Personal Finance

  • Terry Baucher details how the previous National-led government appears to have successfully raised at least $1 billion of extra revenue annually with little or no fanfare

    By Terry Baucher*

    Louis XIV’s finance minister, Jean-Baptiste Colbert, famously declared that “the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.” 

    What was true in the seventeenth century remains true today. And although Colbert might not recognise much of the modern economy and tax system, he would probably still appreciate some of the sleight of hand used by New Zealand finance ministers to raise funds without too much hissing. At a rough guess the last National government seems to have successfully plucked at least $1 billion of extra revenue annually with little or no fanfare. How?

    We’re not talking about specific tax related measures often of a quite technical nature. These are a staple of every government’s budget. 

    A long-standing option used by governments of both hues is inflation, and in particular ‘fiscal drag’. This is when income tax rate thresholds are not inflation adjusted so wage growth lifts more earners on to higher marginal tax rates.  

    Income tax rates and thresholds were last adjusted in October 2010. At that time someone on the average wage had a marginal tax rate of 17.5%. According to the labour market statistics for the September 2018 quarter, average weekly earnings are $1,212.82 or $63,067 annually, well above the $48,000 threshold at which the 30% tax rate applies. Even median weekly earnings at $997 are also well above the $48,000 threshold. 

    So how much revenue does fiscal drag raise annually? The short answer would be “Heaps.” The Budget Economic and Fiscal Update released in May’s Budget estimated the effect of fiscal drag as $1.6 billion over the five years to 30 June 2022.   

    A more detailed analysis of the issue was prepared for then Finance Minister Bill English in November 2016. 

    The aide-memoire noted that adjusting for inflation since October 2010, effective 1 April 2017, would cost $1 billion in the first year. Clearly, baulking at this “large cost,” the paper instead modelled adjustments to thresholds based on price inflation over a single year, from June 2017 to June 2018, and applying that inflation factor to current thresholds beginning 1 April 2017. This produced a cost of $220 million for the 2017-18 year rising to $720 million by 2019-20. 

    The paper concluded by noting “a downside to not annually indexing is that there is less transparency for taxpayers.” This is something that politicians of both hues will rather conveniently rely on when trumpeting “tax cuts.”  

    Although fiscal drag is a well known tactic, Bill English also employed variations of it elsewhere to raise revenue. In the 2011 Budget inflation adjustments to the student loan repayment threshold of $19,084 were frozen until 1 April 2015. This and other changes to the student loan scheme added up to $447 million in “savings” over five years. The freeze on the student loan threshold was later extended until 1 April 2017.

    The 2012 Budget froze the parental income threshold for student allowances until 31 March 2016, a measure worth $12.7 million over four years. More controversially, the same Budget increased the repayment rate applying to income above the student loan repayment threshold from 10% to 12% - a defacto tax increase. This increase raised (sorry “saved”) $184.2 million in operating costs over four years. 

    The 2011 Budget saw changes which also stopped inflation adjustments of the threshold at which abatement of working for families tax credits applied. Instead, measures reducing the threshold over a four year period from $36,827 to $35,000 were introduced. A “slightly higher” abatement rate of 25 cents in the dollar instead of 20 cents in the dollar was also phased in over the same period. These measures were intended to realise savings of $448 million over four years. (The current government’s Families Package partly reversed these changes by raising the abatement threshold to $42,000 whilst lifting the abatement rate to 25 cents in the dollar from 1 July 2018).

    The 2011 Budget also removed the exemption from employer superannuation contribution tax (ESCT) on employer contributions to KiwiSaver funds. This is probably the biggest single measure that increased the tax take outside of the rise in the rate of GST to 15% in October 2010.  

    The exemption was removed with effect from 1 April 2012 and the compulsory employer contribution was also increased from two to three percent from 1 April 2013.  These changes saw the annual ESCT collected rise by almost $400 million from $681 million in the June 2011 year (the last full year before the changes) to $1,078 million in the June 2014 year (the first full year of the changes). 

    Finally, there is the opportunity to increase various duties such as those on alcohol, petroleum and tobacco. For example, tobacco excise duty has been increased every year since January 2009 as part of the country’s Smokefree policy. As a result, the excise duty per cigarette has gone from 30.955 cents per cigarette in 2009 to 82.658 cents per cigarette as of 1 January 2018. During the year to June 2018 the government collected over $1.8 billion in tobacco excise duty. 

    All told, the combination of fiscal drag, ESCT increases and changes to student loans and working for families cumulatively represent at least $1 billion of additional revenue collected annually. Throw in the various excise duty increases, specific “base protection” tax measures such as changes to the thin capitalisation rules for foreign-owned banks or the the “Bright-line test” introduced in 2015, and the increased annual “tax” take is close to $1.5 billion.   

    These under the counter tax increases have happened with little fanfare under the guise of “savings”, or “better targeting of government programmes” (how the Budget 2011 changes were described). Colbert would no doubt approve of this efficient plucking of the goose with very little hissing.


    *Terry Baucher is a tax consultant and director of Baucher Consulting Limited a specialist tax consultancy. He is the co-author with Deborah Russell MP of Tax and Fairness published in 2017 by Bridget Williams Books.

