Personal Finance

  • We review the activity on the Sydnex market platform and track one transaction. Alternative asset investors need a transparent process to access liquidity

    Alternative assets are popular, but some of these investments are sold by slick promotion designed to avoid proper investment analysis*. Promoter distortion is a real risk for non-professional investors.

    The key challenge is how to activate liquidity when you need to quit an investment early, and there can be many circumstances when that is required.

    The large property syndicators offer to do this with their own programs, but these essentially screw the scrum often disadvantaging buyers. Those who buy into this system may not have properly investigated the net asset backing they are buying. This path is one for the naive.

    Real investors do real due diligence. They know the investment realities before they buy.

    The transparency that you get in the equity or bond markets is just not available for 'alternative assets' unless you are a specialist.

    But there is one, under-used platform in New Zealand that can help meet the needs of real investors in alternative assets; the Sydnex platform. We mirror their offerings on our page here.

    It is still not attracting universal support, but it is attracting more interest. And both buy and sell bids are appearing. Transactions are being done.

    Sellers may find it confronting to use a proper, transparent market, especially if they have succumbed to promoter fast-talking.

    But alternative assets should only be traded at their investment value, and price discovery when all the facts are on the table is the real world. Paying too much for a property syndicate share is hardly a relevant factor if you need to resell it before maturity.

    Here is a summary of Syndex trades (supplied by the platform manager). More than half of this activity has occurred in 2018.

    Syndex trading statistics
    Asset Class Completed Trades Total Issue Value of Trades Total Offer Value of Trades Total Buy Value of Trades avg
    timeon market
    Average of Discount to Offer Value Average of Discount to Issue Value
    Commercial Property 26 4,850,000 4,430,500 4,421,250 6.0 -1.5% -6.3%
    Dairy 24 845,000 692,350 655,700 18.5 -5.7% -23.0%
    Horticulture 1 100,000 110,000 102,500 30.0 -6.8% 2.5%
    Grand Totals 51 $5,795,000 $5.332,850 $5,179,450 12.4 -3.6% -14.0%

    The time on market needs to be read with some caution ​as it doesn't include some offers that were withdrawn from the market before they were completed.

    What is interesting about these trades is that in the end most were concluded close to net tangible asset value and that can be a long way from the promoters 'price' which is the 'Issue value'.

    And not all trades on this platform end up with discounts. It is clear above that a premium was achieved in the horticulture trade.

    Markets, market yields, and investor and seller expectations shift over time and these have certainly been shifting recently. The table summary above is through to the end of 2017 and covers a period when expectation did shift. The summary is a mix of transactions over a couple of years.

    We have been able to follow one transaction to check how the Sydnex process works in practice. It started with a seller offering 20,000 units at a price of $19,000 in late 2017.

    This attracted three bids; a cheeky $5,000, another hopeful $11,000, and a more realistic $15,000 bid.

    The platform was engaged by the seller with the $15,000 bidder and a back-and-forth discussion was had; clearly the bidder had good knowledge of the offered type of investment and the seller was able to engage on the specifics. Some of this knowledge would have been accumulated from inspecting the related documents the seller was required to post on the platform.

    The bidder responded and upped their bid. The seller engaged further with more information, and stating the bidder was getting closer to the 'reserve'.

    Then the bidder met the original offer price and the transaction was automatically accepted. All other bids were marked as 'lost'.

    What is obvious from this process is that it mimics a face-to-face transaction but without and agent and their fee (or a promoter and their fee). Only the platform fee is due as both parties agreed by using the platform.

    The number of transactions on this Sydnex platform is low, but rising. However, investors should be aware of it as it allows an efficient marketplace for trading alternative assets and can bring some missing liquidity to asset classes that really struggle with that. New "investors" in property syndications can get an unwelcome surprise over their ability to liquidate their holdings before maturity should the unexpected occur. Without a transparent marketplace, they become vulnerable to any number of other parties with conflicted interests.

    Take a look here for our listings of current offers on the Syndex platform.


    * Proper disclosure is always available in the official documents; but the problem is these are dense and legalistic.

