Personal Finance

  • How banks take advantage of 'deluded optimists', keep credit card rates high, set honey traps, and confound regulators

    By David Chaston

    On Thursday, September 22, 2016, newly appointed Reserve Bank of Australia Governor Philip Lowe was asked this question in his appearance before the Australian Parliament's economics committee:

    "Why are credit card interest rates as high as 20% plus even after official interest rates have fallen to record lows?".

    The question is not unique; it has been asked many times of others.

    But his answer was unique: Lowe said he did not know.

    "I wish I knew the answer to that", he is reported as saying.

    "If you ask the same questions in your subsequent hearings, I will be interested in the answers," Lowe added.

    He is referring to the same Australian committee's role in quizzing the CEOs of their four pillar banks. They will each separately appear before this committee next week for a four hour individual grilling, an event that will become an annual one on their calendar.

    The credit card question is sure to be raised.

    What about in NZ?

    It is equally relevant on this side of the ditch. Last year Commerce and Consumer Affairs Minister Paul Goldsmith and the Commerce Commission made it clear they either won't or can't do anything about high credit card interest rates.

    In the past, when the benchmark OCR went up, credit card interest rates went up by a similar amount. Banks claimed credit cards were funded at rates based on the 90 day bank bill rate.

    And when they went down, those same interest rates tended to slide back as well, maybe with a small lag.

    But since 2012, that changed.

    Credit card rates did not respond to falling wholesale rates.

    We will be watching those Australian hearings carefully for the explanations given by the bank bosses.

    Margin swells

    Meanwhile, back in New Zealand, the margin between the "weighted average interest rate on interest-bearing advances" on credit cards as revealed in the Reserve Bank of New Zealand data series C12, and the 90 day bank bill rate (RBNZ B2) has grown to its highest level since these records began.

    And that comes as the wholesale benchmark has reached a record low.

    Why isn't competition working in the credit card market?

    Clearly Philip Lowe doesn't know, but would be keen to find out.

    It is reasonable to suspect the RBNZ and Commerce Commission don't know either.

    Banks seem to have implicitly decided to not compete on price. Or maybe there are some quiet signals coming from the credit card interchange brands? It is hard to know, but clearly there are no price competitive instincts in this sector.

    Deluded optimists

    And the situation is not helped by customers.

    About 40% of credit card customers pay their balances off on time, without incurring any interest costs.

    However, that leaves a surprising number of users who succumb to these 20% interest rates.

    They have been labelled as "deluded optimists" who believe they will pay their cards off on time. They're not concerned about rates either because they falsely believe they won't have to pay them. Psychological tests show the more likely people are to select cards with high rates, the more optimistic they are about life.

    Banks focus their promotion of credit card benefits around 'rewards' and 'low or no-rate balance transfer terms'.

    Both are honey traps.

    'Rewards' only work for the very disciplined, and usually come with cards that have a high annual fee.

    Promotional 'balance transfer terms' are an even stronger honey trap. The benefit is real for the balance transferred, but any additional charges to the card attract the full interest rate. However, you also give up all interest-free days. It is this lack of interest-free days that most consumers don't know about, and is the trap. It is very hard to make a balance transfer on to a new card at the promotional or zero rate, and then not use the card at all during the promotional period. If you do, the bank has gotcha.

    This is how one bank explains it:

    You can make new purchases and cash advances on the credit card you transfer an outstanding balance to. Both will incur the current standard purchase interest rates from the date the transaction is made with no interest free days.

    This disclosure is there in full; it is just not in the promotion and certainly not in the customers mind when they sign up.

    Effectively, as the RBNZ data shows, banks use slick marketing to take the focus off high credit card rates, make low promotional rates slip into high effective rates quickly, and bait clients with 'rewards' that come with high costs.

    'Deluded optimists' think they can avoid these traps, but the data shows the extent of their delusion. Bank profits reinforce the delusion.

  • Commerce Commission flags concerns over spike in finance company complaints despite new consumer credit laws being introduced

    New consumer credit laws don’t appear to be preventing finance companies from using questionable techniques to peddle debt.

    The Commerce Commission received 40% more credit-related complaints related to finance companies in 2015 than it did the previous calendar year. The Credit Contracts and Consumer Finance Amendment Act 2014 (CCCFA) took effect in June 2015.

    The law change includes an update on lender responsibility principles and changes to some of the rules around disclosure. It also gives the Commerce Commission more enforcement tools and enables tougher penalties to be dished out in court.

    Yet the Commerce Commission’s Consumer Issues report shows it still received 70 credit-related complaints regarding finance companies in 2015.

    Finance companies were the lenders named in 43% of its credit-related complaints, despite them only comprising 3% of the credit market. A total of 24% of credit-related complaints came from mobile traders, car sales and financiers and debt collection and credit services.

