It is a common misconception by borrowers that bank lenders should be ‘happy’ to let a loan run if the borrower gets into temporary strife on the basis that there is ‘plenty of equity’ in the property.
But banks are not ‘asset lenders’. Essentially they are lending to the borrower personally and their principal reliance is on the borrower’s income to service the loan.
Banks are ‘income’ lenders at heart. Serviceability is their key requirement.
Yes, they do want the security of a sensible LVR (loan-to-value ratio) but that is only so they are protected if a meltdown happens. That is only a backstop for them.
When you understand this core motivation you will have a better chance at understanding why they want the disclosures they do.
Banks will say ‘income’ and ‘security’ are both equally important. But it is your ability to service your loan that really motivates them. As you can imagine, what they want is you paying them interest for 25 or 30 years. It’s the basis of their business. Selling you up using the security your property provides just imposes hassle and cost on them, both things they will work hard to avoid.
All the talk in the media these days is about LVRs (loan to value ratios). And that gives an outsized impression this is what home loan lending is all about.
Later this year, this media talk may well turn to “house-price-to-income” ratios. Such talk originates from regulators however, not banks.
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Knowing that your income is key helps you understand a few things.
Firstly, you can’t just walk away from a home loan. It is personal; if you get into strife and the bank sell your property the full amount outstanding is still due from you personally – even if they have sold the house and used the net proceeds to pay down the loan. If the sale didn’t cover all their costs (lawyers, real estate agents, etc.), they will still pursue you for any balance and keep adding interest to the amounts unpaid.
Secondly, even if they don’t require it, you should protect your income with some sort of income protection insurance. A bump in your life’s journey (illness?, and accident?, a family crisis?) can put you in a very tough position which could end up with a bank calling in its loan. And you might still be up-to-date on the payments, and there seems “plenty of equity” in your property.
A large number of mortgage brokers are qualified to help you with such insurance cover.
And thirdly, if you do see an issue coming up, being proactive with your lender usually helps a lot. What it signals is that you are actively planning to overcome those difficulties and banks like that in a borrower. Not fronting early sends the opposite message. Banks like a plan, don’t like borrowers who wing it or don’t think things through. Again, a professional and qualified mortgage broker can help with such planning. A professional mortgage broker will stand with you through the good and the bad. That is when you really know you have a ‘keeper’ as a broker.
This article was written for the Global Finance (GFS) website and newsletter and is here with permission.
By Gareth Vaughan
ANZ New Zealand is welcoming a victory in the High Court of Australia, the highest court in that country, for its parent in a bank fees case that is likely to have implications for New Zealand.
The Australian High Court has ruled in favour of ANZ in two appeals. Its ruling on the first appeal is that late payment fees charged by ANZ on consumer credit card accounts were not unenforceable as penalties. In the second appeal the court ruled the imposition of late payment fees did not contravene statutory prohibitions against unconscionable conduct, unjust transactions and unfair contract terms.
The Australian case over bank fees is separate, but related to the cases brought in New Zealand against bank exception fees by the Fair Play on Fees group. The New Zealand cases have been stayed pending the outcome of the Australian appeals.
"This ruling supports our view that our fees are fair, transparent and in line with industry standards. All the fees referred to are avoidable, and are not paid by the majority of our customers. Banks work hard to attract and keep their customers, and work with them to reduce their fees," an ANZ NZ spokesman told interest.co.nz.
Fair Play on Fees consists of Australian funder Litigation Lending Services, New Zealand lawyer Andrew Hooker and Australian law firm Slater & Gordon. Penalty, or exception, fees in dispute between Fair Play on Fees and the banks include credit card late payment fees, unarranged overdrafts (account out of order fees), rejected payments on deposit accounts (dishonour fees), and exceeding credit limit (over limit fees).
Fair Play on Fees' action against the banks kicked off in March 2013, with cases filed against ANZ NZ, Kiwibank, Westpac NZ and BNZ on behalf of thousands of their customers. The group also pledged to sue ASB but is yet to do so.
A Westpac NZ spokesman said his bank welcomes the clarification that the Australian decision provides on the appropriateness of bank fees and will look carefully at how the decision applies in New Zealand. A Kiwibank spokeswoman said the state owned bank had no comment given the matter is still before the Courts in New Zealand.
A BNZ spokeswoman said; "The decision is a substantial one, which we are reviewing. As the claim against BNZ is still before the courts, unfortunately we are unable to comment."
Hooker is yet to respond to requests for comment.
The Australian cases, which predate the NZ action, were funded by IMF Bentham Limited. IMF Bentham says it's considering the judgment and its implications.
ANZ Australia, not surprisingly, welcomed the court ruling.
"We are pleased with today’s decision by the High Court confirming that our late payment fees on credit cards are legitimate and fair," Fred Ohlsson, ANZ group executive for Australia, said.
"Today’s decision by Australia’s highest court brings to an end this lengthy and expensive litigation funded by IMF Bentham Limited which we have long held was without merit. This effectively puts this lengthy legal case behind us," added Ohlsson.
Here's a statement from the High Court of Australia
Today the High Court, by majority, dismissed two appeals from the Full Court of the Federal Court of Australia. The majority of the High Court held in the first appeal that late payment fees charged by the respondent ("the Bank") on consumer credit card accounts were not unenforceable as penalties, and in the second appeal that the imposition of late payment fees did not contravene statutory prohibitions against unconscionable conduct, unjust transactions and unfair contract terms.
The first appellant ("Mr Paciocco") held two consumer credit card accounts ("the accounts") with the Bank. The terms and conditions of the accounts required Mr Paciocco, following receipt of a monthly statement of account, to pay a minimum monthly repayment. If the minimum monthly repayment plus any amount due immediately was not paid within a specified time, a late payment fee was charged. The late payment fee was $35 before December 2009, and $20 thereafter. 26 late payment fees were charged to Mr Paciocco's accounts.
