The relentless drive lower of wholesale interest rates is taking its toll on term deposit savers.
And low rates put the squeeze on bank 'net interest margins'.
Savers are getting the short end of these pressures.
One of the pressures can come from the imposition of 'break fees'.
'Break fees' you ask? Aren't they just for when you break a fixed term home loan contract?
No, actually. They can also apply to breaking a fixed term, term deposit.
But why would a bank impose a break fee when the rolled-over rate will be lower?
Well, actually, savers don't break term deposits to reinvest them. The need to break them is for other reasons.
To be fair to all banks, we have not heard of all of them imposing these fees.
A reader has sent us some interesting detail of a set of transactions involving three banks.
1) RaboDirect, $120,000 on a 5 year term, interest paid monthly, rate = 5.03% p.a.
2) ANZ, $120,000 on a 5 year term, interest paid monthly, rate = 5.00% p.a.
3) BNZ, $120,000 on a 5 year term, interest paid monthly, rate = 5.00% p.a.
"Due to an unpredicted change in circumstance we are trying to break these term deposits to buy property," he writes.
The break terms between these banks were all different, one significantly, as follows:
1) RaboDirect: same day break, no reduction in principal, slight reduction in final monthly interest payment.
2) ANZ: 31 Day notice required to break. Notice given 11th April for a 5 May Break. No reduction in principal but a small reduction in final months interest payment.
3) BNZ: 31 Day notice given at branch on 11th April. "No notification at day of notification re significant break costs. Receive a call from branch 12th April that the break costs would be $10,397.29."
In this case, BNZ has moved to recover all interest paid at the contracted rate and applied the rate that would have been offered for the actual term. Deep inside their Standard Terms & Conditions (page 25) is the contracted basis for this.
However, they face others who apply a much more forgiving attitude. In this reader's case the only adjustment ANZ or RaboDirect imposed was for the rate in the final month. The saver kept all the higher rate for the earlier term, even though each has standard conditions allowing the same as the way BNZ applied.
Bank officers clearly have discretion to waive break fees but this varies between banks. Unfortunately you can't reliably research this in advance. You may find a bank official imposing the Standard terms, while others may take a more flexible approach.
Another issue this case raises is the Bank's ability to change the T&C's at their discretion. In this specific case, the T&C's that were in place when this term deposit was taken out did not impose the break-fee ability. That was added is a subsequent set of T&Cs imposed by the bank later. But the early BNZ T&Cs did give them the right to alter them after giving a "public notice". (S.4 in the 2012 T&Cs.) Maybe this is understandable given that the law changed in the intervening time imposing the 31 day notice requirement as part of the AML regulations.
We are interested in readers' experience about this. Have you had a similar experience? Who with?
It is only through revealing a series of actual experiences with each institution will others get to know how each bank deals with early breaks on term deposits.
You can either email me directly (firstname.lastname@example.org) or use the Comment facility below.
*By Andrew Hooker
There is a famous skit in a Monty Python Movie – “Search for The Holy Grail” – in which the Dark Knight, having lost both arms and both legs in a sword fight, refuses to give up or back down from his position. Instead he threatens, with the only weapon he has left, to bite the enemy’s legs off.
Watching EQC on television recently maintain that its agreement to finally settle court litigation was nothing more than reflecting its practice from the start seemed airily similar to the Black Knight’s constant refusals to concede that he was beaten.
There have been countless cases involving disputes between home owners and EQC about the standard of repairs and in particular the relevance of what are known as the Ministry of Building, Innovation and Employment (MBIE) standards.
After the earthquakes, MBIE produced a number of detailed documents setting out certain standards that may be appropriate when considering earthquake damage to buildings and a possible repair strategy. But at no stage did MBIE or any other party representing MBIE suggest that these were of any relevance when considering the obligations of insurance companies or EQC. This is because both insurance policies and the EQC legislation require that a house be repaired to “as new” or sometimes “when new” standard.
What that means is the house must be repaired to the standard the same as a new building. This is not the standard it was immediately before the earthquake. It also means that building practices or a finished job that is not the same as would be expected in a new building does not meet the policy standard or the standard under the Act.
Put simply, the MBIE standards are simply what may be accepted as a competent repair or patch up. But insurance policies and EQC legislation require a repair to a new (not patched up) basis.
Engineers and experts acting for both EQC and insurance companies appear to almost routinely trot out repair strategies that meet the MBIE standards, as if they reflected the insurance policy or EQC Act standard. But of course they do not.