    “A similar pattern is noted in 2015 calendar year Insolvency and Trustee Service data, which identifies finance companies as claiming to be owed approximately $70 million. In comparison, trading banks, with 97% of the lending market, were claiming $235 million (approximately three times as much as finance companies),” the Commerce Commission says.

    Around 40% of the complaints about finance companies were generated by seven lenders, including GE Finance, Harmoney, Aotea Finance, Avanti Finance and GE Credit Line.

    “Approximately 70% of 2015 complaints about finance companies were generated by 30 lenders that were not present in 2014 complaints. The majority of these new lenders appear to be smaller, lower tier lenders,” the Commission says.

    “The main issues raised in complaints about finance companies were: fees, responsible lending provisions, disclosure and hardship.”

    Including other lenders, the Commission says: “Non-compliance with disclosure obligations, with 39 complaints, was the most complained about conduct. Of those complaints, initial disclosure, with 30 complaints, was the most complained about lender behaviour.

    “However, initial disclosure complaints have decreased 33% from 2014. Almost all of the lenders in the 2015 complaints were not present in the 2014 complaints.”

    Complaints not leading to many Insurance and Financial Services Ombudsman investigations

    It is worth noting the Commerce Commission's report includes all the complaints it's received, and doesn't separate out the ones it's acted on.  

    The Insurance and Financial Services Ombudsman's (IFSO) 2016 annual report, released following the Commission's report, provides a bit more context around non-bank lender complaints that have actually been investigated by a third party.

    It shows the Ombudsman received 245 complaint enquiries related to credit contracts, but only investigated 10. 

    The Banking Ombudsman's 2015 annual report doesn't provide the same breakdowns, but shows lending-related complaints made up 33% of the complaints it received. 

    Concerns voiced over lenders milking debt culture

    The Commerce Commission, reporting back from annual meetings it holds with advocates who represents consumers, says: “There is near universal agreement among advocates of a debt culture in New Zealand created by easy access to credit. The use of comparatively expensive options such as payday loans and mobile traders has become a part of life for some clients of budgeting services."

    “Budget advisors report that a number of clients, whose budgets are in deficit, have still been given loans which put them further into hardship.

    “There is a concern that efforts made by some lenders to assess the suitability of a loan for a borrower may fall short of the Responsible Lending Code and their obligations under the principles…

    “While there are reports of a noticeable improvement in some lenders’ practices in response to the principles [of the CCCFA], there are also indications that some lenders’ practices have remained unchanged.

    “At the credit roundtables we were told about lenders providing top-up loans within months of a loan draw-down, consolidating loans and providing additional lending on the ‘spare repayment capacity’, and budgeting services clients having multiple simultaneous low-value loans. Some advocates noted that these practices are evident with clients whose budgets are already in deficit.

    “Consumer advocates attending the credit roundtables were concerned that lenders may not be making enquiries before entering into agreements with a borrower or assisting the borrower to be reasonably aware of the full implications of entering into the agreement…

    “It was reported at the credit roundtables that banks are declining hardship applications as they do not consider changing the loan repayments to a longer repay.”

    Furthermore, the Commerce Commission identifies unarranged bank overdrafts, which incur additional fees, as an “emerging consumer credit risk”.

    It also puts consumer credit risk being calculated inconsistently in different geographic locations, in this category.

    Finance companies capture high numbers of low hanging fruit

    The Commerce Commission’s report also includes figures collected by the New Zealand Federation of Family Budgeting Services’ (NZFFBS) clients.

    Government departments excluded, 56% of their clients’ debts (by value) were owed to 13 companies in 2015.

    The table below shows the number of NZFFBS clients with debts owing to or through a range of companies, the total value of these debts and their value as a percentage of the total amount of debt.

    Bank loans and credit cards accounted for 32% of NZFFBS’s clients’ debt (by value), mortgages 23%, finance companies 17%, and government departments 15%.

    NZFFBS data also shows Poverty Bay and Hawke’s Bay have about 5% of the country’s population, but 10% of debt. Wellington has 7% of the population and 11% of the debt. The Far North has 4% of the population and 8% of the debt, while Manukau is on par with debt to population levels. 

  • Banks pull back their headline term deposit offers to shorter terms. Savers scramble over minor differences. Some PIE funds give a little bit extra

    The term deposit interest rate offerings from banks are quietly changing lower.

    Since we last looked at these in early September, there has been some further slippage.

    It has now been six whole months since maximum rates were last offered at 4% or higher by a national bank. (The local branch of the Bank of India was the last of any bank to slip below that threshold and they did that at the beginning of this month).

    What we are seeing are 'headline' rates getting shorter and shorter.