  • Geoff Simmons on why we can't have a fair and efficient tax system, as well as an exemption on owner occupied housing

    By Geoff Simmons*

    Dear Tax Working Group (TWG),

    Personal preamble:

    I’m a little bit peeved to be writing this because I am currently in Buenos Aires, it is a lovely day outside and I’m sure there is something better I could be doing with my time. However, I want to make sure these views are expressed. My submission is entirely personal and does not represent the views of The Opportunities Party nor Dr Gareth Morgan. I am pretty sure he would say similar things in terms of substance, though the tone would no doubt be a bit less polite than mine. Last time I spoke to Gareth he wasn’t making a submission because he is pissed off about the Terms of Reference. I’ve decided to make a submission anyway, because I realise that isn’t your fault.

    And yes, you can contact me if you want to discuss any of the points raised.

    Summary of key points and recommendations

    1. The future of tax is reducing the tax on labour and paying for it by increasing the taxes on capital, resources (environmental taxation) and bads (alcohol, junk food and other legalised and regulated drugs).
    2. The purpose of tax is to collect the money we need to pay for a civilised society in the most efficient and fair way possible.
    3. We aren’t taxing the right things – see 1 above and 5 below.
    4. Tax can make housing more affordable. However, the exemption on owner occupied housing is complete tosh.
    5. What matters to me is both fairness and efficiency. We can’t have both with an exemption on owner occupied housing. Instead I am suggesting a form of asset taxation with a tax free threshold high enough to exclude most Kiwi families (and therefore their homes). This tax-free threshold must also apply to Kiwisaver, and ideally include shares and bank deposits.

    Submission

    First up, I think we all agree that the purpose of a tax system is to gather the revenue required to pay for a civilised society;

    1. in the most efficient (least distortionary) manner possible; and
    2. in the fairest way possible – meaning people with similar means are treated equally and people with more means pay more.

    Our current tax system is failing on both these counts, as this analysis shows. There is a growing gap between rich and poor, and our tax system has a massive distortion towards housing and away from productive investment. How can we solve these problems?

    A capital gains tax is not the answer

    Let’s get this out of the way. Simply put, a capital gains tax (CGT) applied on a realised (cash rather than accrued) basis is distortionary. It discourages selling of assets in order to avoid the tax. This reduces turnover of assets, resulting in sub-optimal allocation of assets in the economy. Houses would get held on to by baby boomers even longer. Succession of family businesses would get delayed even more. This is before we even start to contemplate the distortions added by an exemption on owner occupied housing. This really makes a CGT a total waste of time because it encourages all sort of gaming of the system, as Morgan Foundation found in our review of what works in taxing wealth and property.

    Less distortionary alternatives include a land tax and the comprehensive capital income tax (CCIT) as designed by the Morgan Foundation and advanced by The Opportunities Party at the last election. A land tax is no doubt simpler than the CCIT. However, realistically a land tax will result in (accurate) cries from farmers about double taxation. After all, they are already paying income tax on their profits (if they make a profit). In my view the result of this process would be a land tax that looks surprisingly like the CCIT.

    Of course, this quickly takes us to the issue of how to deal with the exemption on owner occupied housing.

    A fair tax system. An efficient tax system. An exemption on owner occupied housing. Choose two.

    First up, let’s be clear: one simply can’t achieve fairness and efficiency with an exemption on owner-occupied housing as per the TWG’s Terms of Reference. Let’s put to one side the difficulty of even applying such an exemption in reality, as I have discussed previously. The central problem is that you can’t have all three of these things: a fair tax system, an efficient tax system and an exemption on owner occupied housing. You have to choose two. I realise this issue is outside the Terms of Reference of the TWG but I believe the number one finding of the TWG should be to reiterate this point, at the very least to help educate Kiwis.

    As Bernard Hickey pointed out (with the TWG’s own analysis) the tax break on owner occupied housing is the largest distortion in the New Zealand tax system, both in relative and absolute terms. Much maligned ‘speculators’ are merely capitalising on this addiction at the fringes.

    By ignoring this distortion in the tax system, it means that any money raised by a tax change has to be spent either reducing the resulting inequality or improving efficiency of the tax system. You can’t do both.

    Reducing inequality requires money to make the tax system more progressive,  either by reducing GST or dropping the tax rates applied to lower incomes. The alternative is to reform the welfare system, which also costs money and is sadly also outside the Terms of Reference of the TWG.

    Assuming the distortion on owner-occupied housing remains, improving the efficiency of the tax system could also be achieved by reducing the tax applied to other investments. This happens in some European countries, such as tax-free savings accounts or tax exemptions on retirement savings. This would not improve equity one iota, because such exemptions benefit the rich most. Dr Michael Cullen knows about all this. It is why he designed the Kiwisaver incentives the way he did; on a dollar for dollar basis up to a cap.