Mr Paciocco and the second appellant, Speedy Development Group Pty Ltd, a company controlled by Mr Paciocco, were applicants in representative proceedings commenced against the Bank in the Federal Court of Australia, in which they alleged that the late payment fees, and various other fees charged by the Bank, were unenforceable as penalties. They also claimed that the Bank engaged in unconscionable conduct under the Australian Securities and Investments Commission Act 2001 (Cth) ("ASIC Act") and the Fair Trading Act 1999 (Vic) ("FTA"), that the contracts for the accounts were made by unjust transactions under the National Credit Code (a schedule to the National Consumer Credit Protection Act 2009 (Cth)), and that the late payment fees were void as unfair terms under the ASIC Act and the FTA.
The appellants and the Bank each adduced expert evidence as to the losses suffered by the Bank upon the failure by Mr Paciocco to pay the amounts owing on the accounts by the due date. The expert retained by the appellants provided evidence of the amounts needed to restore the Bank to the position it would have been in had Mr Paciocco paid the amounts owing on time. The expert retained by the Bank provided evidence of the maximum costs that the Bank could conceivably have incurred as a result of Mr Paciocco's late payment, which included loss provision costs, regulatory capital costs, and collection costs. The primary judge held that the approach of the appellants' expert ought to be adopted and that the late payment fees were penalties because, amongst other things, they were extravagant and unconscionable in comparison with the greatest loss that could reasonably be proved. On appeal, the Full Court preferred the approach of the Bank's expert and held that the late payment fees were not penalties because, amongst other things, the legitimate interests of the Bank were affected by each of the categories of costs identified by its expert. The Full Court also rejected the statutory claims raised by the appellants, which were not considered by the primary judge.
By grant of special leave, the appellants appealed to the High Court. The majority of the High Court dismissed the first appeal, holding that the Full Court was correct to characterise the loss provision costs, regulatory capital costs and collection costs as affecting the legitimate interests of the Bank.
The fact that those categories of costs could not be recovered in an action for damages did not alter that conclusion. Further, neither the fact that the late payment fees were not genuine pre-estimates of damage nor the fact that the amounts charged were disproportionate to the actual loss suffered by itself rendered the late payment fees penalties. The High Court also dismissed the second appeal, the majority rejecting the statutory claims on their merits.
By Greg Ninness
Interest.co.nz's latest Home Loan Affordability Report shows that young couples in Auckland hoping to buy their first home will have to pay twice as much in mortgage payments as similar couples virtually anywhere else in the country.
It also shows that Auckland's sky high prices are creating a debt burden that will likely leave young Aucklanders economically disadvantaged for the rest of their lives compared to young people in other parts of the country.
The table below shows what the REINZ's lower quartile selling price of homes in all regions of the country was in June, estimates how much a young couple earning the median wage for their age might be able to save towards a deposit, and how big the mortgage would need to be to buy a home at the lower quartile price.
It also shows how much of their income they would need to set aside each week for the mortgage payments on their home.
It shows that in Auckland, the lower quartile selling price of homes sold in June was $671,500.
The median take home pay for an Auckland couple aged 25-29 who are both working full time is $1587.88 a week after tax.
Interest.co.nz estimates that if they had been able to save 20% of the net pay for four years (and earned interest on their savings at the prevailing 90 day deposit rate) they would have saved $72,458 to put towards a deposit.
That means they would need to take out a mortgage of $599,042 to buy a home at June's lower quartile price, equivalent to seven times their annual income.
That is an eyewatering amount of debt for a young couple earning average wages to take on. They would need to set aside $692.78 a week to make the mortgage payments, which would be nearly 44% of their take home pay, and that is before adding other property-related expenses such as rates, insurance and maintenance.
So how would that compare with similar young couples in other parts of the country?
Just south of the Bombay Hills in Waikato/Bay of Plenty, the lower quartile price in June was $335,900.
The median take home pay of a couple aged 25-29 is slightly lower than it is in Auckland, at $1482.75 a week.
But their mortgage payments on a lower quartile priced home would be just $310.80 a week, which is less than half as much as the Auckland couple would be paying and that would take up just 21% of their take home pay.
It's a similar story in the other major centres, with mortgage payments on a lower quartile-priced home taking up just 21% of a typical first home buying couple's take home pay in Wellington, Canterbury and Nelson/Marlborough.
It's a bit higher in Central Otago/Lakes at 33% because of the very high prices in Queenstown, but in all other regions, a typical young couple could expect to be paying out less than 20% of their take home pay to make the mortgage payments on a lower quartile-priced home.
The implications of this go well beyond the fact that it it is a lot easier for young couples outside Auckland to get into their own home than it is for those in Auckland.
Those outside of Auckland are also likely to have more financial choices open to them.
They could choose to increase the amount of their mortgage payments and pay it off sooner and still be within affordable limits.
If they did that, they would be able to start seriously saving for their retirement sooner, putting them on a better footing later in life.
Or they could keep the mortgage payments low and spend some money improving their home, which might also lift its capital value, or start building a nest egg which they could invest into other assets and diversify their holdings.
And yes, if they wanted to blow it on a flash car or a big overseas trip they could do that too.
But the point is that young people on ordinary wages outside of Auckland should be able to buy their home without excessive difficulty and still have those choices.
When it comes to financial matters, choices are good and the more options you have to choose how you manage your money, the better.
Wide ranging implications in Auckland
But young couples on average wages in Auckland won't have as many choices because so much of their income will go towards paying off their mortgage, assuming they can afford to buy their own home at all.
But it won't just be them that will be affected.
Because they'll have less disposable income, they'll have less money to spend on the good and services that their counterparts in other regions are purchasing.
And that means less money circulating in the Auckland economy, which is bad for all types of business, from retailers to manufacturers.