This fight has gone on for years, and finally in an out of court settlement, EQC has acknowledged in writing that the MBIE guidance on floor/foundation dislevelment is not to be used as a trigger or target for repairs under the Act. So, for example, in relation to the MBIE guidelines on releveling damaged floors, the guidelines allowed floors that were less than 50mm out of level to not be repaired. EQC had attempted to adopt this standard, but has now agreed that the MBIE guideline no longer applies. Instead, EQC agrees that it must return the floor to a condition substantially the same as when new and compliant with current regulations.
Anyway, back to the Dark Knight.
It appears that now that EQC has admitted that it can no longer rely on the MBIE guidelines as dictating its obligation under the Act it may acknowledge that it had got it wrong and take well deserved credit for rectifying this error.
Instead, the EQC representative embarked on a continual denial of the obvious:
“…EQC’s approach under the Act has been consistent since day one and I think that this joint statement confirms that for us.”
The interview continued:
“So should it be substantially new or pre-quake?… So our approach since day one has been as per the statement”.
Is he suggesting that all these people decided to embark on court action to get EQC to do what it has always done anyway? Surely not. But no admission, just steadfast denial.
It would be more productive to celebrate this huge concession, rather than to try to understand why, after making such a concession, EQC seems determined to deny that it was ever wrong. Maybe Pythonesque analogies may help us to better understand the thinking of EQC. But on a more serious note, there is now a need for all people whose houses were supposedly repaired by EQC to take a close look.
If EQC relied on MBIE guidelines (for example in relation to acceptable tolerances for subsidence), or offered less than new for old, then homeowners need to have their files reviewed and decide whether they have been short changed.
Otherwise, down the track, they may find that their houses are substandard, and possibly of reduced value.
*Andrew Hooker is the Managing Director of Shine Lawyers NZ Limited practices as a specialist insurance lawyer in Albany on Auckland's North Shore. He also runs an insurance information website - www.claimshelp.co.nz
Crowdfunding operator PledgeMe says it is on track with plans to move into peer-to-peer lending, which would make it the fifth authorised operator.
PledgeMe chief executive Anna Guenther says the company's licence application to provide P2P lending has been approved by the Financial Markets Authority, with the licence to be granted once the final prerequisite conditions are met.
“We’re very excited to have completed this important step towards launching PledgeMe.Lend, which we believe will democratise debt in New Zealand,” said Guenther.
“With over two-thirds of the international crowdfunding market being lending based, we realised that entering the peer-to-peer lending market was an obvious next step for PledgeMe. Allowing our campaigns to offer loan notes provides an important extra piece of the crowdfunding market in Aotearoa.”
PledgeMe.Lend intends to launch its first crowdlending campaign in May 2016. The platform will allow companies and organisations to run transparent campaigns to crowdsource lending from their existing crowd and the wider market. Campaigns will have to demonstrate their ability to pay back the loan and interest over time, with the interest rate set by the campaigner.
PledgeMe chair Nick Lewis described the move as "a major milestone for crowdfunding" in New Zealand.
“PledgeMe has an outstanding track record of offering Kiwis the ability to both fund projects and raise equity. We’re now also able to give our campaigners the ability to issue a loan, all with the same platform.”
PledgeMe CFO Barry Grehan, who previously worked for Bank of Ireland in its business lending team, has been the driving force behind the licence application
“When I came to New Zealand I wanted to hang up my banker’s tie, throw away the corporate instruction manual, and work with a vibrant team that were full of life, ideas and real purpose. At PledgeMe we’re defying convention and putting our stamp on how companies and organisations are funded. Reimagining debt is the next exciting step for us,” Grehan said.
Once finally given the all-clear by the FMA, PledgeMe will join Harmoney, LendMe, Lending Crowd and Squirrel Money as P2P operators.
*This article first appeared in our email for paying subscribers. See here for more details and how to subscribe.
This article was published in our email for paying subscribers. See here for more details and how to subscribe.
Owning your own home is a great achievement. Not everyone can do it, but if you can, there are many great rewards.
But unlike renting, home ownership comes with some definite work, stuff you can't really put off or escape from.
The rewards and advantages last and are substantial.
And so does the work. But at least with some good advice, you can prevent it becoming oppressive worry.
Some people like to say taking on a mortgage is the largest financial commitment you will ever make. But these days, that is not true. (Saving for a comfortable retirement is a bigger project, but property ownership can be part of that project too.)
Home loans these days are large. Without proper structuring that size can be stressful.
But it doesn't have to be at extreme levels - which is where 'good advice' comes in.
Unless you are one of the rare types that don't need a mortgage, buying a house can't be done without a large loan.
It will be stressful, especially at the beginning. But to manage that you need a plan - and you need to stick to it.