  • The NZX warns against the introduction of a capital gains tax on NZ shares, saying it could uneven the playing field between those who invest in the market directly and indirectly through the likes of KiwiSaver

    There has been much talk about how the possible introduction of a capital gains tax would affect property owners.

    But what about those who have invested in the share market, either directly or indirectly through KiwiSaver or other investment funds?

    The Tax Working Group (TWG) is still forming its view on the best approach towards extending the taxation of capital income.

    In its interim report, released in September, it notes how individuals earning the same amount of income face different tax obligations depending on whether they earn capital gains or other forms of income.

    It says the tax system is essentially regressive, as higher income earners tend to derive a greater portion of their incomes from their assets increasing in value, than lower income earners.

    It points out that 82% of assets potentially affected by an extension of the taxation of capital income are held by the wealthiest 20% of households.

    “The lack of a general tax on realised capital gains is likely to be one of the biggest reasons for horizontal inequities in the tax system,” it says.

    However, the New Zealand stock exchange (NZX), as well as the Securities Industry Association (SIA), which represents the sharebroking and wealth management industry, are urging the TWG to recommend the Government keeps New Zealand shares exempt from a potential capital gains tax.

    While they fear this will discourage investment and damage our capital markets, they’re also concerned it will create an uneven playing field between those who invest directly and those who invest indirectly in the share market. 

    In other words, treat retail investors who buy and sell shares in Companies X, Y and Z direct, differently to those who invest in these companies indirectly through their KiwiSaver or portfolio investment entities (PIEs).

    The NZX and SIA note in their submission on the TWG’s interim report that the report mentions it would be difficult to apply a capital gains tax to PIEs, so if a capital gains tax was introduced, these sorts of funds could be exempt.

    They say this could in turn encourage investors to invest in PIE funds rather than in the share market direct.

    It could also lead to the establishment of listed PIEs that each invest in single stocks.

    Furthermore, the NZX and SIA say that if a capital gains tax is applied to New Zealand shares, hundreds of thousands of New Zealand investors would have to file tax returns each year and manage the cashflow uncertainty that arises from any capital gains tax that becomes payable.

    This administrative burden would be another factor encouraging investors to hold New Zealand shares through PIEs to let someone else manage their tax.

    Without retail investors investing direct in the New Zealand stock exchange, the NZX and SIA say the secondary market would be left in the hands of a relatively small number of fund managers, many of whom are passive investors.

    Given the SIA’s members (which include the likes of ASB Securities and Craigs Investment Partners) work with over 300,000 New Zealand retail investors with assets worth more than $80 billion, this would result in reduced on-market activity, price discovery and liquidity.

    The NZX would in turn be less attractive to offshore investors.

    The NZX and SIA say the concentrated ownership of competing companies would affect the competitiveness of the market and be bad for the economy as a whole.

    Furthermore: “[W]ithout retail direct investment, both SMEs and larger companies would have no need to list on NZX and would likely look to list offshore in search of much-needed investment – perhaps even being encouraged to move head office or operations offshore.

    “It would also become logical for New Zealanders with innovative business ideas to consider establishing their start-up business in Australia so that they can more easily list there.”

    The NZX and SIA say that if the Government doesn’t leave tax settings for retail investors as they are, it should at the very least ensure there is a level playing field between those who own New Zealand shares directly and those who own them indirectly through PIEs.

    “For example, if PIEs are to be taxed on Australasian shares using a FDR (or similar) method, then the same option should be available to retail investors who own shares directly,” they say.

    The TWG says in its report that it’s “mindful of how any differences in the treatment of capital income might distort capital markets”.

    “For example, taxing individual share investments more harshly than the same investments through institutions could lower returns, undermine our equity markets and ultimately lead to New Zealand companies migrating offshore.”

    It is therefore “considering these issues further”.

    The TWG also notes that experience here and overseas has demonstrated that savings can be especially sensitive to tax differences between different forms of saving and different savings vehicles.

    “Over the past almost 50 years New Zealand has reduced the extent that savings are treated differently depending on the saving vehicle used – life insurance, direct share investments, investment funds etc,” it says.

  • Chris Trotter says National's apparent decline in the polls may be bad news for those relying on tax-free capital gains to maintain their social status

    By Chris Trotter*

    Strategic leaks from individuals in both major parties have National’s poll results falling below the psychologically important 40% barrier. The number mentioned, by both sides, is thirty-seven. A year after the 2017 election, National’s decade-long defiance of political gravity would appear to be coming to an end. For the New Zealand middle-class this could turn out to be very bad news indeed.

    A National Party bereft of substantial coalition partners and polling in the mid-to-high-30s has no chance of forming the next government. A Labour Party polling in the mid-40s, on the other hand, will find itself well-positioned to dominate the government of the country for the next three years. One of the many reforms which such a Labour-led government will claim a mandate for is some form of Capital Gains Tax (CGT).

