Industry insiders have revealed why banks are distancing themselves from wealth management and how their actions will reshape the Australian financial services sector; via InvestorDaily.
There
are a number of reasons why the big four have decided, to varying
degrees, to put a ‘for sale’ sign on their wealth management
businesses.
Some major bank chief executives have run a ruler
over their advice businesses and seen poorly performing divisions that
just don’t provide enough margin for the group’s bottom line.
Others,
like Westpac CEO Brian Hartzer, have seen the “writing on the wall” and
the mountain of increasing compliance that must be scaled to make
advice operational, let alone turn a profit.
But it may also have
been a strategic play based on negative sentiment, bad press and the
misguided belief that commissioner Hayne would propose an end to
vertically integrated wealth models.
“What
it looks like the banks have done in most cases, or in some cases, is
they’ve picked up their vertically integrated business, which consist of
advice and other products, and have looked to distance themselves from
that by either demerging or selling the wealth business,” Lifespan
Financial Planning CEO Eugene Ardino said.
Speaking exclusively
on the Investor Daily Live webcast on Wednesday (3 April), the dealer
group boss said the banks aren’t actually dismantling their conflicted
businesses – they’re selling them as bundled, vertically integrated
models where product and distribution sit under the same roof.
“That’s
not dismantling vertical integration. That’s really them trying to
distance themselves from wealth management. Whether that now goes ahead
in some cases remains to be seen,” he said.
“Perhaps what could have happened is some sort of recommendation around how to limit vertical integration or how to control it.
“The
issue you have is when you take a business that’s focused on sales and
that business takes over as the dominant force in a company that also
provides advice, then sales wins. I think that’s natural. Perhaps if
they had started there, that could have led to some moderation of
vertical integration.”
The royal commission hearings, more than
anything, were a targeted attack on the sales culture of large financial
institutions, many of which repeatedly defended their models as
profit-making businesses, often beholden to shareholders.
“In
product businesses, their job is to sell. That’s fine. There’s nothing
wrong with that. But if you’re putting an adviser hat on, there needs to
be some separation. That’s an issue of culture,” Mr Ardino said.
I
haven’t seen some of the employment contracts of the advisers from some
of the groups that got into trouble, but I would venture a guess that a
lot of their KPIs talk about new business rather than retaining
business and servicing clients.”
Fellow panellist and Thomson
Reuters APAC bureau chief Nathan Lynch said that despite Hayne’s failure
to propose banning vertical integration in wealth management, the model
will ultimately be dismantled by market forces.
“Hayne points
out that a lot of the dismantling of the vertically integrated model
comes down to the fact that it’s just not profitable. You have an
environment where vertical integration will be dismantled to some extent
by competitive forces and by technology,” he said.
“Servicing
the vast majority of client is going to become very difficult. Most
businesses are starting to pivot to the high end. I think we need to
view technology in advice as a positive, as an enabler.”
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:-
Bankruptcy and liquidation of the bank;
Bail-out, which is the injection into the bank
of the necessary capital to meet the bank’s liabilities. This is the action
which was undertaken after the 2008 GFC by governments through their Treasuries
and Central Banks bailing out the banks with taxpayers’ funds;
Bail-in, which is the injection into the bank of
the necessary capital to meet the bank’s liabilities either by the bank writing
off its liabilities to creditors or depositors or converting creditors’ loans
or deposits into shares whereby creditors and depositors take a loss on their
holdings. A bail-in is the opposite of a bail-out which involves the rescue of
a financial institution by external parties, typically governments that use
taxpayers’ money.
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:-
Hybrid Securities issued by banks;
Customer deposit accounts with banks;
Bank documentation implementing deposit
accounts.
(i) Hybrid securities
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:
Additional
Tier 1 and Tier 2 capital; or
any
other instrument.”
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;
……
The
instrument may be converted in accordance with the terms of the instrument despite:
any
Australian law or any law of a foreign country or a part of a foreign country,
other than a specified law; and
…..
The
instrument may be written off in accordance with the terms of the instrument
despite:
any
Australian law or any law of a foreign country or a part of a foreign country;
…..
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.