    The trouble is that there would not be enough money from a tax reform to pay for both a fair and efficient tax system. We see this in those countries with exemptions on owner occupied housing and incentives on other forms of investing. They don’t have fair tax systems, resulting in a growing gap between rich and poor. Those that act to reduce inequality generally do so through steeply progressive income tax systems which reduce inequality in income – not wealth – but also they harm the efficiency of the tax system.

    A CCIT or land tax (including the family home) would remove the key distortion in the tax system, allowing the money raised to be pumped into reducing inequality. It is a win/win solution.

    On a personal note, if the exemption on owner occupied housing is applied, my intention is to pour all my wealth into buying a really really big house. Maybe the one next door too, and knock through. Then I will live in it, allow my friends to live there too rent free in return for in-kind services such as maintenance, buying and cooking food, paying the electricity bills and rates. This seems like the rational way to minimise the tax bill on my wealth going forward, as well as appealing to my slightly hippy dippy tendencies toward communal living.

    Managing the politics of taxing the family home

    How do we manage the politics of taxing the family home or family farm? In my view the best way to do this is not by excluding the family home, but by implementing the CCIT and putting in place a tax-free threshold. The level of such a threshold is a political question, although the higher the level means less tax is gathered.

    A tax free threshold is less distortionary because it is blind to which assets an individual invests in. If they want to invest their tax free assets in a lifestyle business or farm, so be it. The money need not go into the family home. To make the system truly neutral the money raised could be applied to making sure people have a similar exemption threshold on the earnings from bank accounts and shares. At the very least any earnings from investments in Kiwisaver should be included in the exemption threshold.

    The average Kiwi family would probably not balk at an individual threshold of $500,000. Aucklanders might, but we care about regional development now, right? Such a threshold might finally give people like my parents a reason to cash up and leave central Auckland, freeing up housing for people that actually work there (sorry Mum and Dad). If you really want to be politically safe, have a personal threshold of $1m – that would be $2m for a couple. Most Auckland houses would still be exempt, except maybe in Epsom. Beyond that level, the CCIT would apply.

    Of course, this does nothing to help the 40% of New Zealanders that have no assets at all. That is why any exemption - including the family home - is ultimately middle class welfare.

    In my view it is vital that we have an efficient and fair tax system. I have only been in Argentina a matter of days but the gap between rich and poor is stark, and it seems to feed into the massive political instability the country suffers from. Attempts to reduce inequality by populist governments are usually poorly implemented and end up damaging the economy, fuelling neoliberal reforms which favour the rich (and so the cycle repeats). New Zealand must avoid this fate, and tax reform is central to doing so.

    Environmental taxation

    A final thought on environmental taxation. The usual economist view is that the double dividend from environmental taxation is only possible if it can reduce distortions in the tax system. New Zealand is generally seen as having a non-distortionary tax system (apart from housing as discussed above), hence the double dividend isn’t possible.

    I disagree. There is a new school of thought on this which points out that any taxation on labour favours the linear economy over the circular economy. The circular economy is labour intensive, and the linear economy is capital intensive, and our current tax system incentivises people to replace labour with capital.

    To incentivise people to reduce, reuse and recycle we need to shift the basis of taxation to environmental or resource taxes and use the revenue to reduce taxes on labour. This will encourage the use of labour for reusing and recycling resources.

    So should we have environmental taxes? Hell yeah. If I were boss, there would be a carbon price of at least $50 per tonne of CO2, and a price on water for commercial users. All commercial ocean users would pay a resource rental too. All money would either go into either improving the environment or lowering the tax burden on labour.

    The golden thread

    The golden thread to all of this is the need to future proof our tax system. The economic changes starting to take place are large and rapid. Jobs are being replaced by robots and artificial intelligence. The need to retrain is increasing. Technology is not only taking the jobs from the poor, but also the middle class.

    To keep up with these changes we need to shift of taxation from labour to taxing capital, environmental taxes/ resource taxes and taxing “bads” including alcohol, junk food and other legalised drugs. I have not discussed the last concept in this submission but it is at least as important in terms of improving wellbeing in the long term.


    *Geoff Simmons an economist, who is a former deputy co-leader of The Opportunities Party and the former managing director of the Morgan Foundation.