    In spite of the fact that he once warned Labour against the introduction of a CGT (describing it as a sure-fire way of retaining the Opposition benches for a decade), Sir Michael Cullen and his Tax Working Group (TWG) have made it pretty clear that the present tax-free status of capital gains (most particularly those relating to property), will be the target of significant reform.

    Whatever form Labour’s CGT takes, its impact on the life-world of the average middle-class New Zealand family will be enormous. One of the principal reasons for National’s decade-long defiance of political gravity was the so-called “wealth effect” of rapidly rising property prices – especially in the critical electoral cockpit of Auckland. So long as property owners could monitor the burgeoning value of their family home; the batch they inherited from their grandparents; the rental property they bought with Mum and Dad’s legacy; they felt safe. 

    It was as if an entire social class had won Lotto. No matter how dark the world beyond New Zealand’s shores became; regardless of the stresses and pressures at work; always, at the back of their minds, sat a reassuringly large pile of $100 bills. If worse came to worst, then they could realise their capital gains and retire to one of the more respectable provincial cities.

    The actor, Humphrey Bogart, liked to tell his Hollywood friends about the money he took care to salt away after every successful movie. His aim was to build the sum up to a point where, should the public turn fickle, or the moguls turn nasty, he would have enough money to simply shrug his shoulders and walk away. He called it his FU Fund.

    That’s what John Key and the National Party’s hands-off policies allowed the New Zealand middle-class to build up – at least on paper. Their very own FU Fund. No wonder he and his party were so popular for so long. Low taxes are good – but no taxes at all are even better!

    Labour’s promise that the family home will be exempt from any form of CGT is intended to reassure the middle-class that their FU Fund is safe. But, will it be enough? If the last 30 years have taught New Zealanders anything it is that no matter how modest the first step into forbidden territory may be, it is absolutely certain to be followed by another, slightly larger, step, and then another, and another, until, eventually, no forbidden territory remains at all. 

    Over that same period of time, from 1984 to the present, tax-free capital gains have taken the place of so many of the things the New Zealand middle-class once took for granted. A secure, well-paid job; the ability to save the deposit on a house; not having to save money to send yourself and your children to university. While these options remained open, the middle-class’s confidence that their own social status and the social status of their children were readily defendable remained intact. Anybody with a smidgen of talent and an ounce of gumption could aspire to a middle-class existence in New Zealand. Social advancement on the basis of merit continued to be a reasonable proposition.

    But, as the world of paid employment became ever-more precarious; as the sum required to secure one’s first property soared beyond the reach of more-and-more middle-class adults; and as the user-pays philosophy made ever-deeper inroads into the territory of the post-war social-democratic bargain (that the working-class and the middle-class would ascend the social ladder together), then the wealth accruing from capital gain assumed an ever-greater degree of significance.

    For the first time in a very long time the promise of inherited wealth is playing a key role in the ordinary, moderately affluent family’s ability to retain their class status. Where, for earlier generations, a small inheritance from one’s grandparents or parents might pay for an overseas trip or renovations to the family home; the present generation’s ability to preserve their social status is increasingly dependent on the borrowing power, or outright inheritance, of the assets of the Bank of Mum and Dad.

    Just as Donald Trump’s tweets can send jitters through the world’s financial markets, the merest whisper of a downward plunge in the value of the middle-class Kiwis' property will likely send a devastating shock-wave through the New Zealand electorate.

    Fear and greed, the economists tell us, are the prime human motivators. Any move in the direction of imposing a tax on the middle-class’s property-derived capital gains; any threat to the FU Fund they fondly believe their properties’ speculation-driven value represents; and the combination of the middle-class’s fear of falling with the greed it has been forced to nurture (ever since equity and fairness went out the window), will blow the political parties it deems responsible to smithereens.

    The National Party’s numbers may be on the way down in November 2018 but that trend need not continue indefinitely. Mis-steps over the prospects and/or the timing of a CGT cost Labour dearly in the final fortnight of the 2017 election. Tell New Zealand’s middle-class voters that Labour, NZ First and the Greens are coming after their FU Fund, and their response is almost certain to be a very forceful ‘FU too!’


    *Chris Trotter has been writing and commenting professionally about New Zealand politics for more than 30 years. His work may be found at http://bowalleyroad.blogspot.com. This is his first fortnightly column for interest.co.nz.

  • Fathom Consulting's Andrew Harris has some economist fun delving into how flatmates share the cleaning duties, and learns a little about himself along the way

    This article is a re-post from Fathom Consulting's Thank Fathom its Friday: "A sideways look at economics". It is here with permission


    By Andrew Harris*

    All of us have, at some time, had the ‘pleasure’ of living with others, be that friends, family, lodgers or even the eclectic mix of individuals thrown together in first-year undergraduate dorms.

    Sharing accommodation can be great fun and I’m sure readers will all have plenty of anecdotes to recount.

    But, as with anything, there are drawbacks. Often chief among these are gripes about hygiene, bin rotas and, most commonly, who does the cleaning.

    Bad roommates are just as bad as good ones are good - most memorable to me is one individual who left a half-cooked chicken in the sink, and another whose baking exploits lasted a full ten hours and simultaneously covered dining room, living room and kitchen in flour. Living with others is complex and such disagreements are two-a-penny. And yet, most people living in shared accommodation manage to keep their houses in an at least semi-presentable state.

