has a significant national debt which is currently costing $18 billion, and this with interest rates ultra low!

Last year the coalition had announced plans to reduce income taxes for Australians by $144 billion. Now the Treasurer said the government would deliver more than $150 billion in income tax cuts.

From 1 July 2024 taxes will be reduced from 32.5 per cent to 30 per cent for those earning between $45,000 and $200,000.

“Taxes will always be lower under the coalition,” Mr Frydenberg said, adding that small businesses will also get tax relief from the 2019 budget.

“Small business taxes have been reduced to 25 per cent and the instant asset write-off will be increased from $25,000 to $30,000 and can be used every time and asset under that amount is purchased.

“The instant asset write-off will also be expanded to businesses with a maximum turnover of $50 million.”

The coalition will also boost infrastructure spending to $100 billion over the next ten years.

Finally, the Government has matched Labor’s commitment to end a freeze on the Medicare rebate for GP visits from the first of July, as part of a $1.1 billion primary healthcare plan.