  • What the NZ retail payments industry is doing to facilitate open banking and reduce merchant fees to keep the Government happy and avoid regulation

    Payments NZ has briefed the Government on what it’s doing to pave the way for greater retail payments competition, partially in a bid to ensure New Zealand’s push into open banking remains industry-led and not government regulated.

    By the end of the year at the earliest, the industry group plans to have a standardised piece of technology ready that can be used to facilitate open banking. It also plans to have written some standards around how this technology can be used.

    Open banking requires banks to give third parties access to their systems. It therefore gives bank customers the ability to access their bank account information and make online payments without a credit or debit card, via platforms other than that of their bank.

    The idea behind the concept sweeping the globe, is that it decentralises the power banks have by enabling financial technology firms to give consumers more options around the way they manage their money.

    In other words, it enables consumers to shop online without paying credit or debit card fees, or manage their money via apps on their phones, rather than their banks’ mobile banking apps.

    The pinch of course is that open banking carries a number of security and privacy risks.

    An Australian government-commissioned report has recommended open banking should be legislated, with the Australian Competition and Consumer Commission its primary regulator. A July 2019 launch is targeted for the Australian parents of New Zealand's big four banks, with other banks adopting open banking a year later.

    The Westpac Group maintains the introduction of open banking could cost it more than A$200 million in upfront costs, and its customers up to A$250 million in annual fraud losses.

    In New Zealand, the previous National-led government, just before the September 2017 election, wrote to Payments NZ (which is owned by banks) requesting it report back on what it’s doing to pave the way for open banking and greater retail payments competition by April 2018 or face regulation.

    Laying the foundations for open banking

    Payments NZ responded to the new Minister of Commerce and Consumer Affairs, Kris Faafoi, on March 29, confirming its plans to establish a “shared API framework with a set of common payments related API standards”.

    An API, or application programming interface, is the technology that connects different entities’ systems.

    So a shared API framework is basically a standardised piece of technology banks and approved third parties can use.

    Payments NZ, in a 14-page letter to Faafoi, notes that having this API ready to go, will enhance efficiency and mean open-banking innovations can be brought to market quickly.

    It says the standards it’s developing will address issues around licencing, security, privacy and liability. These will be based on the UK standards.

    Payments NZ doesn't specify exactly when the API framework and standards will be ready to go, but says the results of a pilot it started running with ASB, BNZ, Westpac, Datacom, Paymark and Trade Me in March, will feed in to their development. This pilot (which interest.co.nz wrote about here) is due to wrap up late in the year.

    Payments NZ notes New Zealand and the US are among the few countries in which industry is laying the foundations for open banking.

    Despite the work it’s doing, banks will still not be obliged to partake in open banking.

    Speaking to interest.co.nz, Payments NZ CEO Steve Wiggins says banks are “supportive” of it.

    “We’ve also got an industry moving into a fairly high level of capacity constraints coming up with the [Reserve Bank] BS11 regulations [around outsourcing], and so there’s going to be a lot of strain on capability, capacity and capital over the next five years…

    “Some will be ready [for open banking] before others. That will depend on their other projects on at the time.”

    Faafoi won’t discuss Payments NZ’s letter until he meets with representatives from the organisation to talk about it with them on Thursday.

    Yet he says: “In the new world of open banking, while we need to ensure privacy and security is addressed, we ultimately need better services for consumers, an ability for new entrants to enter the market and for innovation to move the system forward.”

    More transparency around merchant service and interchange fees

    Faafoi and his predecessor, Jacqui Dean, also wanted Payments NZ to report back on how to improve the transparency of merchant service and interchange fees.

    Payments NZ in its letter says banks are “continuing to develop more detailed merchant reporting”.

    Mastercard and Visa are also starting to report their “weighted average interchange rates on a six-monthly basis”. Mastercard has already published its first report here.

    While interchange rates are set by banks, they are subject to maximum rates set by Visa and Mastercard.

    Retail NZ’s head of public affairs, Greg Harford, says that with banks currently charging the maximum interchange rates they are able to, the fees merchants pay are “substantially higher” than they are in other jurisdictions.

    “In itself, transparency is a great step forward, but what we do need to see are moves to bring merchant fees in their entirely down to bring them more into line with fees that are charged in other markets,” he says.

    Harford notes Visa and Mastercard made some reductions to fees in recent weeks, yet says regulation (as is the case in Australia and the UK) is “ultimately required”.