    So, how would an economist explain this? Well, textbooks might consider such situations through the lens of a simple game theory pay-off matrix. To understand how this would work, let’s assume there are two housemates, who each prefer the house to be clean.[1] However, not being Mary Poppins, they can’t simply click their fingers and tell the room to tidy itself. Instead, they suffer some cost if they do the cleaning themselves.

    Under such a framework, the outcomes will vary according to each individual’s attachment to cleanliness and their distaste for doing the cleaning. Indeed, it can be shown that one housemate may do all the cleaning if their utility from cleaning is sufficiently large. Knowing this, the best strategy for all other housemates is to simply wait for the house to be cleaned.[2]

    However, while such a model may be appealing for its visual simplicity, it does leave a lot to be desired. Chief among its limitations, is its assumption that cleaning is done in discrete amounts (that’s to say it’s either done or not done). In reality, this isn’t true and economic theory would predict that rational individuals will clean up to the point where the marginal benefit of further cleaning is equal to the marginal cost of doing so. We could, for example, express an individual’s decision over their cleaning effort as the solution to the following optimisation problem:

    where UA is the utility obtained from a certain level of cleaning, αAand βA are parameters, and qA and qB reflect the amount of cleaning by person A and person B respectively.

    Under this specification, each individual’s utility will depend not just upon their own level of effort, but also upon the amount of cleaning done by their housemate. What’s more, the benefit accruing from further cleaning decreases, and the additional effort required rises, as the quantity of cleaning increases.[3]

    In line with the previous game theory framework, this model predicts that ‘lazy’ people (those with a higher marginal cost of effort) will tidy less while those most concerned with “keeping up appearances” will tend to clean more.[2] The outcome of this laissez faire system hardly seems fair and often proves a source of contention within households. But it’s fair from an economic perspective — those with a higher net gain from cleaning do more of it.

    Those living in professional houseshares often attempt to resolve the unequal distribution of cleaning duties through outsourcing (i.e. employing a cleaner). While this may resolve some of the issues associated with the laissez faire system, it does introduce new questions. For example, should the cleaning costs be split evenly? From a theoretical standpoint the answer is most certainly no. Who pays more ought to depend upon who has more to gain from employing the cleaner.

    You might think that this would be the person who’d been doing the majority of the cleaning before. And, most likely it would be. After all, if the only benefit is that a cleaner reduces labour effort then it seems logical to expect that this person has the most to gain. However, the burden of cleaning under the laissez faire system depends not only upon the quantity of cleaning but also upon the cost of each unit of cleaning. If a person cleans more, but finds it less costly to do so then employing a cleaner may actually eat into their surplus and make them worse off.[5]

    So, what does this teach me about me? I’ve lived with many different people over the years and have typically ended up doing more than my fair share of housework. I always thought this meant that I had a lower tolerance for mess than others. However, I‘ve never been in favour of hiring a cleaner. So, maybe my assertion was incorrect and I actually have a higher tolerance for mess than I previously thought. Or, maybe I was irrational in the past and should now change my behaviour. Who knows? Either way, economics has taught me something about myself. I’ve certainly got some self-reflection to do this weekend…


    [1] Obviously, the house should be kept clean for hygienic reasons, but forward-looking individuals might also have an eye on reclaiming their deposit.

    [2] The numbers shown in the table above are calculated such that person A values a tidy house at 8 whereas person B values it at 6 and that the cost of cleaning is 4 for both people (although this cost is split if both individuals clean). Under these assumptions, person B always has an incentive not to clean, regardless of person A’s actions. Knowing this, person A’s best response is to always do the cleaning. This is what’s commonly referred to as a Nash Equilibrium. However, such a result is highly sensitive to the size of each person’s pay-offs. Indeed, under different assumptions we could easily end up in the world of the so-called Prisoner’s Dilemma where neither player attempts to clean (the end result of this of course being a filthy house). The framework could also be specified in such a way that there could be gains if one person paid the other to do the cleaning.

    [3] The formal solution to this model is such that . Disclaimer: please don’t attempt this at home as it’s likely result in tears (trust me, I’ve been there).

    [4] Of course, individuals’ behaviour may also change over time. For instance, preferences may change significantly if one housemate is planning to invite friends over or if they have recently entered into a new relationship.

    [5] If we assume that employing a cleaner ensures that the same amount of cleaning is done as in the laissez faire system, then it can be shown that person A may be cleaning more and still refuse to employ a cleaner while the person B cleans less but prefers to hire one. If the cost of the cleaner is evenly split then this result will occur if αA < αB (i.e. person B has a higher preference for cleanliness) and β< β(i.e. person A finds cleaning less onerous).


    Andrew Harris is an economist at Fathom Consulting in London, England. This article is a re-post from Fathom Consulting's Thank Fathom its Friday: "A sideways look at economics". It is here with permission

  • FMA director of regulation Liam Mason details the type of bank pay incentives the regulator would like to see rewarded, says incentives linked to sales should go completely

    By Gareth Vaughan

    A good customer outcome for a bank is a customer understanding the product they've got, a product that meets customer expectations, a product that performs as expected and is suitable for the customer over the long-term, says Financial Markets Authority (FMA) director of regulation Liam Mason.

