BFCSA Blog

Toothless regulators let bad businesses run wild The Australian 12:00am February 20, 2019 Kenneth Wiltshire Dr Kenneth Wiltshire is emeritus professor at UQ Business School   There is a clear lesson to be drawn from the Hayne banking royal commission final report: we’re not particularly good at regulation. Quite correctly, Kenneth Hayne has sheeted home the blame for most of the atrocious behaviou­r of our banks to the banks themselves. He also has the regulators in his sights. We have long had a cultural and systemic problem in our governance when it comes to regulation of industry and the community. Academic John Braithwaite identified it decades ago in his seminal work Of Manners Gentle, in which he reveal­ed the softly-softly ap­proach­ to regulation endemic to all our regulatory regimes. Faced with the spectrum available to regulators — warnings, advertising and information, to self-regulation, licensing, penalties, jail terms, or revoking of licences...

Regulators sought to cool property without modelling on price impact Sydney Morning Herald February 20, 2019 4.55pm Shane Wright   A crackdown on lending practices by the nation's key economic regulators that has contributed to the slowdown in the Sydney and Melbourne property markets was done without modelling of how it would affect house prices. As the Treasury said it was comfortable with the trend in house prices, it confirmed that a set of so-called macruprudential regulations endorsed by the Council of Financial Regulators were focused on credit growth rather than what it might do to the value of homes. The council, which includes the Reserve Bank, the Treasury and the Australian Prudential Regulation Authority, started introducing tighter regulations on bank lending to investors from 2015. This included a cap on the rate of growth in lending to property investors and caps on interest-only lending. There has been some criticism that...

Captured Coalition unleashes property locust storm Macro Business 11:00 am February 19, 2019 Leith van Onselen   In the ultimate sign of desperation, the Morrison Government has rolled-out several real estate industry lobbyists to campaign against Labor’s negative gearing and capital gains tax (CGT)reforms. From The AFR: “When you converge the royal commission and APRA regulation with a big fiscal policy change you are asking for trouble,” Mark Bouris said… The biggest lobby group in real estate, the Property Council of Australia, said the tax would curtail property as an investment option because new stock was only a small proportion of overall housing that investors can buy… One of the top house price forecasters SQM’s Louis Christopher told the roundtable that if Labor’s negative gearing changes were implemented yields on investment properties would have to rise and that would mean rents would have to increase… The extraordinary gathering of interests now...

  ASIC lending reforms ‘credit-positive’ for banks The Australian 12:00am February 19, 2019 Joyce Moullakis   The corporate regulator’s proposed changes to responsible lending guidelines would be ­“credit-positive” for Australian banks as loan quality increases, though they won’t significantly curtail the supply of credit, Moody’s Investors Service has found. Following the release of the Hayne royal commission’s final report on February 4, the Australian Securities & Investments Commission released a consultation paper seeking to give lenders greater clarity on the information they should use to verify customers’ ­financial situations. ASIC’s update to the regulatory guidance will be the first time it has been substantially changed in eight years, and comes after the widely used Household Expenditure Measure was criticised in the royal commission for understating expenses. The regulator wants to use the new guidelines to help lenders understand what it considers “reasonable steps” to verify consumer information. “The updated guidelines, if...

  After Australia’s worst two years on record, do retailers see the problem? michaelwest.com.au Feb 19, 2019 Alan Austin   Analysts warn that Australian retailers are going bust in record numbers. Seems the Australian Retailers Association has finally joined the dots and leapt on rising household costs and low wage growth as the culprit. This is a sizable shift from crying out for corporate tax cuts.  Alan Austin reports. ROGER DAVID has disappeared after 76 years. Laura Ashley collapsed after 47 years. Avon has gone after 55 years; it just seems longer. Other Australian retailers to fold in 2018 include Diana Ferrari, Gap, Esprit, Metalicus, Doughnut Time, Shoes of Prey, Toys ‘R’ Us and Babies ‘R’ Us. Those retail collapses follow the 2017 closures of Payless Shoes, Topshop and Topman Australia, Herringbone, Rhodes & Beckett, Pumpkin Patch and others. Business analytics company Illion (formerly Dun & Bradstreet), reported late last year...

