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.
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.
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.
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.
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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Note that the detailed results from our surveys and analysis are made available to our paying clients.
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.
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.
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.
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!
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 earnersof 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 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.