    Wiggins says the early signs are pretty positive on the fee reduction front, but it would be a matter of waiting to see what the outcome would be of having more granular information.

    Daily settlements on the horizon

    Payments NZ in its letter also tells Faafoi that by the end of the year the industry will endorse core retail payments being settled every day, rather than only five days a week, as is currently the case.

    The change will be made to the Settlement before Interchange (SBI) payments clearing and settlement system, governed by Payments NZ.

    The SBI processes over $1.1 trillion of transactions a year, including bulk account to account electronic credit and debit payments such as bill payments, automatic payments, payroll, tax payments, direct credits and direct debits.

    Payments NZ says the change will “improve the service offered to customers and businesses, increase system efficiency, speed up the velocity of money moving through the economy and reduce risk in the payments pipeline”.

    While Payments NZ sets the rules for how participants access and interoperate the clearing system, the Reserve Bank manages and runs the settlement account system.

    Because the Reserve Bank is making some changes to the system, Payments NZ says it has to align the timing of the extension of its service with the Bank’s timeline.

    It says: “There is a strong indication of industry support for this initiative and we are currently in the process of consulting with key stakeholders around impacts and timing.”

  • Why we'd all be better off being more welcoming to migrants' elderly parents and improving the quality of education offered to international students

    Wellbeing - it’s set to engulf gross domestic product (GDP) to become the main way to measure the success of government policy.

    Treasury released a paper exploring the concept in 2011, yet it’s taken until now for a government to fully endorse a wellbeing framework.

    While the National-led Government’s targeted social investment approach aligned with it, the Labour-led Government has gone so far as to saying it will assess bids for spending against a wellbeing framework in its 2019 Budget.

    This will be a world first.

    Treasury has accordingly drawn on the OECD’s How’s Life? analysis to create a Living Standards Framework. By the end of the year it intends to develop a dashboard of indicators - social, human, natural and financial - that policymakers will need to consider.

    Consulting economist, Julie Fry, and New Zealand Institute of Economic Research principal economist, Peter Wilson, have just published a book - Better Lives: Migration, Wellbeing and New Zealand - that explores how a wellbeing framework would change the way migration policy is made.

    Speaking to interest.co.nz in a Triple Shot Interview, they say considering a wider range of factors, in addition to GDP, would see a different mix of people immigrate to New Zealand.

    Elderly migrants and international students 

    Currently we welcome young, healthy, trained migrants who can contribute the most to the labour market, Fry explains.   

    We try to avoid letting their elderly parents in because they don’t pay tax, but need superannuation and have greater healthcare needs.

    A wellbeing framework would recognise the value this group of people could add. For example grandparents could help with childcare and encourage their families to stay connected to their home cultures and languages.

    Wilson explains a wellbeing framework would also see us take a different approach towards international students.

    “The previous government really increased the number of international students coming in, because again, they’re young, they don’t use healthcare, they don’t get benefits, but they pay a lot for their education.”

    A wellbeing framework would consider the impact of our migration policy on the students themselves.

    Recognising the fact many students come to New Zealand with unrealistic expectations around getting citizenship, Wilson says, “You’d want to make sure that the students were getting a very good education - so quality education as opposed to some of the short-term language schools.

    “And that they’ve really got a prospect of genuine employment afterwards.

    “So you’d target more on their wellbeing after education, rather than just thinking of them as a cash cow that’ll boost the economy while they’re here.”

    Wilson says the key thing with using a wellbeing framework is that you can’t cherry pick which indicators you do and don't want to meet. In other words, only consider the impact international students have on the housing market.  

    “You’ve got to put it all together."

    Transparency and predictability 

    He says the value of the framework is that it makes the trade-offs policymakers need to make more transparent and predictable.

    The Government’s decision to ban new offshore oil and gas exploration permits is an example of the fact it already considers more than GDP when making decisions.

    Yet Wilson says a wellbeing framework would encourage ministers to say, We do put more weight on the environment than the previous government, so that explains our decision.

    Generally speaking, he maintains the decision-making process is opaque.

    "You don’t know what is influencing ministers and they should make that more transparent...

    “It also makes it easier… to hold the government to account. To say, Hang on, last time you said the environment was important. This time you’ve put more emphasis on jobs. What’s happened? What’s changed?

    Complexity a price worth paying

    Asked whether policymakers would realistically have the time (or inclination) to report back on how they've considered a broader range of impacts of their decisions; the Government’s call to ban new offshore oil and gas exploration being an example of a thorough consultation process being skipped, Wilson answers yes.