The Introduction to this blogpost can be found here.1. GREED FOR SECURITISATION PROFITS SPAWNED RAMPANT PREDATORY LENDING
Predatory Lending practices in Australia have been well canvassed by Denise Brailey, Phillip Soos, and Paul Egan, including in lengthy submissions to Senate Enquiries and the current Royal Commission into Banking. Some characteristics of predatory loans are: NINJA  (No Income, No Job, No Assets) loans and ARIP (Asset Rich, Income Poor) loans were widely given as they provided loans with a higher default risk than normal to securitise. Interest only. Income stated on Loan Application Forms was fraudulently increased by banks without Borrowers’ knowledge so as to provide loans that were more likely to default. Lo-Doc and No-Doc loans were designed to fail within about 5 years. Securitisation is structured in such a way that more money is made out of defaults than with loans that are paid out before or by the due date....

Paladin cut deal with family of PNG powerbroker Australian Financial Review Feb 17, 2019 11.00pm Angus Grigg, Jonathan Shapiro, Lisa Murray   EXCLUSIVE  The family of one of PNG's most powerful politicians is directly benefiting from Paladin's $423 million worth of security contracts on Manus Island, awarded by the federal government in a closed tender. Documents released under Freedom of Information show in January last year Paladin Solutions PNG entered into an agreement with Peren Investment, a company controlled by the brothers of PNG's parliamentary speaker, Job Pomat. Mr Pomat is the local member for Manus, a key ally of Prime Minister Peter O'Neill and deputy leader of the ruling People's National Congress. His family are among those who claim traditional ownership of the land where the refugees are being housed. The agreement, for local employment and the provision of other services, came just a month after landowners blockaded the refugee...

'Deep-rooted problems': PwC, KPMG, EY, Deloitte face 'serious' audit market review Australian Financial ReviewFeb 17, 2019 11.00pm Edmund Tadros   The audit work of the big four consulting firms PwC, KPMG, EY and Deloitte faces renewed scrutiny after a parliamentary committee expressed "ongoing concern" about the "deep-rooted problems in the audit market" and flagged a "serious review". The joint committee on corporations and financial services wrote that it has been "concerned for some years about audit quality" and asked the Australian Securities and Investments Commission to develop a new way to measure audit quality that produced results that are comparable over time. The committee, in an oversight report published late Friday, also concluded there should be a "serious review" of the audit market that explored issues such as the "market dominance and conflicts of interest arising from the range of other activities also conducted" by the consulting arms of the big...

Apartments casting a shadow over the Australian economy The Australian 7:16am February 18, 2019 Alan Kohler   According to the ABS there are 225,221 apartments under construction in Australia, or at least there were last September, which is the most recent data available. Going by the building approvals data it looks the average value of those dwellings is around $400,000, which sounds about right, so there is a bit less than $100 billion worth of apartments in total being built. More than half of them — 135,000 — are in Sydney and Melbourne. Most, if not all of them, were sold off the plan. Not many developers can afford to fund a block of apartments on spec, and financiers want deposits to have been paid before lending the money. Deposits are typically 10 per cent. Sydney dwelling prices, on average, have now fallen 11.1 per cent; some places more, some less....

Interest-only loans worth $230 billion 'trap' 650,000, warns Morgan Stanley Australian Financial Review Feb 15, 2019 6.00pm Duncan Hughes   About 650,000 borrowers with loans totalling around $230 billion are 'trapped' in their interest-only loans and could struggle to refinance, forcing many to sell into already deteriorating property markets, according to investment bank Morgan Stanley. Borrowers will need to extend the interest-only period, switch to a principal and interest loan or find a buyer for their property as their low rate terms expire, warns the analysis, which was done in conjunction with AlphaWise, a customised researcher for hedge funds and finance companies. "Almost half of interest-only borrowers are 'trapped'," the analysis warns. "These households appear high risk on a variety of metrics, and we expect added selling pressure on the housing market when their interest-only periods expire in the next two years." The warning came as ratings agency Standard & Poors...