    For example, the latest to do this was ANZ, shifting its 3.60% rate offer from 18 months to now just 8 months.

    Here is a summary of each institution's top rate offer for terms less than two years:

      Top rate for Term ... As at PIE, equiv.
        (less than 2 years) for a 33% taxpayer
      %   %
    3.60 8 months* 3.87*
      3.45 18 months 3.75
    ASB 3.65 18 months 3.98
    3.55 9 months 3.86
      3.30 18 months not offered
    Kiwibank 3.60 6 months 3.76
    Westpac 3.50* 6 months* 3.75*
           
    3.60 6 & 18 months not offered
    Heartland Bank 3.40 12 & 18 months 3.69
    HSBC 2.90 12 months not offered
    RaboDirect 3.50 6 months 3.76
      3.40 12 months 3.65
    SBS Bank 3.60 18 months not offered
    3.25 18 months not offered
    UDC 3.50 9 months not offered
      3.55 12 months not offered
      3.65 18 months not offered

    [* Updated. This rate was missed in an earlier version of this story.]

    If you are in the top 33% tax bracket, you have to option to use a PIE account to get a more effective after tax rate. (The PIE rates in the above table show what the equivalent non-PIE rate would be, enabling a fair comparison with regular rates).

    At this time, you can "almost get 4%" using the ASB 18 month offer as a PIE. Either way, ASB will only offer you 3.65%, but the tax is at 28% for those in a PIE account (hence the higher comparison rate above for those who would otherwise pay tax at 33%).

    Every little bit counts when rates are low.

    You can of course go up the risk curve by checking out other types of institutions. Finance company Liberty Financial, which has an investment grade credit rating of BBB-, is still offering rates of 4% and above. Most sub-investment grade rated finance companies do so as well.

    But the balance of security (as measured by credit ratings) needs to be weighed against return (as measured by interest rates).

    The option with the highest security (Government issued "Kiwi Bonds") are currently only paying 2.00%.

    Our unique term deposit calculator can help quantify what each offer will net you.

  • Bernard Hickey looks at whether to fix or float and how long to fix as the Reserve Bank looks to cut the OCR again later this year and as the banks refuse to pass on lower wholesale rates

    By Bernard Hickey

    Could mortgage rates have finally bottomed out? That's the question many are asking, despite the Reserve Bank cutting the Official Cash Rate at least twice and possibly three times in 2016.

    The answer is important for those thinking of whether to fix or float their mortgage. Normally, the prospect of further falls in the Official Cash Rate (OCR) makes floating more attractive than is usually the case because floating mortgage rates are usually cut in line with the OCR cuts. But this time the banks are taking a different approach to cuts in the Official Cash Rate.

    The Reserve Bank has cut the OCR twice or by 50 basis points to 2.0% in 2016, but banks have only passed on about 30-35 basis points of those cuts. That's because they say their overseas funding costs are increasing, although there's debate about that, and they say they can't pass on all the cuts to term depositers.

    Savers are not growing their term deposits quite as fast as they used to, which means the banks have to work a bit harder to ensure they get the funding they need to keep growing mortgage lending. See more here from David Chaston on term depositors benefiting a bit from the banks not passing on all the OCR cuts to them.

    The Reserve Bank also forces the banks to have a certain percentage of their funding from long term overseas bond issues and from local term deposits so they don't get burnt again by a freeze on international 'hot' money markets like they did in 2008/09. That in turn forces them to go after term deposits with higher interest rates than they normally would.

    There's a couple of other things upsetting the usual bank behaviour this time around. The Reserve Bank is reviewing capital requirements for banks and many think the Reserve Bank will require the banks to hold more capital against their riskier mortgages to rental property investors. That would mean the banks have to put some of their profits aside as capital, rather than pay it out as dividends to shareholders. In preparation for these higher capital requirements from Australian and New Zealand regulators, the banks believe they need to build up their profit margins to put aside that capital. One way to build up their profit margins is to not pass on all the falls in the OCR and in wholesale interest rates to mortgage borrowers and term depositers alike.

    Bank net interest margins had been easing back a bit in recent years as they competed a little bit harder for new business and as borrowers moved from more profitable floating rate mortgages to less-profitable fixed rate mortgages. But that fall in margins looks to have stopped and the banks now want to build up their net interest margins and profit stocks again ahead of these new capital requirements.

    The end result of all this is that, for example, two year wholesale 'swap' rates have fallen 67 basis points to 2.09% this year, while the two year average advertised mortgage rate has fallen just 22 basis points to 4.4%. To be fair to the banks, the specials the banks offer of around 4.3% for owner-occupiers with deposits of more than 20% are better, but they also haven't fallen nearly as much as wholesale rates have fallen in recent months.