The core of any plan is your household budget, something you will be forced to face when you apply for a loan.
Fudging your application with 'enhanced income' and 'unrealistic expenses' is never a good idea. Ever.
But tight budgets focus the mind.
Three key things to understand
And there are a number of powerful ways you can get on top of the loan payments.
Firstly, you should look past the 'loan payment' amount.
Remember, you can get your payments down by extending out your loan. But over the length of your loan you will pay far, far more in interest. This is why you should target paying your loan off faster to get the best overall benefits.
Secondly, you should be prepared for bumps in the road. Illness and job loss could be something that might force you to lose your home. Fortunately you can insure for these risks.
And thirdly, remember a table mortgage pays down the loan principal very slowly at first, and very fast at the end. You will be energised to stick with your budget if you can get your head around how a table mortgage works. It’s not hard, but it is also not intuitive.
Advert: Since 1999, Global Finance has focused on saving interest on mortgages without increasing fixed loan instalments. Their 3,500+ customers have been able to save more than $100 million in interest costs. You can contact them here
Change the way you live
Once you have a home with a loan, keep your budget plan ‘live’. Make staying on top of it a key part of how you live. You won’t need to be completely focused for the whole life of your loan, but you should until at least a third of it is paid down – and that is much longer than a third of the time you committed to repay the loan.
This is the first in a series, so we will explore some ideas and concepts in future articles.
But let’s end this one with some math behind a well-known budget trick:
A daily cup of $4 coffee can be used to pay down your mortgage faster and the impact of this small restraint can be more powerful that you might realise.
If you have that coffee only once a week rather than once a day, you could save over $22,800 over a 30 year loan. That is serious money, well worth the sacrifice I say. You will have ‘little ideas’ that can be equally powerful – if you can stay disciplined. And almost all the savings will be future interest.
Use the skills of a savvy adviser
But you can’t know all the tricks. This is where good advice pays for itself.
Mortgages are long term commitments. A savvy mortgage adviser can help with so much more than getting you that competitive initial interest rate. Make sure you get access to all that assistance and expertise.
This article was written for the Global Finance (GFS) website and newsletter and is here with permission.
The founder of WorldRemit warns that banks’ bids to avoid breaking tough new anti-money laundering rules, by ditching virtually all of their money remittance clients, is having the opposite effect.
Dr Ismail Ahmed says the ‘blanket de-risking’ approach taken by the banks operating in New Zealand is driving many of the money remitters whose accounts they’ve closed, to operate underground.
Without recognising these clients as ‘remitters’ and doing the necessary checks on them, banks are more at risk of breaching the Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) Act 2009, than if they assessed remitters’ risks on a case-by-case basis.
The London-based and Somali-born chief executive has drawn this conclusion having established WorldRemit in 2010 – an online service that lets people send money using a computer, smartphone or tablet. It services around 400,000 transfers a month – 15,000 of which come from New Zealand.
Prior to this, Ahmed worked as a compliance adviser to the United Nations East Africa Remittance Programme. During this time he blew the whistle on alleged fraud and corruption at the UN Development Programme.
How is blanket de-risking exacerbating money laundering risks?
Speaking to Interest.co.nz in a Double Shot interview, Ahmed says banks’ blanket de-risking policy is “wrong”.
“The money transfer industry is huge – we’re talking about US$600 billion. Historically more than half of that volume used to go through informal networks. Regulation has helped move the industry to formal financial services, where most of the players are now registered.
“What the de-risking is doing, is it’s reversing that trend.”
Ahmed explains that a large portion of remittances are done through retailers who work as agents for remittance companies. Remittance services often make up only small parts of these businesses.
“When a bank says it’s shut down the accounts of a money transfer business, it means some of those retailers that are mixing business will continue to deposit money transfer funds into banks.”
For example, a corner store that generates 90% of its business from selling food, and 10% from remittances, is unlikely to separate out and disclose this remittance portion to the bank.
So banks are still working with the same businesses, but they aren’t doing the checks they would have done if they were registered as remitters.
Ahmed says this exposes remitters to greater risks. By not being recognised as remitters, they aren’t investing the capital needed to build robust systems to comply with the AML/CFT Act.
What’s more, they’re no longer in a position to work with banks to help report suspicious activity to the regulators.
Ahmed coins the approach taken by banks as “wilful blindness”.
“Banks know that when they say ‘we’ve taken a blanket approach’, a big chunk of remittance is still going through their networks. They’re avoiding investing the capital needed to build the compliance infrastructure.
“Whereas the banks taking a case-by-case approach are working closely with industry associations. They’re learning from the companies they work with, and they’re also sometimes getting tip-offs from clients in the industry.”