And it's also bad for jobs.
But there will be one group that will be creaming it more than most - the banks.
The surge in Auckland house prices and its flow on effects into the regions has been mana from heaven for them.
Banks are in the business of selling debt to people and they have been doling it out with gusto, pushing total household debt to unprecedented levels, making record profits for themselves in the process.
Property developers and real estate agents won't be doing too badly either.
The city of broken dreams?
Auckland is a city that likes to promote itself as one of the most liveable in the world, and perhaps for the bankers and property developers it is.
But for young people on average wages looking to own a home and eventually start savings towards their retirement, it could increasingly be becoming the city of broken dreams.
To read the full suite of Home Loan Affordability Reports for all regions, which include analysis of how affordable it is for people to move on to the second rung of the property ladder, click on this link.
|REINZ Lower quartile house price - June 2016||Deposit saved||
|Weekly mortgage payments||Weekly income||Mortgage payments as % of income|
By Gareth Vaughan
Set up in 2011 to help restore the public's confidence in financial markets after the meltdown of the finance company sector, the Financial Markets Authority now - almost - has its key tool finalised. And CEO Rob Everett has a simple message for those working in the financial services sector.
Basically it is to put the needs and expectations of their customers first.
The massive programme of implementing the Financial Markets Conduct Act, described by two Ministers of Commerce as a once in a generation shake-up, and by one as a new era, reaches its conclusion later this year with fund management licensing.
"At that point we have the full remit, we have the full horizon," Everett told interest.co.nz in a Double Shot interview.
"So the focus there will be on how a modern supervisory regulator influences behaviour, influences conduct, how we look at what's going on in the licensing sector so that we can target our resources properly. So for me it's about how we develop the relationship that licensing starts into a relationship with the industry, where we know we need to be looking, we know we need to exert our influence, and everyone understands what we're trying to achieve," Everett said.
"So it becomes a steady state of looking at conduct, looking at systems and controls, looking at governance. Where hopefully the legislative framework stays in place for a while [so] people can see with some consistency and stability that it's not going to change. I think that's really critical, and that we get to start moving the needle on the dial in terms of how financial services treats its customers."
Lack of trust
Everett points out that internationally there's a lack of consumer trust in the financial services sector. This follows the likes of the collapse and bailout of banks in the Global Financial Crisis, benchmark interest rate rigging scandals and conduct and pay controversies. Everett said against this backdrop it's important New Zealand's financial services sector is not complacent.
"Somewhere like New Zealand the industry can make decent money effectively by just turning up because of the competitive nature of the market," he said.
But there ought to be a "relentless" focus on the customer experience and whether financial service providers are delivering on what the customer both needs and expects.
"If the industry approaches things with that mindset my own view is that most of the rest falls into place. And some of the heavily prescriptive legislation you see in the States, for instance, shouldn't be necessary," Everett said.
"But that requires a regulator like us to be convinced that at the very top of all of those firms that's actually the mindset and that will feed down through the organisation. So for us it's that relentless focus on if things are going wrong at the ground level, which they often do, why is that, how are they reacting to it, what are they changing to make sure it doesn't happen in the future. So I think it's about an industry not being complacent about the fact that most people have to interact with financial services in some way and actually making that more of a choice."
'With some of the asset bubbles we've got now the down could be quite steep'
And against the backdrop of a red hot property market and a share market at record highs, Everett said in the good times it's crucial to focus on how customers and investors are being treated in order to survive a downturn.
"Because as a relatively new regulatory environment what we really don't want to see in a downturn is to see everyone go back and ask the same questions they were asking five, six years ago about how could this have happened. So people need to accept that markets go up and down and that's a normal part of the investment cycle. And with some of the asset bubbles we've got now the down could be quite steep," said Everett.
Retail investors need to feel even in a downturn that it's a normal market environment, damage is as limited as possible, and the downturn hasn't been driven by poor treatment of customers, Everett added.
*This article first appeared in our email for paying subscribers early on Friday morning. See here for more details and how to subscribe.
It is only a matter of time before we see ‘Deloittes’ or ‘PwCs’ for financial advice pop up in New Zealand, according to Sovereign’s chief distribution officer.
Richard Klipin maintains the regulatory shake-up the financial advice industry is undergoing, will encourage firms to join forces by merging businesses or forming a strong federation.
The rise of multidisciplinary financial advice firms
Klipin acknowledges advisers face a crossroads where they’ll have to decide which business model is best for them.
“There will be some that will no doubt choose to become financial advisers in their own right… and there’ll be others who will be looking to connect in with colleagues and what you might end up finding is that firms come together - share capabilities and almost become like your multi-partner professional services firms.”
Klipin, who was the CEO of Australia’s Association of Financial Advisers between 2006 and 2013, says this is what happened across the ditch when the industry started to professionalise in a similar way it is in New Zealand.
He says firms like Evalesco Financial Services and Kearney Group started providing multi-disciplinary advice on investments, insurance, wills, estates, superannuation, age-care and so on.
“Like-minded professionals came together and said, ‘Let’s create a single branded business that provides this one-stop-shop, or let’s join together almost as a bit of a federation.
“This was driven by client need on the one hand, but also cost savings and economies of scale on the other hand.”
Klipin recognises advisers’ compliance costs might increase as the government evens the playing field by doing away with the current adviser classifications, and makes all advisers (not just Authorised Financial Advisers) put consumers’ interests first and disclose how they’re paid and what the limitations of their advice are.
He says it’s too early to tell whether this may be the case for Sovereign, which distributes its products through Authorised Financial Advisers (AFAs), Registered Financial Advisers (RFAs) and Qualified Financial Entity (QFE) advisers.
Yet he points out MBIE has indicated it doesn’t want to stifle business. In fact, it says one of its objectives is to ensure “Regulation is enabling, with no undue compliance costs, complexity or barriers to innovation”.