    Speaking to interest.co.nz about the FMA's bank incentive structures report, Mason said it's important to remember that incentives work, they signal to staff what behaviour is valued in an organisation, and what sort of behaviour will be rewarded.

    "And if it's just simple sales [incentives], then given the relationship between banks and customers, we think that's a very high risk signal to be sending. We think the better thing to do is remove them [incentives linked to sales] completely," said Mason.

    "We're very happy for banks to reward performance. What we want them to think about is how they can set up their structures so they're rewarding staff who provide better outcomes so they look after their customers."

    Asked how better customer outcomes could be judged, Mason said a good customer outcome is one where a customer understands the product they've got, the product meets the customer's expectations, the product performs as expected and it's suitable for the customer over the long-term.

    "That's the challenge that we are setting for banks. Because bank customers have a long-term relationship with their institution, they [bank staff] are in a position to be able to check in with customers to see whether the long-term products that they've sold remain suitable for them over time. That's what we'd like to see them [banks] setting up to reward," Mason said.

  • Gareth Vaughan argues credit cards should be the first target for our regulators if they're serious about making banks protect or enhance customer interests & outcomes

    By Gareth Vaughan

    If our financial markets regulators are serious about making the banks they regulate consider their customers' long-term outcomes they could start by plucking the low hanging fruit of credit cards.

    The Financial Markets Authority and Reserve Bank report on bank conduct and culture this week suggested establishing basic legal duties on banks to protect or enhance customer interests and outcomes. Credit cards are an obvious product where the long term benefits to their users can be questioned.

    Over the past few years interest.co.nz has, on several occasions, highlighted a baffling lack of interest in credit cards from our regulators. Most recently we did this in July.

    On that occasion we noted an Australian Securities and Investments Commission (ASIC) report on credit card lending in Australia had again contrasted with the dearth of interest from New Zealand authorities in credit cards, their high interest rates and their debt trap potential for consumers. ASIC, in contrast, highlighted concerns with problematic credit card debt.

    This year's Ministry of Business, Innovation & Employment discussion paper on the Government's review of consumer credit regulation mentioned credit cards just three times. And "credit card(s)" did not appear in a single one of the paper's questions seeking feedback.

    And in 2015 the Commerce Commission told us there are no restrictions on NZ credit card interest rates with constraint provided by the competitive market, and credit card interest rates aren't something it would investigate unless evidence emerged of collusion between banks to set rates at a certain level.

    Meanwhile ASIC's report estimates Aussie consumers, repeatedly charged interest on high-interest rate cards with a purchase rate of more than 20% for three or more months, paid at least A$621.5 million more, in 2016-17, than they would have if interest was charged at 13%. ASIC also highlighted a "debt trap" risk for consumers when making balance transfers between credit card issuers. That's because 31.6% of consumers making balance transfers increased their total debt by more than 10% with 15.7% increasing their debt by 50% or more.

    A highly profitable market

    Interest.co.nz's credit card page shows numerous NZ credit cards with purchase interest rates at or above 20%. In today's low interest rate world, with an Official Cash Rate mired at a record low of 1.75%, how can such high interest rates be justified? 

    Two years ago when The Co-operative Bank launched its credit card, with annual interest of 12.95% for both purchases and cash advances, the bank's then-CEO Bruce McLachlan said credit card interest rates and fees "have been ridiculously high for too long." McLachlan was right.

    This year's Financial Institutions Performance Survey (FIPS) from KPMG showed banks' profits at $5.19 billion and banks' funding costs at 2.82%. These were the highest profits and lowest funding costs in the 31-year history of the FIPS. And credit cards are a profitable area for NZ banks. In 2016 the London-based Lafferty Group cited NZ as the seventh most profitable credit card market out of 72 countries it surveyed.

    "Pre-tax profits reached $275 million in 2015, an increase of 2% compared to 2014. It is forecast to reach $297 million by 2018. Profit per card reached $105 in 2015, compared with $88 in 2010. It is forecast to reach $114 by 2018," Lafferty said.

    At $105 per card, profitability in NZ was up $17, or 19.3%, over five years.

    Reserve Bank data shows credit card advances outstanding stood at $7.257 billion as of September, having risen 6.1% year-on-year. The weighted average interest rate on personal interest bearing advances was 17.9%, and the weighted average interest rate effective on all personal advances 11%. In 2017 total credit card billings in NZ reached $43.368 billion.

    Meanwhile, mortgage brokers point out borrowing capacity for home buyers has reduced by about 20% over the past two to three years, in part because banks are now factoring in credit card limits to their mortgage lending decisions. This is against a backdrop of household debt as a percentage of disposable income reaching 166.3% in June, a fresh record high, according to Reserve Bank data.