How worried should we be about remitters operating underground in NZ?
Asked about the extent to which remitters operating underground is a problem in New Zealand, Ahmed says: “It is a big problem in New Zealand. New Zealand de-risking was far bigger than anything we’ve seen elsewhere in the world.
“Here, you have a small number of banks that dominate the [market]… and we understand two of the four large banks decided to take a blanket approach. So certainly we think de-risking is a far bigger issue in New Zealand than elsewhere.”
In fact, Kiwibank has been taken to the High Court on two occasions, further to it trying to close two of its final few money remittance clients’ accounts.
E-Trans has dubbed Kiwibank the “last bank standing”, as its accounts have previously been closed by ANZ, ASB, BNZ and Westpac.
Ahmed concludes: “If there’s a lesson that New Zealand should learn from the US and Europe, is the fact that the blanket approach does not work.”
He notes some of the big US banks that adopted the blanket approach 10 years ago, have reverted back to addressing remitters on a case-by-case basis.
The UK banks – Barclays, the Royal Bank of Scotland and Lloyds for example – haven’t exited the remittance market as a whole.
Ahmed says that globally, HSBC is the only bank that’s taken the blanket approach.
Does the remittance industry simply need to change with the times?
Despite Kiwibank trying to close KlickEx’s accounts, even though it provides an online service that doesn’t involve the sorts of retail agents, Ahmed maintains online money transfer operators are the way of the future.
“The challenge with the traditional money transfer has been there’s been no audit trail. Someone goes to an ATM or takes money from somewhere, then goes to a corner shop, and then sends a transaction.”
The independent agents used are separate to the companies that own the networks. Often the person doing the transaction won’t take compliance with AML/CFT rules as seriously as the remittance company.
“In the online setting there’s an audit trail, the migrant uses a debit card or transfers the money from a bank account, so if the transfer becomes suspicious, law enforcement agencies have something to check.”
Ahmed says that as the industry becomes digitalised and AML/CFT compliance becomes tougher, smaller players that can’t afford big investments are being driven out of the sector.
“Before we [WorldRemit] started, we had invested heavily in compliance. We built a code of compliance. We’re a big player, we raised a lot of money, we raised close to US$200 million.”
He says WorldRemit also partnered with big global banks and hasn’t been as affected by blanket de-risking as the corner store type remitters.
“Traditional players require a local bank account so they can take the money they collect to a local branch. For us it’s different because we don’t accept cash. We’re cashless, we use debit and credit cards to process transactions.”
Kiwibank is taking another hit for the Aussie banks in New Zealand, as a second money remittance firm takes it to court, further to the bank endeavouring to close its accounts.
KlickEx says Kiwibank on April 4 started closing its accounts, in line with its position to stop doing business with money remitters.
This sparked the independent New Zealand-owned foreign exchange company to file High Court proceedings against Kiwibank on the morning of April 8.
By the afternoon of April 8, the Court had issued Kiwibank with an injunction prohibiting it from closing KlickEx’s accounts, pending the outcome of the case.
KlickEx’s battle with Kiwibank comes as the bank awaits a High Court judgement following E-Trans International accusing it of breaking a number of laws by also endeavouring to close its accounts.
Both KlickEx and E-Trans say Kiwibank has followed the big four Australian owned banks operating in New Zealand (ANZ, ASB, BNZ and Westpac) in implementing a blanket de-risking policy to get rid of money remitters, rather than assessing their anti-money laundering/countering financing of terrorism (AML/CFT) risks on a case-by-case basis.
The Reserve Bank has spoken out against this, issuing a statement in January 2015, saying it “considers that banks’ obligations under the AML/CFT Act require measured risk management and do not justify blanket de-risking”.
During its trial, E-Trans’ lawyers argued Kiwibank was the “last bank standing” in New Zealand, and its moves to get rid of its 100 money remittance clients [figure contested by Kiwibank] was driving the industry into the ground.
KlickEx’s executive chairman, Robert Bell, believes E-Trans, KlickEx and Western Union are the only remittance clients Kiwibank is still servicing.
He says KlickEx has on-boarded a number of the small operators, which have been shut. This has seen it have one of the highest penetration rates of all the fintech remittance firms to enter the market in the past five years.
With it being one of the only independent remittance operators (that isn’t a public company or owned by a bank) to service Tonga and Samoa, he says the market will be hugely impacted if KlickEx was to leave.
He acknowledges the two cases aren’t identical, as KlickEx and E-Trans have quite different business models. Yet the cases are drawing attention from banks, remitters and regulators around the world, which are contending with the same issues.