    That's also despite the Reserve Bank signalling on September 22 that it planned to cut the OCR at least one more time in 2016, and possibly once more in early 2017. See more in my OCR report on September 22.

    So the equation is slightly different to the normal situation, but not different enough to change the relative attractiveness of fixed mortgages vs floating. The bank's discounts on fixed mortgages, particularly shorter-term ones, mean that fixed mortgages are still more attractive than floating rate deals, particularly now the banks are not passing on all the OCR cuts.

    So how does this fit into the decision fix or float?

    My view for several years has been that interest rates stay lower and for longer than most economists and the Reserve Bank have forecast. They may even fall more than some expect.

    That makes me more likely to fix for a shorter terms than longer terms because it allows me to take advantage of refixing at a lower rate reasonably soon and be able to take advantage of the discounts for fixing. The banks subsidise fixed rates at the expense of higher floating rates, so even though floating would normally seem to make more sense if rates were to fall, the cheapest and most flexible option is a shorter fixed mortgage. The idea of a 10 year fixed mortgage scares me witless.

    That rate of 5.89% for 10 years might have looked good earlier last year when lots of people thought interest rates had bottomed out and would bounce, but what if the long term average for mortgage rates is in the process of a structural fall to more like 4-5% instead of the 7.4% we've seen on average over the last decade?

    Imagine the break fees on a 10 year mortgage. As it turns out, TSB have since cut their 10 year rate to 5.75% and it is well above the 4.3% low rates on offer for one year fixed rate mortgages.

    Could they go lower?

    The slide in fixed mortgage rates over the last 18 months has made it much more difficult to justify paying the 5.60% offered by most banks for floating rate mortgages. The question then is: how long to fix?

    The answer to that question depends on your view on where inflation in New Zealand and globally is going, and what you think central banks will do about it.

    The jury is in overseas. They are treating this very low inflation and deflation as a cyclical issue that needs to be addressed with even lower interest rates and money printing. The People's Bank of China has also eased monetary policy repeatedly this year, as has the Reserve Bank of Australia. The Reserve Bank of New Zealand was an outlier for all of last year and was forced reluctantly to cut this year because inflation remains well below its 1-3% target range.

    Only the US Federal Reserve is talking about putting up rates, albeit from 0.5% percent, but it has talked about it now for years without actually doing it. Some think there will finally be another US rate hike in December, but there remains plenty of doubts about whether rates will actually rise much at all. There may be one more small hike and then a long pause.

    The global trend over 15 years has been for interest rates to fall ever lower. It's not just about falling petrol prices. There is now a growing debate about whether the deflation is structural and linked to changing technology, the globalisation of services and ageing populations. For now, central banks think it's cyclical. The wisdom of crowds in financial markets, particularly bond markets and stock markets, suggest it might be structural.

    Structural or cyclical?

    If it is structural then interest rates could remain low and possibly fall even further. Remember that interest rates averaged around 3% for all of the 1800s during the first age of industrialisation as new machines lowered the cost of production.

    Some argue the world is entering a second age of industrialisation that delivers a similar type of 'supply shock' that lowers prices of goods and services for decades to come. The age of the smartphone has clearly driven down prices for many services, including shopping, accounting, music, telecommunications and taxis. Could we see many other areas such as education, health and financial services similarly transformed in a deflationary way?

    Calculating the gains

    There is a way to work out which mortgage and which rate saves you the most money, relative to floating rates. Interest.co.nz has built a special fixed vs floating calculator. See the table below for the latest calculations on a NZ$500,000 mortgage.

    Here's a table that shows the benefits of moving a NZ$500,000 mortgage of moving from a floating rate of 5.65% to the various fixed options, assuming different interest rate tracks. The gains are indicated as a positive and the losses are negative. The middle track for the OCR is in line with market expectations. See all mortgage rates here.

    The latest estimates, given the drop in fixed rates in recent months, suggest fixing is cheaper than floating across the board. Fixing for one year would give you the biggest benefit and the most flexibility to fix again at a lower rate if, as bank economists forecast, interest rates are cut again over the next year.

    OCR rate by late 2017 One year fixed (4.3%) Two year fixed (4.6%)
    OCR at 1.5% (low) + NZ$6,477 + NZ$7,458
    OCR at 1.75% (middle) + NZ$9,272 + NZ$10,283
    OCR at 2.0% (high) + NZ$12,379 + NZ$13,389

  • Money remitter shut out by banks due to AML concerns claims it has no choice but to physically ship cash around the world

    By Jenée Tibshraeny

    Anti-money laundering and countering the financing of terrorism (AML/CFT) laws have sparked a major New Zealand money transfer operator to consider going back to the dark ages of shipping cash around the world.

    KlickEx, which also processes transactions for a number of other remitters in New Zealand, is planning to transport what could be hundreds of millions of dollars of cash, mainly between New Zealand and the Pacific Islands, each year.