(ii) Deposits
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:
…..
the body
corporate has contravened a prudential requirement regulation or a prudential
standard; or
the
body corporate is likely to contravene this Act, a prudential requirement
regulation, a prudential standard or the Financial Sector (Collection of Data)
Act 2001, and such a contravention is likely to give rise to a prudential risk;
or
the
body corporate has contravened a condition or direction under this Act or the
Financial Sector (Collection of Data) Act 2001 ; or
….
(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:
….
not to repay any money on deposit or
advance;
not to
pay or transfer any amount or asset to any person, or create an obligation
(contingent or otherwise) to do so;
…..”
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. …”
(iii) Bank documentation implementing deposit accounts
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.
As both the interim and final report from your Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry
has confirmed, the good, decent, hardworking people of Australia are
under attack from their own banking system in a manner reminiscent of an
attack from a foreign invader that wants to destroy the will and
financial resources of the citizens in order to gain absolute control of
the country.
Americans, more than any other people in the world, can understand
and relate to the precarious predicament in which you now find
yourselves. The devious vices and devices of your banksters to transfer
the meager savings of the common man and woman to their own greedy
pockets have been laid bare by your Royal Commission. But just as
happened here in the United States following the report of the Financial Crisis Inquiry Commission, no concrete measures to end the domination of the banks has occurred.
Australians, like Americans, remain on the road to financial ruin at
the hands of predatory banking behemoths that are using their
concentrated money and political power to attack each and every
democratic principle that we cherish as citizens – from repealing
consumer-protection legislation to installing their own shills in
government to regulatory capture of their watchdogs to corrupting the
overall financial system that underpins the stability of our two
countries. Sadly, citizens at large do not understand that their own deposits at these mega banks are being used to accomplish these anti-democratic goals.
What has now occurred in Australia is precisely what has occurred in
America. Last year Bob Katter, MP in your House of Representatives,
introduced the Banking System Reform (Separation of Banks) Bill 2018 in
the Australian Parliament. This year, Senator Pauline Hanson introduced a
bill of the same name in the Australian Senate. The legislation is
tailored after the 1933 legislation that was passed in the United
States, the Glass-Steagall Act, to defang the banking monster that
brought on the 1929 stock market crash and ensuing depression by
separating commercial banks, which take in the deposits of risk-adverse
savers, from the globe-trotting, risk-taking, derivative-exploding
investment banks. (An unsavory group of bank shills succeeded in
repealing the Glass-Steagall legislation in the U.S. in 1999 and then
enriched themselves from the repeal. One year later the U.S. experienced
the dot.com bust and eight years after that the country experienced the
greatest financial crash since the Great Depression – what you call the
GFC or Global Financial Crisis but U.S. bank lobbyists prefer to dub
The Great Recession.)
U.S. Senator Elizabeth Warren, a Democrat, and the late Senator John McCain, a Republican, had been introducing the 21st Century Glass-Steagall Act
for the past five years in the U.S. Congress. Just like the legislation
proposed in Australia, it would have restored integrity to
deposit-taking commercial banks by separating them from the predatory
investment banks that financially incentivize their employees to fleece
unsuspecting customers while using the deposits to engage in high-risk gambles
that regularly implode. The powerful mega banks in the U.S. and their
legions of lobbyists have worked hard to prevent this legislation from
gaining momentum.
Despite the critical need for this legislation in both countries,
mainstream media has not done its share to inform and educate the public
about the pending legislation. We know this to be true in Australia
because the Royal Commission received more than 10,000 submissions from
the Australian public while the Senate’s request for public comment on
the Glass-Steagall legislation has thus far received just 350 responses.
The Senate Committee has elected to publish just a sliver of those responses.
You can submit your comments on the Australian legislation using an online form; or you can email your submission to economics.sen@aph.gov.au;
or you can mail your submission to Senate Standing Committee on
Economics, PO Box 6100, Parliament House, Canberra ACT 2600, Australia. The deadline for submissions is a week from this Friday, April 12, 2019.
In a falling property market, who still has to sell? Property expert Joe Wilkes and I discuss. We also note how the banks are targetting some of these cohorts.
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.
Fiscal outlook
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.
Domestic economic outlook
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.
Global economic outlook
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.
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.