Bell says the conflict largely stems from differing interpretations of the AML/CFT Act.
“Banks believe money laundering is not allowed to happen. This is untrue. There is nowhere in the law that says, ‘you must stop all money laundering’. What it says is, ‘you must be clever enough to detect it and report it so the police can take action if necessary’."
Bell argues 40-50% of KlickEx’s expenses have come from it setting up systems to monitor and report transactions between its clients.
He would’ve preferred it if Kiwibank had approached him and the regulator – the Department of Internal Affairs – to discuss any issues it has with the business, rather than just shutting its accounts.
He says KlickEx is constantly reviewing the structure of its business to ensure it’s complying with AML rules. It’s even won a number of innovation awards in New Zealand and abroad.
A Kiwibank spokesperson says: “I can confirm that an action by KlickEx is before the court, but as the orders weren't made in open court, the bank is unable to provide any details of the action. I can of course confirm that Kiwibank will abide by the decision of the court.”
Your bank, insurer or doctor may know your personal details are being circulated around criminals after a cyber-attack on their system, but choose not to tell you.
It is on this basis the global cybersecurity firm, Symantec, is lobbying the Government to urgently push through changes to the Privacy Act 1993, to make it a legal requirement for agencies to report cyber breaches to the Government and the individuals affected.
Its technology strategist Mark Shaw says the Government needs to follow the lead of European authorities and oblige agencies to report cyber breaches as soon as they become aware of them.
According to Symantec’s annual Internet Security Threat Report, at least 429 million people’s identities were exposed by cyber criminals in 2015, up 23% from 2014.
Shaw says there’s been an 85% increase over this time in the number of companies that have said they’ve suffered a breach but have chosen not to disclose how many of their records have been affected, or the extent of the information exposed, because they weren’t legally required to do so.
“The increasing number of companies choosing to hold back critical details after a breach is a disturbing trend. Transparency is critical to security. By hiding the full impact of an attack, it becomes difficult to assess the risk and improve security to prevent future attacks,” says Symantec’s security response director, Kevin Haley.
Shaw says a number of security organisations are therefore pressuring the Government to update the law. He notes the Government is largely taking its lead from Australian authorities on the matter.
Progress updating the Privacy Act
A review of the Privacy Act 1993 has been on the Government’s radar for the past decade.
Progress was made in 2014 when Cabinet agreed to introduce provisions in the Privacy Act that would make it mandatory for both public and private agencies to report material data breaches to the Privacy Commissioner.
The Justice Minister Amy Adams explains: “The paper outlined that agencies would also have to notify affected individuals in serious cases unless an exception applies. Specific criteria in the new Act would determine the thresholds for notifying breaches.”
So what’s the hold up?
“I’ve been taking time to consider whether there are any other issues in the privacy area that should be included in the reform Bill,” Adams says.
“I expect that a draft exposure Bill will be released later this year so that the public and interested sectors have an opportunity to make submissions on the draft.
“This is a shared problem. Government can’t solve this on its own. Nor can the private sector. Partnerships will be essential to improve our security.”
Pros and cons of notification
The Law Commission, in its Privacy Act Review 2011, supports mandatory notification in a “clearly defined set of situations”.
It says notification can enable those whose information has been compromised to take steps to mitigate the harm by monitoring their bank statements, changing bank account numbers and passwords or cancelling credit cards for example.
It points out data breaches can also result in people being publically humiliated, so giving those affected a heads up can only help.
“Notification can enable law enforcement, researchers, and policy makers to better understand which firms and sectors are best (or worst) at protecting consumer and employee data,” the Commission says.
“In this regard notification assists in understanding the privacy and security environment and aids the development of policy in this area. It also alerts the community to the prevalence of such incidents.”
On the flipside, the Law Commission recognises notification is likely to come at an economic and reputational cost to the agencies affected.
“There might also be insurance consequences: for example, companies might be reluctant to notify for fear of it being perceived as an admission of liability, thereby prejudicing rights to claim from their insurers.”
Furthermore, it says notification can cause people unnecessary stress, as often they won’t be able to do anything about it.
It can also be seen as a punishment to an agency, as it can undermine customer trust and lead to a loss of custom. This can act as an incentive to conceal rather than reveal breaches.
The New Zealand Bankers' Association won't comment on notification specifically.
Its acting chief executive Antony Buick-Constable says, "The industry will address the proposed changes to the Privacy Act 1993 more fully when the review process has been initiated.
"Cyber security is a major priority for banks. Ongoing investment in technology, processes and systems helps ensure our banks and customers are well-protected against potential threats of cyber crime, including data breaches. This long-term view and investment is also a commitment to maintaining a sustainable and successful banking sector in New Zealand."