    Its founder and chief executive, Rob Bell, wants to use 130 foot “high speed vessels” to transfer funds KlickEx can’t balance using its currency clearing system.

    He claims the company’s being forced to use an archaic system to stay in business, due to banks’ “de-risking” policies.

    The (unintended) consequences of AML/CFT

    Banks around the world have systemically been ditching their remittance clients, in fear of being held responsible for soliciting any illegal transactions under tough AML/CFT rules. 

    The issue is that if a remitter gathers funds from a number of people in New Zealand, puts these in a bank account, and then transfers the funds to recipients overseas, their bank doesn’t necessarily know where the money is coming from and who it’s being sent to. It could therefore be breaching AML/CFT rules.

    Yet if remitters go out of business, consumers will pay the price. Migrants in particular rely on remitters to transfer money to their homelands, paying much lower fees than what the banks charge.

    While the Reserve Bank has spoken out against banks’ blanket de-risking, Finance Minister Bill English has ruled out “radical” policy changes to shield money remitters from banks' blanket de-risking policies.

    A High Court judge in May also set a precedent by clearing Kiwibank of any wrong-doing in closing the accounts of one of its remaining few remittance clients, E-Trans International.

    KlickEx has since backed away from the legal action it threatened Kiwibank with, and has had its accounts with the bank closed.

    While some banks still service remitters, Kiwibank had been considered the “last bank standing” in New Zealand.

    Replicating the international banking system

    Speaking to Interest.co.nz in a Double Shot Interview, Bell explains that in the absence of a bank account, KlickEx is emulating the cash clearing system banks use to balance payments coming and going between countries.  

    “What we try to do is balance the number of payments coming in to New Zealand with the ones going out,” he says.

    “Generally when someone sends money to Tonga or Samoa, we have someone on the other side wanting to bring money out. So you have lots of people sending money home for food. Then you have lots of the purchasers of food, the importers there, needing to pay for that food back in New Zealand. So we just manually manage that.”

    Without being able to tap into the economies of scale of a banking system, Bell says it’s “kind of ridiculous the lengths that we’re going to”.

    “When we had banks, we could actually go to the banks and offset that ourselves and just purchase from the wholesale market. But as the banks are shutting out our access to first of all the wholesale market, we then approach the commercial clients and say, ‘Hey do you want free FX?’.”

    Bell says KlickEx’s “commercial clients” include “every business you can imagine. Just regular businesses… Supermarkets, importers, just normal, everyday, very low risk people”.

    It collects cash from around 80 locations in New Zealand, including shops offering remittance services. Due to commercial sensitivity, Bell won’t reveal which remittance brands use KlickEx’s netting system, but says it’s a large bulk of those operating in New Zealand.

    While KlickEx has been using its own cash clearing system in a limited capacity since 2007, it has this year rolled it out across the business more broadly.

    Using boats to become a 'necessity'

    Bell recognises it can be difficult for the company to balance the funds going in and out of a country, as the quantities don’t always match up.

    This is where the boat idea comes in.

    “If you can’t use a monetary exchange or an arrangement with a bank, you have to go to physical shipping.

    “We need to be able to move collateral. If we have a surplus of say New Zealand dollars, we need to be able to get some sort of collateral up to say Tonga to do payouts, and that might mean shifting pallets of cash, which is crazy.”

    KlickEx’s financial results aren’t publicly available, but Bell says the company transferred $400 million during its “peak year”.

    Asked how much of this may be considered “collateral” and could therefore be moved on boats, he says: “A very small percentage of the total daily movement would need to be exposed to this.”

    Bell says he can’t go into more detail. “I can’t tell you what’s going to be sitting on ships - that’s too dangerous.

    “Everything that we don’t net, has to move eventually, or wait. We have synthetic liquidity systems that can bridge those shortfalls.”

    Asked how seriously he is taking this proposal, Bell says: “It will become a necessity.

    “We need options because we can’t be seen, or known to put large amounts of value transit onto Air New Zealand or Virgin flights.”

    Going into more detail on the boats he wants to use, Bell says: “We need a couple of them, because you can’t have one because everyone will know that might be the one that has cash on it. You have to run decoys.

    “It sounds a little crazy, but… we spend more money on our cyber security than it would cost to run a big diesel engine like that, so it’s not actually a big cost increase.”

    Bell concludes: “It doesn’t really increase the risk that much.”

    Department of Internal Affairs 'not responsible for ensuring the safe transportation of the cash'

    The Department of Internal Affairs - the supervisor responsible for monitoring remitters’ compliance with the AML/CFT Act - says: "The DIA is aware that KlickEx has proposed using boats to transport cash as part of their money remittance services. 