Government moves towards more ‘flexible’ regulation
Following 18 months of review and consultation, the Ministry of Business, Innovation and Employment (MBIE) released a report on Wednesday outlining how it plans to simplify the regulation of those who provide financial advice, through its review of the Financial Advisers Act (FAA).
It plans to give firms that provide financial advice more flexibility to decide how they would like to demonstrate compliance with the Financial Markets Authority’s (FMA) “competence, knowledge and skill standards”.
While the regime will be changed so that anyone who gives financial advice will have to put consumers’ interests first and be more transparent, the industry will also be given more responsibility to regulate itself.
Under the new regime, anyone (or any robo-advice platform) providing financial advice services will also need to be covered by a licence. To ensure this does not impose undue costs on firms or government, licensing would be required at the firm level (for the avoidance of doubt, a sole-trader is considered a firm).
Those providing financial advice will be known as either a ‘financial adviser’ or an ‘agent’. Financial advisers will be individually accountable for complying with the legislative and Code obligations whereas financial advice firms will be accountable for their agents.
While the standards ‘financial advice firms’ will need to meet will be legislated, MBIE says “expectations would vary, depending on the size and nature of the firm, the services it provides, and whether it engages financial advisers and/or agents.”
MBIE goes on to say financial advice firms will be given “flexibility” in how they comply, and while there will be an industry Code of Conduct, “some firms could develop their own internal training programmes. This may be preferred by larger firms that want to establish courses tailored to their services and agents at potentially less cost.
“Through the licensing process, firms could convince the FMA that their tailored programmes achieve the standards in the Code of Conduct.”
NZ’s 6,400 RFAs to be hit the hardest
Klipin acknowledges: “From an adviser’s point of view - particularly those who are RFAs - the report will lead to significant change and when change occurs, sometimes it’s pretty confronting.”
RFAs will be hit the hardest by the regulatory changes, as they’ll have to meet higher disclosure and competency standards, similar to that AFAs already have to meet. There are currently around 6,400 RFAs in New Zealand.
Klipin says the devil will be in the detail as to how QFE advisers will be affected by the changes, yet maintains banks (which are also QFEs) won’t be hugely impacted, as their staff are generally salaried.
He is worried changes to the regime will spark an exodus of advisers from the industry, which is already suffering a shortage, similar to that of 2010 when the FAA came into force.
“Change always provides opportunity, but it is confronting for some and in the end, for New Zealanders to have access to good advice, they have to have access to good advisers, and that’s about growing the market rather than contracting the market,” he says.
“From Sovereign’s point of view, our role is to work closely with our distribution partners, with our adviser partners across the market, to help them get well positioned for the future.”
Overall Klipin believes the review will serve consumers well. He says: “The government wants to see more consumers getting advice and this is well in that direction.”
See this story for more on how the review will affect consumers.
By Mike Ebstein*
Dairy farmers may well be bemoaning low milk prices but New Zealand consumers overall do not appear to be letting too much get in the way of increasing their use of credit and charge cards.
Five years ago, annual spend on credit and charge cards issued in New Zealand was just a little over $NZ30 billion and this is now poised to exceed $NZ40 billion in the 12 months to May 2016.
The incremental growth of $NZ2.97 billion in the last 12 months was almost double the incremental annual growth of $NZ1.55 billion over the previous five years.
Compare that with the island off New Zealand’s west coast. Growth in Australian card spend has slipped from 5.7 to 5.1 per cent over the last five years – and that’s before the added uncertainty stemming from the election – while in New Zealand it has risen from 2.8 per cent to 8.0 per cent.
There’s no doubt consumer confidence has some part to play in this (and again the Australian election is unlikely to improve the situation). The ANZ-Roy Morgan Consumer Confidence index in New Zealand has recently moved lower but has remained above the Westpac-Melbourne Institute Consumer Sentiment Index in Australia throughout the last five years.
In addition, the index in New Zealand has been well above the 100 mark at which optimism and pessimism are balanced.
The increasing use of payment cards in New Zealand is maintaining that market as a world leader in per capita use of cards.
Spend outside of New Zealand by New Zealand cardholders has been particularly buoyant having grown from $NZ3,450 million five years ago to $NZ5,090 million today.
This represents growth of 47.5 per cent in five years in comparison to what would be considered sound growth of 29.1 per cent in spend within the country over this same period.
Kiwi cardholders are currently spending a considerable 12.8 per cent of their credit and charge card dollars outside of the country compared with 11.3 per cent five years ago.
It is interesting to consider the principal drivers of this growth in card spend. Segmented card data is issued by both Statistics New Zealand and Marketview and standout growth is presently being seen in hospitality at 11.3 per cent, motor vehicles at 11.4 per cent and services at 9.2 per cent (Statistics New Zealand) with bars, cafes and restaurants at 12.5 per cent, furniture and flooring at 11.4 per cent, takeaway foods at 10.0 per cent and automotive at 10.0 per cent (Marketview).
The underlying trend in annual growth in card spend from both sources has been upwards over the last 12 consecutive twelve month periods.
Observers could be concerned with the recent strong metrics in card spend. The May 2016 monthly credit and charge card spend was the second highest on record and 12.3 per cent above the May 2015 figure.
At 8.0 per cent, spend is now increasing at its highest rate in almost eight years. However, the movement in growth of balances indicates an altering pattern of cardholder behaviour with a changing relationship between spend and balances.
Even though card spend is now growing at almost twice the level of five years ago, the current growth of 3.4 per cent in balances is only slightly above the 2.8 per cent of five years ago.
In fact over the last two years the growth in spend and growth in balances have been markedly divergent. Cardholders have increasingly embraced credit and charge cards as a payment option whilst more aggressively managing the resultant card balances.