S&P says housing biggest risk for banks as Fitch downgrades NAB Australian Financial Review Feb 15, 2019 4.45pm James Eyers   The main risk facing banks is the housing downturn and not the banking royal commission, which will make lenders cautious but have no lasting impact on reputations or funding costs, credit experts say. "We see a scenario where the rapid unwind [of housing] is the most plausible scenario for what can go wrong for banks in Australia," S&P's director of financial institutions ratings, Sharad Jain, said. "We think house prices will continue to slide down, which is partly about momentum, and partly a realisation as it gets played out in media repeatedly that house prices are overvalued and in a correction phase. "But at the same time, we think that the risk of a harsh correction ... remains relatively low even though it is elevated by historical standards." S&P Global...

ASIC eyes 'extremely harsh' sanctions against banks Australian Financial Review Feb 15, 2019 2.25pm John Kehoe   The corporate regulator's chief prosecutor, Daniel Crennan, QC, has warned that the government has empowered him to pursue "extremely harsh civil penalties and criminal sanctions against banks, their executives and others" after the Senate passed tough new sanctions for white-collar offences. Corporate executives would face maximum jail terms of 15 years for criminal offences and companies be liable for fines of up to $525 million per civil violation, after the Morrison government agreed to Labor's amendments to toughen the Coalition's bill on Thursday night. Mr Crennan, an ASIC deputy chairman, said the passage of the penalties bill through the Senate was a very significant step for the Australian Securities and Investments Commission's enforcement capabilities when corporate laws had been breached. Daniel Crennan, QC, deputy chairman at the Australian Securities and Investments Commission: "Without this...

Class action over cladding The Australian 12:00am February 16, 2019 Ben Butler, Ben Wilmot   A landmark class action against the importer and manufacturer of potentially deadly building cladding could result in hundreds of millions of dollars in compensation for apartment tower owners, its backers say. The lawsuit, filed in the Federal Court by Sydney firm William Roberts Lawyers and bankrolled by listed litigation giant IMF Bentham, targets the Sydney-based importer of Alucobond, Halifax Vogel Group, and its German manufacturer, 3A Composites. But more importers and manufacturers of other similar products could also be targeted by similar lawsuits, William Roberts principal Bill Petrovski told The Weekend Australian. “We anticipate that we will be able to launch action and get compensation for other products and other manufacturers,” he said. The move came as new figures revealed the extent of the problem was growing as state authorities undertake more invest­igations into problem towers....

In September 2018 I sent a 20 page Report to the Royal Commission into Banking. It’s not that I expected anyone would take action on the issues I covered - the Terms of Reference were limited, and it was clear they weren’t going to go near the issues I raised.  However, I wanted to summarise my findings of the last 14 years, and setting myself the goal of doing this in time to submit to the RC was the motivation I needed to finish the task.Now that it’s finished, I can leave it to sit with the other 10,000+ RC submissions that none of us have access to - or I can make my Report available for those who don’t yet understand the issues I discuss.  So with Christmas over, travels behind me, and the major project of my son’s 80 page 21st Birthday Photo Album just completed I thought I...

ASIC wants banks to apply new lending buffers Australian Financial Review Feb 14, 2019 4.01pm James Eyers   The corporate regulator has indicated in new prescriptive lending guidance that the controversial household expenditure measure is too low and not an appropriate estimate of loan applicants' living expenses. A highly anticipated update to Regulatory Guide 209 was put on hold pending the final report of the banking royal commission, which did not, as feared, prevent banks using the HEM. However, the commissioner suggested its use was not a sufficient quality check on borrowers' financial position — and it appears the Australian Securities and Investment Commission now agrees. While retaining a flexible and risk-based approach, ASIC said it wanted to insert a clause in its regulatory guide stating: "Benchmarks can be useful as a tool to test the plausibility of consumer-provided information, but do not give a positive confirmation." Lawyers welcomed the update,...