    He says lots of decisions are made on the basis of white papers and consultation processes.

    Yet he warns a wellbeing framework shouldn’t be seen as a checklist.

    “It does make decision-making more complex, but we think it leads to better, more transparent, more accountable decisions…

    Fry agrees.

    “At the moment we primarily focus on GDP impact, and sometimes we think about labour market impacts and sometimes we think about housing impacts, but we don’t do that in a systematic way. We don’t think about all the things that people care about when they’re living a life they value…

    “That means we are setting policy that isn’t based on the things that matter. We’re missing out on important things.”

    Wilson acknowledges trade-offs will still always need to be made.

    “The book’s called Better Lives for a reason. It’s not Perfect Lives. What we’re looking for is an improvement on the current process.”


    See this story and this one for more from Fry and Wilson on wellbeing, and this story for Arthur Grimes' perspective. 

  • Govt seeks feedback on what tough disclosure requirements to curb conflicted advice should look like in the absence of a ban of commissions

    After years of discussion about preventing financial advisers on commission from providing conflicted advice, the Government has released a detailed proposal on exactly how it would like advisers to be more transparent.

    The Ministry of Business Innovation and Employment (MBIE) has released a discussion document outlining what information it wants advisers to disclose, and how it wants them to disclose it.

    The proposed regulations, which the public have until May 25 to provide feedback on, support the Financial Services Legislation Amendment Bill currently before Parliament.

    The Labour-led Government has adopted the previous government’s view that imposing stronger disclosure requirements is the best way of “overcoming information asymmetries and improving transparency of, and confidence in, financial advice”, as opposed to capping or banning commissions as UK and Australian authorities have done.

    MBIE suggests advisers make the existence of any commissions, incentives or conflicts of interest public from the get-go; providing clients more detailed information further down the track.

    What this would actually look like

    A firm might stipulate on its website that its advisers receive commission payments.

    When an adviser engages with a prospective client and finds out the “nature and scope” of services they’re after, they’d be required to detail any commissions or incentives.

    For example, explain that if the client chooses to take out insurance from Insurer A, the adviser would receive a commission of 200% of the first year premium, whereas if the client goes for Insurer B, they would receive a commission of 150% of the first year premium followed by annual commission of 5% of the premium.

    If the client progresses things and the adviser recommends they go with Insurer A, the adviser would have to confirm they would receive that  200% commission. They would also have to detail things like if the they write X number more policies with Insurer A that quarter, they would receive free tickets to the annual conference in Hawaii.

    At this point the adviser would also have to disclose information like a requirement for the client to pay them for any lost commission should they cancel the policy within the first three years.

    Striking the right balance

    In the discussion paper MBIE asks submitters to consider how prescriptive regulations should be. 

    Its view is that “regulations set out what information needs to be disclosed at certain points in the financial advice process, but provide flexibility in terms of precisely how this information is provided”.

    MBIE also says: “To reduce the likelihood of disclosure becoming overly complex, we think that only those commissions and incentives which might be perceived to materially influence the financial advice should be disclosed.”

    While it provides detailed case studies of the disclosures that would have to be made in different scenarios, it doesn’t define what "material" is.  

    A staged approach for other disclosures 

    The discussion paper goes beyond commissions. It details the other disclosures MBIE proposes advisers make at different stages of the advice process.

    It says firms/advisers should publicly provide a “general description of the limitations in the nature and scope of the advice that can be given”.

    For example, on their website they say they only weigh up products from Insurers A, B, C and D.

    Then when they find out what sort of service a client is after, they should make clear which insurers they will consider in their assessment. IE Only Insurers A and B, as Insurers C and D don’t provide the type of insurance the client is after.

    MBIE also takes this staged approach to proposing how advisers disclose information about the fees they charge, any relevant insolvency, bankruptcy or disciplinary history they have, and the dispute resolution scheme of which they are a member.

    Here’s a summary of its proposal:

    Additional options 

    MBIE is also considering the following:

    - Requiring advisers to provide clients with a prescribed notification, warning them of the risks of replacing financial products. IE, that they won't be covered for a pre-existing medical condition they are currently covered for if they change insurers. 

    - Requiring advisers to use a set template to detail what disclosures clients can expect them to make through the advice process. 