On the Australian side of the Tasman, consumer sentiment has continued to be soft. Whilst the index did move above the 100 mark in May and June, it has been below that crucial mark for most of the past 2 years.
In fact, the last time the annualised sentiment series in Australia exceeded 100 was in August 2014.The series has edged higher in recent months but the uncertainties associated with Brexit, the US electoral process and now our own Federal Government are unlikely to maintain this trend.
The prognosis is expected to be a continuation of the more buoyant mood and spending patterns at our near neighbour.
*This article first appeared on ANZ's BlueNotes website and is used here with permission. Mike Ebstein is founder and principal of MWE Consulting, a specialist payment card, loyalty and reward scheme consultancy.
The Insurance Council of New Zealand's chief executive, Tim Grafton, has responded to an opinion piece insurance lawyer, Andrew Hooker, wrote for Interest.co.nz.
Andrew Hooker’s recent opinion piece on how insurers were in his view responding to providing cover for meth damage made outlandish and sweeping comparisons with 9/11, the Canterbury earthquakes and the weather-tightness crisis.
It is in Mr Hooker’s interests to sketch a poor picture of insurers as solely obsessed, as he put it, with trying to “maintain its profits by excluding yet another common problem.” After all, he makes his living by inviting those aggrieved with insurers to pay for his advice.
There are though many people who take out insurance who are very satisfied with their insurer. Perhaps not surprising since about 90% of common accident claims are paid and promptly too. These are the people we should spare a thought for and ensure as far as possible that premiums are kept at an affordable level.
The purpose of insurance is to cover loss for sudden and unforeseen events. To maintain premiums at an affordable level, insurers must manage the risks they take on with skill and due care. Insurers and reinsurers have obligations to policyholders to ensure that their solvency remains intact so that claims can be paid and cover maintained for future claims, even after massive natural disasters. Mr Hooker doesn’t seem to understand this, in spite of the fact that he spent many years as part of the executive of a large general insurer.
Weather-tightness is another problem that had the potential to threaten the solvency of insurers. The extent of the problem was not immediately known and insurers had to make a call to either price in margins for uncertainty to continue to offer cover, or to exclude cover and continue to offer affordable premiums for all other risks. Insurance drives behaviour, so by excluding weather-tightness issues, insurers brought their influence to bear on the building industry to confront the problems and change building standards to prevent future losses.
When the earthquakes struck Canterbury, private insurers maintained cover for residents which enabled them to also obtain cover from EQC. Despite what will cost private insurers over $20 billion in pay-outs, the equivalent of several decades of premiums, insurers stood their ground and maintained cover for existing customers. True, they didn’t take on new risks there, but who in their right mind would? Over 98% of people were insured and continued to maintain their cover.
Yes, one insurer did withdraw commercial building cover for the lower North Island and Canterbury. In the face of much uncertainty they chose to review their risk profile. Others didn’t – that’s how the market operates.
So, to meth damage, an altogether less costly business by comparison, but significant nonetheless. It is another area where there is a great deal of uncertainty in play with one expert challenging another about the risks posed and remedies required. The Insurance Council has joined an expert group that is looking at what standards should apply, so we can all get clarity and certainty.
In the meantime, though, uncertainty remains. We do not know the extent of the problem or the costs. It is difficult to model the costs to help inform actuarial assessments that help set premiums. So, insurers will take a cautious approach to the cover they will write and place limits on the exposure. To do otherwise, would require pricing in margins for uncertainty, a cost that would be borne by all homeowners. How fair would that be?
Even so, some insurers are still providing cover for meth damage. But as with any risk, it is never simply a matter of transferring it to someone else, there is an obligation we have to ourselves to avoid risks if we can. Due diligence and inspection of a house may avoid the pitfall of purchasing one that has been contaminated.
By Jenée Tibshraeny
Financial advisers will keep being shouted trips to Rio and paid hundreds of millions of dollars in commissions each year, but they will have to start putting more of their cards on the table.
The government has acted on the signals it has been sending, confirming it doesn’t plan to ban or cap commissions paid to advisers. Yet it has made decent progress in revealing how it wants advisers to be more transparent, and financial advice to be more accessible.
Having received hundreds of public submissions on its review of the Financial Advisers Act (FFA) over the past 18 months, the Ministry of Business, Innovation and Employment (MBIE) has released a ‘factsheet’ and 'final report' revealing what it would like the new legislation to look like.
It plans to simplify things for consumers by doing away with the current Authorised Financial Adviser (AFA), Registered Financial Adviser (RFA) and Qualified Financial Entity (QFE) classifications; replacing them with ‘financial advisers’ and ‘agents’.
All advisers to be on equal footing when it comes to disclosure
In removing these distinctions, it will require all advisers to meet higher standards of disclosure, similar to that only our most qualified category of advisers (AFAs) currently have to meet.
MBIE explains: “Disclosure will be simplified and shortened to include core information about the scope of service, remuneration (including commissions) and competence, and would be available in user- friendly formats.
“In addition a client-care obligation will also be introduced, requiring advisers and agents to ensure that consumers are aware of the limitations of their advice, such as how many products and how many providers they have considered.”
Currently, only AFAs have to disclose how they’re paid, while QFE advisers have to disclose this if they’re asked and RFAs can keep quiet on the matter.
The problem is, people aren’t often aware what their advisers are obliged to disclose. Furthermore, the advice they receive risks being skewed by the incentives their advisers receive from those whose products they sell.
A Financial Markets Authority (FMA) report on ‘churn’ released last month found there are at least 200 advisers likely to be encouraging their clients to change life insurers, even if it isn’t in their best interests, so they can earn up-front commissions of up to 200% of their clients’ annual premiums, or soft commissions like overseas trips.
Meanwhile, a New Zealand Institute of Economic Research report found the country’s 14 main life insurers collectively pay a whopping $431 million a year in commissions.