    Then there's fees and the effective cost of credit. Interest.co.nz recently calculated the the effective interest rate is 26.2% on Gem Finance personal loans when fees are added, well above the advertised 12.99% interest rate. However in the Government's recent review of credit regulation Cabinet rubberstamped MBIE's decision to not require lenders to disclose the full cost of debt in one percentage figure, by combining both the interest rate and fees charged to borrowers.

    Not willing or able

    In 2015 when Australian authorities, led by the Reserve Bank of Australia, were moving against high credit card interest rates, interest.co.nz sought to engage NZ authorities on the issue given credit card interest rates were at similar levels here.

    The Commerce Commission told us; “There are no restrictions on interest rates so constraint is provided by the competitive market. It’s not an issue we would investigate unless evidence emerged of collusion between banks to set rates at a certain level.”  

    The Reserve Bank told us; "The Reserve Bank of New Zealand regulates banks, insurers, and non-bank deposit takers (NBDTs) at a systemic level - i.e. to make sure the financial system remains sound. We don’t regulate from an individual customer protection perspective and don’t have comment to offer about pricing of products and services offered by banks, insurers and NBDTs."

    And then-Commerce and Consumer Affairs Minister Paul Goldsmith told us; “We watch what goes on in Australia with interest, but ultimately, what are the levers that you pull? My sense at the moment is there’s no strong call for any significant intervention in this area. Ultimately it’s for the banks themselves to explain the interest rates they charge, and they’ll be under competition pressure if a gap emerges over an extended period of time between the OCR and the credit card rate."

    So neither the consumer watchdog, bank regulator nor Minister were willing or able to step in.

    And what about Visa & Mastercard & the social licence concept?

    Then there are Visa and Mastercard, who earn fees from the banks that issue their credit cards, and by processing payments. The bank credit card issuers, of course, lend the money and charge the interest rates. Reserve Bank Governor Adrian Orr spoke this week of banks needing to go above and beyond their minimum regulatory requirements and having a social licence to do the right thing by customers.

    Well, what about Visa and Mastercard's social licences? These two multi-nationals were pioneers of the tax minimisation the likes of Apple, Google and Facebook are now criticised for. Visa and Mastercard's NZ revenue is routed through their Singapore parent companies who have sweetheart tax deals in that country.

    So if our government and regulators are serious about making banks protect or enhance customer interests and outcomes and big corporates live up to social licence obligations, they could start by taking a good look at the credit card market.

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

  • ASB cuts one rate to 3.95% but raises two others as the sub 4% rate level embeds in the current home loan market; only three stragglers to go now

    Yes, ASB has joined the under 4% mortgage rate party. But it feels like they are following reluctantly.

    ASB, which is the second largest mortgage bank in New Zealand, has adopted the 3.95% one year fixed price point.

    But the bank has taken the opportunity to raise rates for two other fixed terms, one of which ASB was market-leading on.

    Its 'special' rates only require customers to have a minimum of 20% equity; that is, an LVR of 80% or less.

    ASB is raising its 18 month 'special from 4.15% to 4.29%. That will leave Westpac on 4.15% and HSBC Premier is still offering 3.85% for 18 months fixed.

    And ASB is raising the hot three year rate of 4.39%, which was market-leading, up by +10 basis points to 4.49%. That is a level adopted by just about every bank.

    ASB's changes are all effective on Wednesday, November 14.

    So far today (Tuesday), wholesale swap rates are moving very little, with just a hint of weakness for durations of three years and above.

    After today's shift by ASB, only three banks are not offering a sub 4% fixed mortgage rate; Kiwibank, Co-operative Bank and TSB.

    As at June 2018, ASB had 64.9% of its loan book in mortgages. That is the largest proportion of any of the big Aussie banks operating in New Zealand, and of the majors is only higher at Kiwibank which has 88.9% in housing loans. The bank with the most balanced loan book is BNZ with 47.3% in housing loans and therefore the only bank that can't be called a mortgage bank.

    Update: The Co-operative Bank has trimmed its one year rate from 4.19% to 4.15%.

    Kiwibank earlier had a sub 4% rate, but that has since expired.

    See all banks' carded, or advertised, home loan interest rates here.

    Here is the full snapshot of the fixed-term rates on offer from the key retail banks.

    below 80% LVR 6 mths  1 yr  18 mth  2 yrs   3 yrs  4 yrs  5 yrs 
    as at November 14, 2018 % % % % % % %
                   
    ANZ 4.99 3.95 4.85 4.29 4.49 5.55 5.69
    ASB 4.95 3.95 4.29 4.29 4.49 4.95 5.09
    4.99 4.15 4.79 3.99 4.49 5.19 5.39
    Kiwibank 4.99 4.05   4.29 4.49 4.99 5.09
    Westpac 4.99 3.95 4.15 4.29 4.49 5.29 4.99
                   
    4.50 4.10 4.29 4.35 4.49 4.99 5.15
    HSBC 4.85 3.85 3.85 4.19 4.69 4.99 5.29
    HSBC 4.99 4.19 4.49 3.95 4.49 4.89 4.89
    4.85 4.05 4.19 4.19 4.49 4.95 4.99

    In addition to the above table, BNZ has a fixed seven year rate of 5.95%.