It’s unanimous: Economists’ poll says we can fix the banks. But that doesn’t mean we will The ConversationFebruary 14, 2019 6.17am AEDT Gigi Foster, Professor, School of Economics, UNSW Paul Frijters, Co-Director, Wellbeing Program, London School of Economics and Political Science   After three years and 35 polls, the Economic Society of Australia has received its first-ever unanimous response to a survey question. It asked just over 50 of Australia’s leading economists to respond to this statement: There is no way to significantly increase the degree to which Australian retail banks act in the interests of consumers. Twenty did. All rejected the proposition that nothing could be done. But there was widespread disagreement about what should be done. Most thought that regulations should be tightened and better enforced. Mathew Butlin’s comments typify this “more regulation” approach: The incentive structures for bank staff, from the top down, play a key role in...

Banks to face a new inquiry in three years Australian Financial Review Feb 13, 2019 10.30pm John Kehoe, Phillip Coorey   The federal government has told the banks and regulators there will be a fresh industry inquiry in three years to ensure they have improved their behaviour and are treating customers better. Treasurer Josh Frydenberg wrote this week to the heads of the Australian Banking Association, Australian Securities and Investments Commission and Australian Prudential Regulation Authority directing them to swiftly implement dozens of Commissioner Kenneth Hayne's recommendations that pertain to their bodies. "The government is committed to seeing lasting change within the financial sector," Mr Frydenberg wrote. As he did the day the royal commission findings were released, Mr Frydenberg also urged ASIC to move swiftly with recommended civil and criminal prosecutions for up to 24 companies or individuals. He told ASIC to follow Commissioner Hayne's recommendation to shift to a...

AMP faces $1.5bn bill to buy out planners The Australian 12:00am February 14, 2019 Michael Roddan   EXCLUSIVE  Royal commission recommendations to clamp down on recurring financial advice fees are likely to accelerate the exit of AMP-aligned advisers from the industry, forcing the wealth manager to become the buyer of last resort for their businesses. The prospect that royal commissioner Kenneth Hayne would propose a ban on grandfathered trailing commissions had already stoked concerns that a number of AMP licensees and authorised advisers would sell up under their so-called buyer-of-last-resort agreement, potentially ramping up the wealth manager’s liability. The agreements oblige AMP to purchase a licensee’s business at four times recurring revenue. While grandfathered commissions are believed to make up less than 20 per cent of adviser revenue, Mr Hayne’s proposals to limit the ability of companies to deduct fees on super products will further reduce the value of many advice...

CBA can't stop charging fees, scrambles for fix Australian Financial Review Feb 13, 2019 11.00pm James Frost   Commonwealth Bank has admitted it is unable to stop charging fees to investors as ordered by the Australian Securities and Investments Commission as the bank works feverishly behind the scenes to meet the demands of the regulator. Ten days ago, on the day the final report of the Hayne royal commission was released, ASIC ordered CBA to stop charging financial advice customers ongoing service fees and prohibited it from entering into new ongoing service arrangements. However the bank has been unable to switch the fees off. A spokesman for the bank said any fees deducted by the bank in breach of the order would be warehoused and customers would be refunded fees back to February 1. The bank says it needs third parties including super funds and platform providers to stop charging its...

APRA's Wayne Byres tells banks to take carriage of Hayne recommendations Australian Financial Review Feb 13, 2019 2.15pm James Eyers   Australian Prudential Regulation Authority chairman Wayne Byres said banks and their boards of directors have ultimate responsibility for cementing the Hayne royal commission recommendations and can't rely on regulators to stipulate the way forward on culture. While prudential regulation will ramp up focus on risk culture in coming years, Mr Byres said a clear lesson from the royal commission was that primary responsibility for misconduct rested with boards and senior management of banks and "the quality of management, and the risk culture that pervades an institution, can't be prescribed". "Good policies and frameworks may be established, but without the right culture, they are no guarantee of good practice," he told a meeting of global prudential supervisors in Sydney on Wednesday morning. "And practice is what counts." The comments come as...