    "The Department is not responsible for ensuring the safe transportation of the cash. That would be a business decision for and responsibility of KlickEx.

    "As with any reporting entity, KlickEx must maintain an adequate and effective AML/CFT programme. This includes the requirement to update their AML/CFT risk assessment and procedures to address any changes to their business model.

    "The AML/CFT Act also has specific reporting requirements (sections 68-71) relating to the transportation of cash into or out of New Zealand."

    It also confirms: “We do not have any current or previous investigations relating to KlickEx. In 2014, we completed a desk-based review of Klickex’s written risk assessment and AML/CFT programme and were satisfied with the level of compliance of these documents."

    KlickEx: 'Everyone knows what we're doing is not the solution'

    Bell says there’s a requirement for KlickEx to undergo an external audit every two years. While it had bank accounts, banks also did “quarterly reviews” of its business.

    Since using all its own systems, KlickEx has not been audited.

    “I feel for the regulators… they want a solution. Everyone knows what we’re doing is not the solution,” Bell says.

    He maintains being ditched by banks is an unintended consequence of the AML/CFT legislation.

    “Because there’s this ambiguity [around the legislation], you’re forcing peripheral people like us… to go to these really archaic systems. We’re stepping back in process, but applying wonderful technology to it.

    “And the regulators are looking at us going, ‘You’re buying ships - this is crazy, but solve the problem. It is better to do this than it is to see the prices [consumers pay] go up’.”

    *This article was first published in our email for paying subscribers. See here for more details and how to subscribe.

  • Julie Anne Genter says it's time for some good old fashioned auditing and policing of high net worth individuals' tax behaviour

    By Julie Anne Genter*

    National’s Tax Working Group used the following graph (p30) in 2010 as part of their justification to cut the top tax rate.

    The big peaks around the top tax threshold were evidence of a suspiciously high number of taxpayers declaring income at the threshold before the top tax rate kicked in. The Group argued that the high top tax rate incentivised wealthy taxpayers to use trust and company structures to hide income and avoid paying their fair share of tax. 

    Instead of going after tax cheats, National decided to increase tax thresholds and reduce the top tax rate to bring it into closer alignment with the lower company and trust tax rates – arguing that this would remove the incentive to hide income and avoid paying the top tax rate. 

    We know now, in hindsight, how the story ended.

    National’s 2010 upper-income tax cuts sent the Government deeper into debt and helped fuel the growth of inequality in New Zealand. But did tax ‘alignment’ eliminate the tax dodging behaviour around the top income tax rate (33%) now that it was closely aligned to the trust (33%) and company tax rates (28%)? 

    Here’s the same chart six years on (black line).

    The updated chart from IRD’s website shows the same suspicious peak, now at a higher threshold. 

    Turns out that wealthy people are still arranging their tax affairs to avoid paying the top tax rate on their income despite a big cut to their top tax rate. 

    Last week, this immoral behaviour was further reinforced by Hamish Fletcher who uncovered that over a third of the High Net Worth Individuals monitored by IRD last year declared personal income of less than $70,000. 

    National’s plan to address tax dodging at the top end of the income scale by aligning tax rates has not worked. 

    It’s time the National Government invested in some good old fashioned auditing and policing of high wealth taxpayer behaviour in New Zealand. 

    The signs are not promising, however, if Budget 2016 is anything to go by:

    Note: In case you’re wondering about all those other spikes, below $25,000, they reflect taxable transfers such as welfare benefits or NZ Super, with large numbers of people having the same taxable income.

    -----------------------

    *Julie Anne Genter is the Green Party's finance spokesperson. This article first appeared on the Greens' website here and is used with permission.

  • ANZ increases its eight-month term deposit rate by 10 basis points to 3.60%, matching the bank's five-year rate

    ANZ has increased its eight-month, or 240 day, term deposit interest rate by 10 basis points to 3.60%.

    That rate is the same as the bank's five-year rate, making it the equal highest carded term deposit rate currently on offer, for any period from one month to five years, from the country's biggest bank.

    Eight months is an unusual term, with this ANZ offer the only carded eight month term deposit rate currently on offer from a bank. ASB does, however, currently have a 3.60% seven-month rate.

    At the same time ANZ is increasing its 240 day PIE Fund rate by 10 basis points to 3.60%, which again matches the bank's five-year PIE Fund rate.

    The changes are effective from today, Friday, September 23.

    The latest term deposit rate move from ANZ comes after the bank last week cut its 18 month 'special' term deposit rate by 15 basis points to 3.45%. That 18-month 3.60% rate had been pitched by ANZ as a reason it only passed on five basis points of August's 25 basis points Official Cash Rate cut to borrowers. 

    See all banks' carded, or advertised term deposit rates for one to nine months here.