New Zealand a soft target for cyber attacks
Symantec’s latest report reveals New Zealand is ranked second in the Southern Hemisphere and 21st globally for ransomware attacks – attacks that restrict access to your computer system and demand you pay a ransom for the restriction to be removed.
The average number of ransomware attacks in New Zealand per day increased by 163% from 2014 to 2015, to 108.
Symantec also ranks New Zealand fourth across Asia Pacific and 21st globally for social media scams.
Shaw says we’re a soft target as we’re an affluent nation that’s engaged with the internet.
“Advanced criminal attack groups now mirror the skill sets of nation-state attackers. They have well-resourced and highlight-skilled technical staff that operate during normal business hours – they even take weekends and holidays off,” Haley says.
He notes the effect of a data breach can be extensive. “Large businesses that are targeted for an attack will on average be targeted three more times within the year.”
New Zealand has within in the last few months been at the centre of a serious scam – ‘Slempo’ – targeting banking app users on Android.
Using a fake log-in screen, the malware locks a user's phone until they enter those details and steals them. It also can see text messages that the bank may send to verify a new password and then uses that code to gain access to accounts.
Shaw warns, “If your bank is using SMS as a two-factor authentication mechanism, I’d have a word with them. Frankly, SMS is archaic as a security technology for delivering one-time passwords.”
He acknowledge a number of banks do use SMS as a two-factor authentication mechanism.
All the banks in New Zealand have also been targeted by the ‘Dyre Financial Trojan’, which duplicates the bank pop-up on your internet banking and asks you to fill in your details to progress to the next page.
Buick-Constable says, "If a bank was responsible for a cyber security data breach, the bank would work to resolve the issue.
"Banks may be able to reimburse customers depending on individual circumstances and their terms and conditions. That doesn’t override each customer’s responsibility to protect access to their bank accounts."
The NZ Fire Service and Te Wananga O Aotearoa are two other examples of New Zealand agencies that have been hit by attacks over the past year.
Globally, breaches within the health services sector accounted for 39% of all the attacks in 2015, while attacks on business services accounted for 7% and insurance carriers 6%.
Below is the Financial Markets Authority's full statement.
Be wary of investment offers from outside the regulatory patch
After receiving more than 2,000 complaints since July 2014, the Financial Markets Authority (FMA) is warning investors to step inside the regulatory tent for their own protection.
Financial products and services from outside the perimeter of regulation are being offered to investors who are not realising the consequences. More than half of all complaints received were related to scams, or money being lost to – or withheld by – unregistered or unlicensed companies, some of which are offshore.
Often, the companies involved offer ‘big win’ products such as forex trading services, investment schemes, property seminars and forex training software.
The FMA remains focused on identifying any individual or entity that is operating in New Zealand without a licence or authorisation, where that is required by law. A number of these companies, however, are overseas operations which we will not be alerted to until a local investor has a problem with them. And, outside local jurisdiction, the FMA generally can’t help people to recover funds or take legal action.
Liam Mason, director of Regulation, says “The Financial Markets Conduct Act has determined what products are regulated and it has strengthened the powers we have over the providers’ conduct. Unfortunately we recognise there will always be businesses that deliberately set up outside our jurisdiction and still manage to entice New Zealand investors to use their services.”
The FMA’s response to this has been to alert the public when it is concerned with an individual or business by issuing warnings on their website and, in some cases, strongly recommending against investing with these companies.
“For example Forex trading is considered a high risk, complicated investment and so we recommend consumers protect themselves as much as possible when contemplating this – or indeed any – investment. Do some research and take advantage of the Financial Markets Conduct Act and the protections it offers the investor,” says Mr Mason.
While some financial products and services are offered by legitimate firms who do not require a New Zealand licence, when contemplating any involvement in a financial product or service the key things an investor should check are:
· The location of the provider - the FMA has more ability to help you if the business is in New Zealand.
· The Companies Office website – does the business have a New Zealand Director and does the company have the appropriate licence for the financial product or service they provide?
Be wary of Forex trading ‘training’ and ‘tools’ that promise a particular product or technique that gives access to better exchange rates or easy money. While software programmes and training courses can teach an investor how to make forex trades, no person or programme can ever accurately predict movement in foreign currencies. Property seminars also can make promises of no-fail wins on the property market.