‘The Government’s not generally in the business of setting prices’
Yet speaking to Interest.co.nz, the Minister of Commerce and Consumer Affairs Paul Goldsmith explains he isn’t keen on capping - let alone banning - commissions, as has been done in Australia and the UK.
“The Government’s not generally in the business of setting prices, which is effectively what you’d be doing. Our instinct really is to say to people they can organise things as they like, but we’re interested in full disclosure. People can make a judgement on whether they think it’s reasonable or not,” he says.
“This is an area which has been changing over the last few years internationally. We’ll keep watching it - who’s to say where it leads long-term.”
How much disclosure is enough?
Yet more specific details around what disclosure requirements will actually look like, are yet to be ironed out.
The Minister can’t confirm whether advisers will be able to get away with telling their clients something along the lines of: ‘Half of my income generally comes from commissions’. Or if they’ll have to be much more prescriptive by saying: ‘If I sell 10 life insurance products from company X, I will get to go to Vegas, and if you buy this product from company Y, I will get commission worth 200% of your first year’s premium’.
Goldsmith says: “It’s always a balancing act and that’s what we’ve got to arrive at. My expectation is there will be a reasonably high level of disclosure around commissions. You’ll have to balance that against the desire not to run to multitudes of pages that nobody reads.”
He suggests one way of avoiding this could be to have the providers of financial products disclose the details of the soft commissions they pay in an annual register; “the basic idea being that sunlight is the best means of dealing with these sorts of practices”.
Another upshot of simplifying the regime is that there will be a universal obligation on all those providing financial advice to put the interests of the consumer first. Currently only AFAs (of which there are 1800 in New Zealand, but only around 1000 practising) have this obligation.
MBIE explains: “All advisers and agents have limitations on the services they can provide. For example, some [like bank employees] only provide advice on one or two providers’ products.
“In putting the interests of the consumer first they would not be expected to consider the full range of products from across the market, but would be required to recommend the best product for the consumer from their suite and, if no product from those providers is genuinely suitable, to advise the consumer on that basis.
“In all cases, advisers and agents must put the consumers’ interests ahead of their own regardless of the differing financial incentives offered by providers.
“The consumer first obligation will be supported by FMA monitoring and enforcement, where any breaches of the obligation could be penalised. The FMA would continue its surveillance activities, such as setting reporting requirements for advisers.”
‘Financial advisers’ and ‘agents’ to replace AFAs, RFAs and QFEs
Explaining the nuts and bolts of proposed new categories of advisers, MBIE says:
“To improve consumer understanding, anyone providing financial advice will now be known as either a ‘financial adviser’ or an ‘agent’. Financial advisers will be individually accountable for complying with the legislative and Code [of Conduct] obligations whereas financial advice firms will be accountable for their agents."
In other words, AFAs and RFAs are likely to fall into the ‘financial adviser’ category, while QFE advisers (who work for banks for example) will fall into the ‘agent’ category.
MBIE says: “While there will be no legislative difference in the services financial advisers or agents could provide, in practice, agents will only be able to provide advice services where their firm has sufficient processes and controls in place such that the FMA is satisfied it is appropriate for the firm (and not the individual) to hold accountability. It is therefore likely that, in practice, the services offered by an agent would be limited when compared to those offered by an adviser.”
So the confusing 'Category 1' (complex) and 'Category 2' (simple) product differentiations that different types of advisers can advise on will be removed, as will distinctions between ‘class’ and ‘personalised’ advice.
"Advisers won't be restricted from providing consumers with the advice they want and need when they have the competence to provide it," MBIE says.
“All advisers (not just a sub-set) will be held to common competence and conduct requirements to ensure that they are competent to provide advice and to put the consumer’s interests first.”
Goldsmith can’t be definitive on whether advisers will need to retrain
Goldsmith can’t confirm whether this means RFAs (of which there are around 6400 in New Zealand) will need to retrain or upskill to meet common standards of competency.
He says the main thing is that they meet the requirements of a Code of Conduct, which is yet to be developed and will include standards of competency, knowledge and skill that apply to particular parts of the industry.
“For example, life insurance advisers could be required to demonstrate knowledge of life insurance products and skill in managing replacement business,” MBIE says.
Asked whether the change will exacerbate the adviser shortage we’re suffering from, Goldsmith says:
“My expectation is that will be reasonably pragmatic and there will be transition measures in place. The purpose of all this is to try to increase Kiwis’ access to financial advice and to remove barriers getting in the way of financial advice… The goal is not to remove potential sources of financial advice.”
Door opened for robo-advice
MBIE would also like to see a path for robo-advice platforms established.
“Online advice (known as robo-advice) is emerging abroad and has the ability to provide consumers with a convenient, more affordable means of accessing financial advice.
“Firms wishing to provide advice through robo-advice platforms will need to obtain a licence from the FMA.
“Robo-advice will need to meet the same standards as a person providing advice; however the means of meeting these standards will differ. For example, while a financial adviser may be required to demonstrate competence through having passed a qualification, a robo-advice platform may have to demonstrate equivalent quality through algorithm and scenario testing.”
Goldsmith says: “When you think of the average person in their early 20s - not everyone wants to sit down and have a half an hour conversation with an adviser. They want to go to an app, type in their details and get some guidance from that.
“We’re trying to achieve a situation where more New Zealanders are accessing and engaging with financial advice. The reality is that at the moment, there’s not a huge amount going on.”
From here, the government will release an exposure draft of the new legislation for consultation. It aims to introduce a Bill to the House by the end of the year.
By Jenée Tibshraeny
There are calls for the spotlight to be shone on the sales tactics banks use to sell their products, following the Financial Markets Authority releasing a damning report on the level of ‘churn’ in the life insurance sector.