    And TSB still has a 10-year fixed rate of 6.20%.

  • Cybercrime and scams run through email, phone calls, text, mail, and door knocks could be costing up to $0.5 bln per year. A big bank has some advice about how to avoid being a victim

    Content suppled by Westpac

    Ninety per cent of New Zealanders are concerned about being scammed or defrauded and one in three say they’ve been a victim, according to a new survey by Westpac.

    These findings, released during International Fraud Awareness Week, which runs from 11-17 November, highlight the growing importance for customers to keep their information, such as usernames, passwords and banking PIN numbers, safe.

    Westpac NZ’s head of financial crime and security, Tiffany Ryan, says New Zealanders’ unease is warranted given the growing sophistication of scammers and their activities, and numbers of attempted fraud.

    “In the last 12 months alone, Westpac’s financial crime team has prevented more than $22 million of fraud from occurring. We have seen the numbers of attempted fraud increase on last year but due to protections in place and increased surveillance the amount being lost to fraud is decreasing. Card fraud is the biggest issue,” Ms Ryan says.

    “Most scams go unreported but there are industry estimates that New Zealanders may be losing up to $500 million each year to cybercrime and scams run through email, phone calls, text, mail, and door knocks.”

    The survey of 1003 people aged 18+, focussed on three areas:

    • Identity theft, where someone uses another person’s identify information to pretend to be them, such as their full name, date of birth, place of birth, current address;

    • Financial fraud, which is an unauthorised transaction, such as card skimming or an unauthorised online banking transaction;

    • Scams, which involve being tricked into authorising a transaction.

    People were most worried about fraud when using their cards online (44%), followed by sharing their card details over the phone (18%), and when overseas (10%).

    “Our advice is for customers to be extremely vigilant. They should monitor their bank statements regularly, as well as keep the bank notified of contact details changes, overseas trips or intended large purchases,” Ms Ryan says.

    Westpac NZ monitors customer accounts 24 hours a day, 365 days a year for fraudulent activity. When detected, payments are blocked, access immediately suspended, and customers alerted.

    “Customers need to do their bit too, by installing up-to-date anti-virus software on their computer, not clicking on links or responding to texts or emails, and being careful not to authorise payments unless they are absolutely sure of the recipient.”

    Other findings in the survey show that when it came to those most susceptible to scams or fraudulent transactions, 30 per cent considered their parents to be most at risk, followed by grandparents on 26 per cent.

    “People are especially worried for the older generations. These scammers know how to pressure vulnerable people into quickly giving away confidential details such as PIN numbers, or into transferring money out of their accounts.

    “I would encourage people to have a conversation with their extended families and friends explaining the types of scams and tactics scammers may use to try to get their sensitive information from them, and what they should do if someone they do not know calls them, emails them, texts them, or comes to their front door purporting to be from a particular company,” Ms Ryan says.

    And Westpac NZ’s new research also suggests many New Zealanders are unaware of the protections offered by their banks to support them in situations of financial fraud. Seventy-seven per cent said they didn’t know whether their bank guaranteed their money back if they were a victim of fraud.

    “At Westpac, provided the customer hasn’t breached their account terms and conditions, we will refund the amount they’ve been defrauded, giving our customers peace of mind,” Ms Ryan says.

    FRAUD AND SCAM TIPS

    Do:

    • Monitor your bank statements regularly.

    • Be suspicious of callers purporting to be from your bank, a utility company (Spark, Vodafone etc), or a government agency such as the Police or Inland Revenue, asking for your PIN number or your username or passwords for internet or telephone banking.

    • Use privacy settings to limit who can see your information on social network sites – as these can be used to impersonate you or steal your identity.

    • If you think you may have been targeted or fallen victim to a fraud or scam, contact your bank and let us know as soon as possible.

    • If you believe you have received a Westpac-related phishing email (where scammers send an email pretending to be from Westpac in order to attempt to obtain sensitive information such as your usernames, passwords and credit card details), forward it to phishing@westpac.co.nz or a Westpac related phishing SMS , please report it by forwarding the SMS to 021 4 Check (021 4 24325). [Other banks have similar services.]

    Don’t:

    • Give out your PIN number

    • Give out your personal info

    • Respond to or click on a suspicious email or link

    • Give out your bank account details.


    Report all scams to authorities. See here.


    You can also watch a video interview with the Commission for Financial Capability's fraud education manager Bronwyn Groot here.

  • BNZ unveils two year 3.99% home loan rate from November 13 as mortgage wars intensify

    Hot on the heels of ANZ's 3.95% one-year mortgage rate offer, BNZ has announced a 3.99% two year rate.

    The new offer, for BNZ’s two year "classic" rate, begins on Tuesday, November 13. It's a reduction of 30 basis points from 4.29%. The new rate is the second lowest advertised, or carded, two-year mortgage rate on offer from a bank after SBS Bank's 3.95%.

    The new rate is available to residential owner occupiers with at least 20% equity, and will be available until the end of November.

    The bank's press release quotes BNZ's chief economist Tony Alexander.