    - Introducing separate requirements for when advice is given via a robo-advice platform or over the phone. For example, requiring financial advice providers to disclose how a robo-advice platform works. IE that the advice is automatically generated by an algorithm based on information provided by the consumer.

    - Requiring any disclosures made verbally to be supported in writing. 

  • Patrick Watson sees cracks appearing in the bull market and says now's the time to look for opportunities to take profits and reduce exposure

    By Patrick Watson*

    You may have noticed stocks have stopped going straight up. By itself, that’s not scary. Bull markets and high volatility can coexist, and often did until the last few years.

    No, the scary part is that bull markets fall apart slowly.

    Smaller cracks accumulate to set up the big breaks. History shows 2008 was a terrible year — but the Dow had peaked months earlier, in October 2007.

    Even in 2008, the bull took a long time to collapse. The Bear Stearns collapse in March was even followed by a nice rally because people thought the worst was over. But six months later Lehman went bankrupt, and then it was six more months before the final bottom in March 2009.

    So, like the metaphorical frog in boiling water, you can be in the middle of a bull market’s unraveling and not even know it — or at least not know how bad it will get or when it will end.

    That should worry you because right now, the number of cracks is growing while the ability to patch them up is not. Let’s look at just three of those cracks.


    Photo: Getty Images

    Crack #1: Cryptocurrencies

    Last fall, investors went crazy for crypto, mainly Bitcoin. Prices climbed fast as “fear of missing out” caused near-panic buying in some quarters.

    Panic buying is almost always a mistake, and sure enough, bitcoin fell from its peak of $19,000 in December to below $7,000 today.

    Bitcoin fans are undeterred and convinced it will be back. Maybe so. But the more immediate effect is that crypto-mania soaked up a lot of uninformed risk capital that is now less able — and probably less willing — to take the risk of buying stocks.

    This is important because according to Dow Theory, “distribution” is the first phase of a primary downtrend. That’s when the last buyers enter the market, buying stocks from big sellers who perceive signs of trouble. It gets worse from there… eventually a lot worse.

    In this case, the distribution phase could already be near its end if those last few buyers already spent (and often lost) their cash on other, non-equity assets like cryptocurrencies.


    Photo: Getty Images

    Crack #2: Bond yields

    We entered 2018 knowing the Fed would both raise interest rates and reduce its bond portfolio. Those two factors might have been manageable, but others soon followed.

    The tax cuts Congress passed in December, combined with subsequent spending bills, are driving up the federal budget deficit faster than most expected. That’s forcing the US Treasury to sell more bonds, which puts even more upward pressure on bond yields… while the Fed is already tightening.

    Higher bond yields, in turn, make stock dividends a less attractive income source. At the end of March, the S&P 500 dividend yield was 1.85% and the one-year Treasury yield was 2.08%.

    Yes, stocks have capital gains potential and T-bills don’t. But the bull market is nine years old now. It could continue — but it could also reverse, handing you capital losses as well as subpar yield.

    To choose stocks now, you must accept lower income in exchange for higher principal risk. A growing number of buyers don’t like that deal.

    The stock market doesn’t need aggressive selling to make prices fall. Reduced buying interest could do the same thing.


    Photo: Getty Images

    Crack #3: Tech trouble

    Every bull market has leaders. This one has depended heavily on a handful of giant technology stocks, namely Apple (AAPL), Amazon (AMZN), Facebook (FB) and Google’s parent company Alphabet (GOOGL). All these are having problems.

    Apple’s expensive new iPhone X didn’t sell as well as expected, and Google Chromebooks are capturing its once-dominant position in schools and colleges.

    Amazon is getting attacked by none other than the President of the United States himself, who says it is hurting small retailers and taking unfair advantage of the US Postal Service. Old-fashioned retailers are fighting back too.

    Facebook’s success in gathering personal data to use for advertising has thrown the company’s whole business model into question. Regulators and lawyers are circling like vultures.

    Google’s ad sales and data collection are also getting some negative attention, as is its near-monopoly position in many markets. Investors are starting to question the future.

    These companies will likely survive and remain profitable. But their currently handsome profit margins probably won’t, and it’s already showing in their stock prices. That’s problematic for a bull market built on their once-reliable growth.


    Photo: Getty Images

    What to do

    Those three cracks, plus others I haven’t mentioned, don’t necessarily mean a crash is imminent. We can’t even rule out a renewed uptrend — stranger things have happened.