For a full list of who requires a licence in order to do business in New Zealand, see our website at http://fma.govt.nz/compliance/licensing-and-registration/who-needs-a-licence/
For broader consumer information and guidance, please visit http://fma.co.nz/consumers/investment-basics/
By Gareth Vaughan
The regulation overseeing New Zealand's peer-to-peer (P2P) lenders is too light, and some operators here are facilitating loans to people who wouldn't get a loan from a bank putting the NZ industry at risk, says the ex-pat Kiwi running an Australian P2P lender.
Daniel Foggo, a New Zealander who is CEO of RateSetter Australia, told interest.co.nz his company had held back from entering the NZ market despite looking at launching here since early 2014. P2P lenders are online service providers that act as intermediaries matching borrowers and lenders.
"We have a strong interest because a number of our senior team are New Zealanders and because we know New Zealand consumers have been starved of alternatives to bank offerings. However we’ve held off this expansion as we feel the local industry is at risk due to a regulatory approach that is too light touch, and because of the approach to growth taken by some of the early market entrants," Foggo said.
"So whilst expansion into New Zealand is something we really want to progress, we’ll probably need to watch for a little longer to see how the regulatory environment and the behaviour of the key operators develop. "
'Relatively light touch'
Foggo said RateSetter had not applied to the Financial Markets Authority (FMA) for a P2P lending licence.
He describes NZ's approach to regulating the fledgling P2P sector as "relatively light touch," especially in terms of the thresholds required to gain a licence, the level of disclosures that must be made to investors and the on‐going regulatory oversight of P2P operators.
"This is evident simply by looking at some of the retail investor protections that are missing from New Zealand versus Australia," he said.
Foggo pointed out that in NZ compared to Australia;
‒ There’s no requirement to provide investors with a comprehensive offer document, explaining how the platform works and what the investment risks are (RateSetter's is here);
‒ There’s no formal compliance plan or formal external compliance committee an operator must comply with;
‒ There are no continuous disclosure obligations, to either the regulator nor investors;
‒ There are no specific obligations to treat investors equally nor for effectively dealing with conflicts of interest, which Foggo argues are especially important when an operator is mixing retail investors with wholesale and/or institutional investors;
‒ There are no requirements to use a third party custodian to reduce the risks associated with funds transfers. And;
‒ There is no requirement to hold operating capital proportional to an operator’s loan book.
'The FMA is happy for consumers to lose money'
On top of all this Foggo is critical of the FMA's attitude. Noting comments CEO Rob Everett made in a recent video interview with interest.co.nz. Everett said the regulations underpinning the P2P sector shouldn't be reviewed until after the industry has been through a downturn.
"What’s most concerning is the FMA’s expressed view that they don’t see a need to look at regulatory changes until there is a downturn. This is essentially a statement to consumers that they (the FMA) are happy for them to lose money in this space, and a statement to operators that they aren’t really aligned in supporting the longer term prospects of the industry," Foggo said.
As reported here last month, a major international study of alternative online financing in the Asia-Pacific shows NZ with the fourth highest volume of funding, and the second largest volume on a per capita basis. NZ scored the highest alternative finance volume on a per capita basis outside of China with US$59.37 per capita, followed by Australia (US$14.83), Singapore (US$7.27), Japan (US$2.83) and Hong Kong (US$1.28). China’s alternative finance market volume per capita was put at US$74.54 in 2015.
China is the world’s biggest online alternative finance market by transaction volume, registering US$101.7 billion (or RMB 638.79 billion) in 2015. This accounts for nearly 99% of the total volume in the Asia-Pacific region. Of the rest of the region, New Zealand trailed only Japan and Australia by volume at US$267.77 million of funding during 2015.
To date the NZ market by volume has been dominated by Harmoney, the first licensed P2P lender to launch in NZ. Since its September 2014 launch, Harmoney has facilitated more than $220 million of lending with about 75% of its lenders'/investors' funds coming from institutional investors.
Since Harmoney's launch three further P2P lenders have been licenced by the FMA and launched towards the end of 2015. They are Squirrel Money, LendMe and Lending Crowd.
Foggo suggested a global consensus on what constitutes the right regulations for P2P lending is emerging, and the FMA would do well to replicate some of these.
"In the UK (RateSetter's ultimate home) we’ve seen the FCA (Financial Conduct Authority) design regulations from the bottom‐up and in a very well thought‐out way. We’ve also seen the European Banking Authority recommend similar policies as it seeks to harmonise the regulatory approach across Europe. And maybe unsurprisingly the regulations in Australia, at least if an operator wants to accept funds from retail investors, are very similar to those in the UK and those recommended by the European Banking Authority," Foggo said.
Harmoney's P2P model is closer to that of US giant Lending Club than the British style advocated by Foggo.