    “Sustained low inflation, the effectiveness of the Reserve Bank’s LVR rules and the recent cooling in the New Zealand housing market in spite of still strong economic growth have combined to provide a unique set of interest rate conditions that lenders can take advantage of,” Alexander said.

    See all banks' carded, or advertised, home loan interest rates here.

    Here is the full snapshot of the fixed-term rates on offer from the key retail banks.

    below 80% LVR 6 mths  1 yr  18 mth  2 yrs   3 yrs  4 yrs  5 yrs 
    as at November 12, 2018 % % % % % % %
                   
    ANZ 4.99 3.95 4.85 4.29 4.49 5.55 5.69
    ASB 4.95 4.19 4.15 4.29 4.39 4.95 5.09
    4.99 4.15 4.79 3.99 4.49 5.19 5.39
    Kiwibank 4.99 4.05   4.29 4.49 4.99 5.09
    Westpac 4.99 4.19 4.15 4.29 4.49 5.29 4.99
                   
    4.50 4.19 4.29 4.35 4.49 4.99 5.15
    HSBC 4.85 3.85 3.85 4.19 4.69 4.99 5.29
    HSBC 4.99 4.19 4.49 3.95 4.49 4.89 4.89
    4.85 4.05 4.19 4.19 4.49 4.95 4.99

    In addition to the above table, BNZ has a fixed seven year rate of 5.95%.

    And TSB still has a 10-year fixed rate of 6.20%.

  • In the wake of the bank conduct & culture review, Gareth Vaughan argues more sunlight is needed on the RBNZ's DIY regulatory regime

    By Gareth Vaughan

    Fresh from demanding greater accountability from bank boards in a report on bank conduct and culture, the Reserve Bank must deliver greater accountability itself and publicly release the review of its director attestation regime done by Deloitte last year.

    The Deloitte review was ordered after the International Monetary Fund (IMF) urged the Reserve Bank to more rigorously test director attestations in last year's Financial Sector Assessment Program report on New Zealand. In a March speech Reserve Bank Deputy Governor Geoff Bascand said Deloitte concluded the attestation regime was "largely effective," but pointed to a number of general issues potentially limiting the effectiveness of the regime.

    My request for a copy of the report was rejected by the Reserve Bank, with a second request, under the Official Information Act (OIA), also rejected in March. 

    The OIA request was rejected because "making the information available would be contrary to the provisions of section 105 of the Reserve Bank of New Zealand Act, which specifies that information obtained for the purposes of part 5 of the RBNZ Act must be kept confidential by the Reserve Bank."

    The RBNZ approach to bank supervision relies on three pillars being self discipline, market discipline, and regulatory discipline. Significant weight is put on the self discipline pillar. The IMF last year pointed out this self-discipline relies on directors’ attestations to the fact that a bank has adequate risk management systems in place. There is a requirement for bank directors to attest to, or sign-off on, the accuracy of information contained in disclosure statements.

    Thanks to the introduction of the Reserve Bank's Bank Financial Strength Dashboard, our banks now only have to issue disclosure statements twice a year instead of quarterly. Banks' dashboard disclosures don't require director attestations. And there's no specific liability regime for false or misleading dashboard disclosures. 

    The Reserve Bank continues to view the attestation regime as a crucial aspect of its regulatory oversight of banks.

    As Bascand put it in his speech; "Directors are responsible and accountable for the integrity of bank reporting. Due diligence helps support the internal governance processes of the bank, driving responsibilities, systems and processes to generate and scrutinise management information."

    There are no specific rules around how a bank must meet the attestation requirements, and the Reserve Bank accepts these attestations without auditing the process.

    As I argued in March the fact that the attestation regime is such a key plank of the Reserve Bank's overall regulatory regime and there's scant public detail available on it, means it remains opaque to the public, including household depositors who have loaned $174.2 billion to banks.

    But in light of the Financial Markets Authority and Reserve Bank report on banks' conduct and culture, and demand for greater board ownership and accountability, this simply isn't good enough. The Reserve Bank is telling bank directors, whose attestations it trusts, that much deeper accountability from them is required to improve how the banks they oversee treat customers.

    The regulators are telling bank boards to properly measure and report on conduct and culture risks and issues, and point out the banking industry doesn't even have a common definition of what constitutes a complaint.

    Meanwhile the attestation regime arguably outsources regulation to the regulated. And this is against a backdrop of New Zealand being an OECD outlier in not having explicit deposit insurance, and with local depositors potentially facing haircuts should a bank fail and the Open Bank Resolution policy be applied. 

    Thus my message for the Reserve Bank is find a way to issue the Deloitte report. The public needs sunlight on your DIY regulatory regime.

    In a media conference on Monday Reserve Bank Governor Adrian Orr said banks must go above and beyond their minimum regulatory requirements to meet their social licence expectations. The Reserve Bank also now needs to go above and beyond the minimum requirements placed upon it so the public can understand how New Zealand banks are regulated, and why the Reserve Bank trusts bank directors to effectively regulate their own banks.

    Because as things stand the Reserve Bank is saying bank directors are trustworthy in one area, being attesting to their financial disclosures, but not in another, being how their banks treat customers.

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

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