The New Zealand Shareholders’ Association (NZSA) is urging a government regulator to investigate the way banks distribute their products, in the same way the FMA has looked at how the commissions New Zealand’s 12 main life insurers pay to the advisers who sell their products, affect consumers.
The FMA’s study found that of the top 1100 life insurance advisers, 200 have a high rate of replacement business or ‘churn’.
In other words, 200 are likely to be encouraging their clients to chop and change insurers, even if it isn’t in their best interests, so they can earn up-front commissions of up to 200% of their client’s annual premium, or soft commissions like overseas trips.
The FMA concludes churn could be seeing New Zealanders overcharged for life insurance, as providers are spending too much on commissions. Consumers could also end up being over or under-insured due to being given poor advice, or could lose benefits they were once insured for.
NZSA chairman, John Hawkins, says he would like to see a similar report produced for the banking sector, which is becoming an increasingly dominant provider of financial services like insurance and KiwiSaver.
The FMA issued a ‘Strategic Risk Outlook’ report in December 2014, in which it identified churn and banks’ sales tactics as risks it would keep an eye on. However it didn’t do an official investigation and publish the details of its findings, as it’s done with life insurers.
How you’ll get different “advice” from different “advisers”
As at June 2014, there were around a million active life insurance policies across the country’s 12 main providers. Less than half of these were sold by the authorised financial advisers (AFAs) and registered financial advisers (RFAs) at the heart of the FMA’s study. The rest were sold through direct channels such as banks, or other types of advisers that existed before the Financial Advisers Act came into force.
Hawkins acknowledges banks operate differently to insurance companies, so churn may not be as prevalent among them.
The FMA also admits that while banks could be mis-selling products, they’re unlikely to be churning policies because they only sell one brand.
Yet Hawkins’ concern is: “Many people do not understand that with different types of advisors in these organisations [ie banks], the information supplied will often not acknowledge that there may well be more suitable products available elsewhere.
“However, there’s no hard data publicly available to test this concern.”
In other words, the public might not fully understand the fact banks employ different types of advisers, who are authorised to provide different levels of advice and have different disclosure obligations. For example:
Qualified financial entity (QFEs) advisers, who are often bank tellers, can only sell the products of the ‘QFE’/bank they’re employed by. They can give personalised advice on life insurance, but not as a part of an investment planning service. They only have to disclose how they’re paid if they’re asked.
Then there are RFAs. They can give personalised advice on life insurance, but not on more complex products such as KiwiSaver, bonds, shares, managed funds and derivatives. They must register with the Registrar of Financial Service Providers and meet minimum education requirements. RFAs don’t have to disclose how they’re paid.
And finally, there are AFAs. They are individually authorised by the FMA to provide personalised advice on most types of financial products and can be licensed to provide investment planning services.
They are required to abide by a code of professional conduct, including minimum education requirements. The code includes a requirement to act in the best interest of consumers at all times, and to avoid situations where the interests of the adviser conflict with the interests of the consumer. AFAs have to disclose how they’re paid.
In essence, Hawkins says: “The information a bank teller can give you, is very different to the information a bank-employed AFA can give you.”
He’s concerned people don’t understand how and why this may differ.
Banks are growing, but at what cost?
Hawkins would also like to see an investigation done around how banks are growing their market share of financial services by offering clients better deals for using more of their products. For example, it is not uncommon for banks to offer lower mortgage rates to clients who join their KiwiSaver schemes.
“There is potential for large profits to be made in some areas by giving away a modest profit in others,” Hawkins says.
Depending on the structure of payments that are made to bank staff, customers’ best interests could be compromised.
In regard to both regular and soft commissions paid to bank staff, Hawkins says:
“There are a whole bunch of grey areas here that would be very helpful to be addressed by a similar indepth look at what is actually going on and shining a little bit of sunlight on it.
“The banks would not be offering these ancillary services if they didn’t think that it was a commercially viable option for them. So I think we can reasonably assume, by the fact that they can be quite aggressive in promoting a number of these products, that there are good profits to be made and building some critical mass is certainly something they’re keen to do. But the extent to which that’s a problem is something there isn’t any data out there to support.”
Separating sales and advice
Hawkins acknowledges doing solid studies around these sales practices is important in light of the Government reviewing the Financial Advisers Act.
He would ultimately like to see the law require clearer lines to be drawn between sales and advice.
“If the advice is not to be truly independent advice, but is nevertheless good and useful advice, then that has to be very clearly delineated so that people understand.
“If we don’t make a delineation between what is financial advice and what is financial sales, then that will over time do nothing to help the reputation in the capital markets and is likely to put people off if they discover they are getting what they think is advice, which is actually information given to them with other motivations in mind.
“It’s critical that people can access proper financial advice… in a reasonably straight forward way, at a reasonable cost.”
Goldsmith’s response to the FMA report “extremely disappointing”
Hawkins hopes the Minister of Commerce and Consumer Affairs, Paul Goldsmith, will strongly consider the recommendations made by the FMA, as he believes those who read its report would have been “aghast” by its findings.
Yet he says the Minister’s response was “extremely disappointing”.
Speaking at the Financial Markets Law conference just before the FMA’s paper was publically released, Goldsmith reiterated the fact commissions wouldn’t be banned or capped as is the case in the UK and Australia, and said the review wouldn’t include any major changes to the current system.
He also released a media statement saying: “It is encouraging to see that the majority of insurance advisers do not have high levels of replacement business and appear to be putting the consumer’s interests first.”
Hawkins says: “The Minister needs to look at what the best solutions are, not what the easiest solutions are.
“The banking and insurance lobby is very strong, but it needs to be remembered that they are motivated by commercial imperatives.”