"When thinking about regulating a new industry, it’s important to strike the right balance between supporting innovation and protecting consumers. I think a more even balance has been struck in the examples above (than NZ), so I would leverage the time and effort already undertaken by overseas regulators, and broadly replicate those regulations and investor protections," Foggo added.
"We’ve already talked to the FMA about what regulations we’d like to see in place before we make the investment to expand into New Zealand," added Foggo.
Licensed P2P lending in NZ was enabled by the passing of the Financial Markets Conduct Act, which then-Commerce Minister Craig Foss hailed in 2014 as "once-in-a-generation" reform that makes up an integral part of the Government’s Business Growth Agenda "to restore confidence in our financial markets."
FMA says its role is to ensure P2P regime operates as intended by Parliament, says institutional investors can't obtain advantages over retail investors
Unsurprisingly, the FMA says it is actually not happy for consumers to lose money through investments made in loans facilitated through P2P lending platforms.
"The FMA’s role is to ensure the regime operates as it was intended, and within the defined parameters of the legislation established through Parliament. It is incorrect to say the FMA is happy for consumers to lose money," an FMA spokesman said.
Commenting on the obligations for P2P platform providers under the Financial Markets Conduct Act, the FMA spokesman said while a Product Disclosure Statement is not required, there is a requirement for "certain pertinent information" to be made available to investors about the loans themselves. Each platform is also required to publish a disclosure statement that details how the platform operates.
"Each platform is required to have a compliance plan. While the details of that plan are not prescribed, the plan is assessed as part of the licensing process and must be appropriate for the scale and nature of the business," the FMA spokesman said.
"Each platform is required to have a conflicts of interest policy. And investors must be treated fairly. We have been quite clear with platforms that wholesale (or institutional) investors must not be able to obtain any advantage over other investors."
'Significant impact' if a single P2P operator gets in trouble
Foggo said P2P lending can bring significant benefits to a financial system, because "in its purest form" it helps foster a more diverse and more resilient financial system.
"Most notably it diversifies financial resources away from a concentrated core of ‘too big to fail’ institutions, the risks of which are inherently underwritten by taxpayers. It also reduces the reliance of the financial system on wholesale funding, it removes the risks attached to leverage within financial institutions, and it removes the risks attached to the maturity transformation undertaken by the banks," said Foggo.
"I also think that it’s important to remember that the downside risks of investing on a platform are actually very low compared to many financial investments. As a platform operator we are paranoid that a single investor might not get a positive return in a single investment period. Losses might occur on some platforms in a severe downturn, although I think that it’s important to recognise that given the structural nature of P2P lending, these losses should be relatively small, not like the finance company failures of the past, and that if they do occur, its likely in an environment where equities, for example, are down substantially more."
Nonetheless "if a single operator in our region does experience investor losses, the impact on the trust of the industry would be significant," Foggo said.
"I think in this context it is important to raise an important distinction between the industry in New Zealand with the industry globally. Internationally operators have built scale through offering borrowers better interest rates than offered by banks, whereas in New Zealand the focus of some has been to offer finance to those that wouldn’t get approved for a loan from a bank."
"To give this some perspective, to date in Australia RateSetter has funded over 1,900 loans at interest rates typically 4% to 10% lower than offered by the banks, with only four loans in default. While if you look at the statistics for the industry in New Zealand you’ll see some operators have average interest rates that are somewhat higher than the banks, and default rates that are heading some multiples higher," said Foggo.
"This distinction does put the New Zealand industry at risk, and is one of the reasons we have paused our expansion into New Zealand."
RateSetter open to NZ investors
RateSetter Australia is open to NZ retail investors and since it launched in late 2014 Foggo said it had attracted "a couple of dozen." On average they've invested just under $40,000 compared to the $11,000 overall average. Foggo said there were currently no plans to open RateSetter Australia to Kiwi borrowers, but added "never say never."
He said RateSetter Australia has no plans to be "a shop front for traditional finance" and focuses on providing consumers with an alternative to the traditional banking system.
"Consequently we don’t anticipate we will ever have a bank as a shareholder, nor do we expect to be lending bank funds any time soon. Our focus on consumers is evident from the two years we invested to work with the regulator in Australia to become the first to open up P2P lending to retail investors, and why every one of our lenders in Australia is a retail investor," said Foggo.
"From a New Zealand economy perspective, I think there is also an opportunity for genuine retail investor-led P2P lending to ensure finance generates returns that stay in New Zealand, rather than being siphoned off to overseas owned banks or offshore fund managers."
*This article is a combination of two articles that appeared in our email for paying subscribers early on Monday and Tuesday morning, respectively. See here for more details and how to subscribe.