    And see all banks' advertised, or carded, term deposit rates for one to five years here.

  • Government mulling credit, debit card interchange fees charged to businesses and surcharges faced by consumers in retail payments probe

    Commerce and Consumer Affairs Minister Paul Goldsmith says he is considering advice from officials on wide ranging retail payments issues. This follows a report issued by Retail NZ last November suggesting NZ retailers and consumers may pay substantially more than overseas counterparts for credit and debit card transactions.

    Goldsmith says after considering Retail NZ's report, and following a meeting in February, he and Finance Minister Bill English asked officials to look into the issues it raised. 

    “In late July this year I received advice from MBIE officials and am currently considering this advice and discussing it with colleagues," Goldsmith said.

    “The report focuses on interchange fees charged to businesses but does look at surcharging to consumers as part of a wider discussion. The report also considers how New Zealand’s retail payment systems are performing, the level and transparency of fees and the current state of innovation in the system." 

    “Currently, for example, consumers have access to EFTPOS which has zero fees. However if the use of EFTPOS declines, the public could face more fees on alternative transaction modes," Goldsmith added.

    The Government appears to be considering publishing a consultation paper on these payments issues, although a spokeswoman for Goldsmith said nothing has been confirmed yet as he is still considering officials' advice. 

    “As Commerce and Consumer Affairs Minister I am focused on ensuring New Zealanders get a fair deal on transaction fees while at the same time encouraging innovation. The government will continue to approach this matter in a thoughtful and considered manner," Goldsmith said.

    'No regulation, little transparency'

    In its report Retail NZ described NZ as increasingly a nation where payments for everything, from groceries to airline tickets, to restaurant and doctor's bills, are paid electronically.  It pointed out that, unlike most developed economies, there is no explicit regulatory regime covering the costs of payments systems in NZ, and there is little transparency regarding fee levels.

    "This means that New Zealand consumers pay substantially more in hidden charges for debit and credit card payments than consumers in other markets such as Australia. In a recent report [commissioned by Retail NZ], economic consultancy Covec, estimates that, in 2015, the hidden cost of payment systems to shoppers is currently approximately $380 million per annum. This is forecast to rise to as high as $711 million by 2025 - an estimated total cost of $3.1 billion over the next 10 years as consumers increasingly adopt scheme debit," Retail NZ said.

    "The costs are expected to rise substantially over coming years. Banks and card companies are incentivising customers to move away from traditional EFTPOS and adopting new forms of contactless payments, such as Visa PayWave and Mastercard PayPass. These come at a substantially higher acceptance cost for the merchant, which translates into higher prices for consumers, and a wealth transfer from New Zealanders to foreign-owned banks and credit card companies."

    A report from the London-based Lafferty Group in 2013 noted NZ was one of the world's most profitable credit card markets.

    'The case for regulation in NZ needs to be investigated'

    A Treasury letter released under the Official Information Act shows advice to English in February suggested investigating the case for regulation of retail payments in NZ.

    "The Treasury agrees with the Ministry of Business Innovation & Employment’s judgement that the case for regulation in New Zealand needs to be investigated, given that market forces appear unlikely to drive more efficient outcomes absent government intervention. Competition between the card schemes appears to be driving higher, not lower, fees. Furthermore, new payments providers (such as Apple Pay, Android Pay, and Semble) continue to rely on bank-issued scheme cards for their underlying payments processing," Treasury said.

    "New Zealanders and New Zealand business rely heavily on electronic payments for retail transactions. In the past, the dominance of the low-cost EFTPOS system has helped ensure that the costs of these electronic transactions were among the lowest in the world. However, the growing dominance of higher-cost scheme debit and credit cards (such as Visa and MasterCard), and contactless payments technologies (such as Visa payWave and mobile wallets) is increasing the costs to business for accepting electronic payments. To some extent, higher costs are being offset by benefits in terms of convenience, online functionality, and cardholder rewards." 

    "However, there is increasing concern that the costs of accepting these payment methods is excessive, and that competition is unlikely to reduce these fees given the unique structure of the market. At present, retailers pay an estimated $370 million (0.15% of GDP) per year on 'interchange fees' associated with electronic payments. There are also concerns that the level and proliferation of such fees could increase substantially over time as EFTPOS use declines (as is widely expected)," Treasury said.

    "Our overarching concern is that “excessive” interchange fees could unduly increase costs for business, particularly smaller businesses, and get passed onto consumers through marginally higher prices. This in turn could result in a deadweight cost to the economy, potentially in the magnitude of hundreds of millions of dollars per annum." 

    Treasury noted interchange fees are directly regulated in other countries such as the United States, the European Union, and Australia.