More on the FMA’s findings
Here is a bit more on the findings of the FMA’s life insurance investigation:
- During the review period, advisers were offered trips to destinations such as Shanghai, Prague, Las Vegas, Hollywood, Rome, New York and Rio de Janeiro as sales incentives. The high-replacement advisers took an average of two of these trips each, with one taking 10 trips in four years.
- The overall number of life insurance policies grew at under 2% each year during its review period. However, in each year life insurers described 11% to 13% of their policies as ‘new’. This shows that many ‘new’ policies were more likely to be replacement policies.
- There was a strong link between types of commissions, the end of the clawback period (the period within which an adviser must repay a portion of their commission if the policy is cancelled), and the likelihood of a policy being replaced. Policies with a high upfront commission were more likely to be replaced once the clawback period ended.
- The quality of a policy (known in the industry as a ‘product score’) was only a minor factor in whether a policy was replaced. This suggests that some advisers are acting in their own interest, rather than in consumers’ best interests.
- On average, the high-replacement advisers earned almost 50% more from commissions on life insurance than other high-volume advisers.
- Around half of all advisers earned less than the minimum wage in commissions from life policies in 2014. These advisers may have other sources of income. However, some advisers earned significant income from life insurance commissions. Around 150 advisers (4%) earned at least $200,000 in 2014, and around 70 advisers (2%) earned at least $300,000.
*This article first appeared in our email for paying subscribers. See here for more details and how to subscribe.
The Retirement Commissioner maintains we would need 15 to 20 years of preparation time, if the age of eligibility for national superannuation was to be raised.
Diane Maxwell says 65 is not what it used to be, as we’re healthier and living longer.
Yet a move towards raising the age of eligibility would need to be planned and signalled - something Prime Minister John Key has completely refused to do.
Maxwell says there would need to be a long lead time before any change is made, as both employers and employees would need to get ready for the shift.
Some key decisions would also need to be made around how the Government’s savings would be spent.
“If we had an eligibility age of 67 today, we’d save $1.5 billion a year, out of the $12.2 billion that super costs,” Maxwell says.
“The question is, what do you do with that $1.5 billion, where should it go? For example, should it be invested in people between the ages of 45 and 55 who may need retraining; who may want upskilling to be able to work longer; who want to be prepared for a job of the future?”
Maxwell says consideration would also need to be given to how much of the savings from paying less super would be spent funding unemployment benefits for those unable to get jobs.
This is a key consideration, as New Zealanders are increasingly both needing and wanting to work beyond 65, but are often brick-walled by ageist employers.
“Don’t even send me a CV”
A Commission for Financial Capability (CFFC) survey of 3000 people concludes New Zealanders see the age of retirement as being between 68 and 72.
“They [respondents] wanted to work partly for the money but also for the purpose - to be active, keep their brain active, social connectedness, all those things.”
Yet Maxwell says: “We hear from recruiters that they try to put forward a CV of someone who is 55, 60, 65, and they get told, ‘Don’t even send me the CV. We won’t do an interview’.
“So I think employers have a fair bit of work to do and I think things need to change in the workplace.”
Over 80% of the 5000 companies the CFFC has recently surveyed say they don’t have plans in place for their workers over the age of 50.
“But I think we’ve also got to ask ourselves, ‘What do we think is old?’” says Maxwell.
“If you think about it, Clinton’s 69 and Trump is 70, and one of them (hopefully Clinton), is going to be the leader of the biggest economy in the world. So we don’t mind a 69-year-old US President, but we don’t want a 69-year-old to hand us our boarding pass as we board our flight.”
The benefits of employees who doesn’t stand on swivel chairs to change lightbulbs
Asked whether small to medium sized businesses (SMEs) may find it harder than large corporates to accommodate for older workers - by giving them extra training around technology or more flexible working hours for example - Maxwell says:
“Inherent in that question is a belief that somehow, someone 50-plus will be less productive, more of a problem. I’m not sure that we know that.
“Why would a 55-year-old not be as productive a worker as a 35-year-old for a SME? They may bring in a level of maturity, steadiness, consistency, experience, and that may be extremely beneficial to that SME, particularly if they’ve been in that industry for a long time. They may have a lot of historical knowledge that’s incredibly useful.”
Furthermore, a large employer has told Maxwell that at 60, workplace accidents halve, “because 60-year-olds don’t stand on swivel chairs to change lightbulbs”.
The biggest change will come when businesses understand the value of it
The Retirement Commissioner maintains both government policy and a cultural shift within the business community are needed to make the most of our ageing workforce.
“As with any diversity measure, businesses need to understand how it’s good for business. So there are some things that you can legislate for, but actually, probably the biggest change will come - as it has women and other forms of diversity - when businesses understand the value of it.”
As for government policy, she says CFFC survey results show people want to see changes, but a lot of thought would have to be put into this to avoid any unintended consequences resulting.
Taking age out of the equation
Maxwell says older workers also need to do their bit by changing their attitudes towards work.
She acknowledges it’s tough: “I get lots of letters and emails from people, and they’re getting knocked back, and knocked back, and knocked back. They’re feeling discriminated against, they’re losing their confidence, they’re losing their mojo. Interviews are hard enough, without being turned down for the last 50.”
Yet Maxwell suggests older job hunters try to take their age out of the equation.
Rather, they should ask themselves, ‘What am I offering? What are my skills? Am I offering to be retrained? Am I sounding optimistic and open?’
She suggests they get second opinions on their CVs - even from younger people - and give themselves a “good hard talking to” about how good they are with technology.
What’s more, Maxwell highlights a point independent economist, Shamubeel Eaqub, made in a presentation at a CFFC forum on the ageing workforce last week, that New Zealand’s moving from a primary and goods producer to a services sector nation.
In other words, there’s less demand for manual, labour intensive work, which older employees may struggle with, or that might cause people to age quicker physically, and more for office jobs.
See this story for more on what was discussed at the CFFC’s ageing workforce forum.