    "At present, there is no such regulation in New Zealand. Current provisions under the Commerce Act would only be able to address potential issues around interchange fees should there be clear evidence of anti-competitive behaviour or an absence of current or potential competition (which does not appear to be the case). MBIE is planning to undertake work to assess whether regulatory intervention is justified in New Zealand. This work may lead to recommendations around the form of regulation in New Zealand. The Treasury supports the need for work being undertaken, and plans to engage with MBIE as work progresses," Treasury wrote to English.

    Winston Peters on the case

    NZ First leader Winston Peters recently suggested big credit card companies "are ripping off" Kiwi consumers and businesses through "excessive" credit card interchange fees but the government is doing nothing.

    “In June alone, Kiwis put over $3 billion on the plastic, so the fees charged to businesses by credit card companies matter because the public ends up footing them,” Peters said.

    “It’s especially concerning when only last month a £19 billion class-action law suit was lodged against Mastercard in the United Kingdom. Off the back of that we asked the Commerce Commission what it was doing to investigate interchange fees and the answer was pretty much nothing," added Peters.

    The chart below comes from the Retail NZ report

  • ANZ removes the term deposit premium it used to justify passing on only 5 basis points to floating rate borrowers. But it retains all the margin grab on the mortgage side

    [Updated with additional comment from ANZ.]

    ANZ has cut its 18 month 'special' term deposit rate by -15 basis points.

    That takes the bank's new rate down to 3.45% from 3.60%.

    The 3.60% rate was pitched by ANZ as the reason it only passed on -5 bps of August's -25 bps Official Cash Rate cut to borrowers. The bank's story was "savers are benefiting, even though borrowers only get a part of the rate cut".

    This means the 'benefit to savers' has lasted just five weeks. But the cost to borrowers looks like it will be more permanent.

    Other banks used the same strategy, following ANZ's lead. It seems probable that they too will reduce or remove their 18 month specials as well, pocketing the margin gains.

    The history of the ANZ 18 month rate is that it was reduced to 3.30% from 3.50% just after the March 2016 OCR rate cut. It stayed at this level for the 21 weeks to August 11 when it was raised to 3.60%. It has remained at this higher level for just five weeks, now reduced to 3.45%.

    On August 11, just after the RBNZ rate cut, ANZ issued a media statement that included this:

    Mr Hisco said ANZ was refocusing its lending and borrowing emphasis.

    “On the deposits side, we have five times as many customers as those with home loans. Lifting term deposit rates will help customers grow their savings,” Mr Hisco said.

    “We are sending a strong signal today to New Zealanders that at a time of record low interest rates, it is more responsible to pay down home loans and save, than borrow more. New Zealanders need to consider changing their financial strategies.”

    A spokesperson for ANZ today said, "We’ve had an 8 or 9 month (currently 8-month term deposit special) at 3.50% since before the OCR change and we’ve retained our 3.25% 5-month term deposit rate, along with holding our Serious Saver rate. We had hoped lifting the 18 month term deposit special at the time of the last OCR would change behaviours but it hasn’t – the vast majority of NZers prefer TD’s at 12 months or less."

    "You should also know that we’ve reduced our 2-year home loan rate. As you’ll know, about 75% of New Zealanders are on fixed rather than floating home loan rates so changes in the OCR have no impact on them," he said.

    Use our deposit calculator to figure exactly how much benefit each option is worth; you can assess the value of more or less frequent interest payment terms, and the PIE products, comparing two situations side by side.

    All carded, or advertised, term deposit rates for all institutions for terms less than one year are here, and for terms one-to-five years are here.

    Term PIE rates are here.

    The latest headline rate offers are in this table. (now updated with new UDC rates)

    for a $25,000 deposit Rating 6 mths 1 yr 18 mths 2 yrs 3 yrs 5 yrs
                   
    AA- 3.15 3.25 3.45 3.35 3.40 3.60
    ASB AA- 3.20 3.20 3.65 3.25 3.35 3.55
    AA- 3.15 3.25 3.60 3.35 3.40 3.60
    Kiwibank A+ 3.50 3.25   3.25 3.40 3.60
    Westpac AA- 3.50 3.20 3.20 3.25 3.30 3.40
                   
    BBB 3.50 3.25 3.50 3.20 3.25  
    Heartland Bank BBB 3.30 3.40 3.40 3.70 3.70 3.80
    HSBC Premier AA- 2.80 3.00   3.00 3.05 3.15
    RaboDirect A 3.30 3.40 3.40 3.45 3.55 3.80
    SBS Bank BBB 3.55 3.25 3.60 3.35 3.40  
    A- 3.15 3.20 3.25 3.30 3.40 3.70
    UDC AA- 3.25 3.55 3.65 3.45 3.45 3.65

    Our unique term deposit calculator can help quantify what each offer will net you.

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