    For one, first-quarter earnings reports will probably look pretty good, but the tax cuts are funding share buybacks and debt reduction rather than pay raises and capital investments.

    In other words, companies are effectively

    • eating dessert first while
    • avoiding their vegetables.

    That’s fun for a while, but eventually makes you sick. So I still think the risk of further losses outweighs the risk of missing further gains.

    A cracked vase doesn’t spontaneously heal itself. The cracks get worse with time, not better.

    In the last bear market, the ideal strategy would have been to either exit near the late-2007 peak or hold on through the whole storm. Few investors did either of those. Instead, they waited and then sold at lower prices. That wasn’t the intent, but it is what happened.

    If you believe the top is in, now is the time to act. At the very least, start looking for opportunities to take profits and reduce exposure. Do it on your own terms, not the terms the market gives you. You’ll be glad you did.

    See you at the top.

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

    *Patrick Watson is senior economic analyst at Mauldin Economics. This article is from a regular Mauldin Economics series called Connecting the DotsIt first appeared here and is used by interest.co.nz with permission.

  • Simplicity launches investment funds that track the NZX top 50 and NZ bond market, under-cutting the NZX's Smartshares ETFs on fees

    Simplicity has launched two investment funds that rival the New Zealand stock exchange’s popular Smartshares Exchange Traded Funds (ETFs).

    The not-for-profit has launched a ‘NZ Share Index Fund’ that invests in the 50 largest companies that make up the NZX50 index, as well as a ‘NZ Bond Index Fund’ that tracks an index of over 30 New Zealand investment grade bonds.

    The funds are structured almost identically to Smartshares’ NZ Top 50 and NZ Bond funds, so should deliver similar gross returns.

    Yet taking Simplicity’s lower fee structure into account, investors’ net returns should be higher.

    This is how the offerings differ:

      Simplicity Smartshares
    Establishment fee None A one-off fee of $30 regardless of the number of ETFs being invested in.
    Annual admin fee $30 $0
    Annual management fee (of funds under management) 0.1%  NZ Top 50: 0.5% 
    NZ Bond Fund: 0.54%
    Fee for withdrawing funds $0 Depends on broker. ASB Securities charges 0.30% for sums over $10,000 for example.
    Minimum investment per fund $10,000 $500
    Minimum that can be added to fund No minimum $250, or $50 if signed up to regular investment plan.

    Simplicity CEO Sam Stubbs says Simplicity has maintained a $10,000 minimum investment threshold to reduce the number of transactions investors make and thus keep its costs down.  

    “Once we get the efficiencies - the economies of scale - to drop that, we certainly will. I don’t think we’re too far away from doing that.”

    He says the funds give New Zealand retail investors access to products at the same price as investors in more developed markets.

    “As a non-profit, we only charge what it costs, and that means management fees much lower than our profit making competitors.

    “There’s an ever growing body of evidence showing the best way to get higher returns, in bull and bear markets, is by paying lower fees.”

    Looking at Simplicity’s fee structure more closely, it becomes more attractive the more one has to invest.

    For example, a Smartshares NZ Top 10 investor with $10,000 under management will save 20% if they switch to the equivalent Simplicity fund. Meanwhile an investor with $50,000 will save 68%.

    Funds under management Annual fees
    Simplicity NZ Share Index Fund investor  Existing Smartshares NZ Top 50 investor  New Smartshares NZ Top 50 investor 
    0.1% management fee + $30 admin fee 0.5% management fee 0.5% management fee + $30 establishment fee
    $10,000 $40 $50 $80
    $50,000 $80 $250 $280

    Stubbs says the underlying message behind Simplicity launching two low cost, index-tracking funds is that it wants to get into wholesale asset management.

    He says the funds effectively set a new benchmark for what institutions should be able to pay to invest in New Zealand bonds and equities.

    “We can’t compete against Vanguard internationally, if you want to invest direct there. But here in New Zealand, no one’s offering what should be offered, which is an absolutely at-cost, passive series of investment funds.”

    Stubbs maintains an unintended consequence of Simplicity launching a product that competes with the NZX’s Smartshares, is that it will hold the exchange to account.

    Smartshares launched its first ETF in 1996. It has since added another 22 ETFs to its offering, in October surpassing the $2 billion of funds under management mark.

    More than 60,000 New Zealanders are invested in Smartshares, either directly or via the NZX’s SuperLife KiwiSaver business, or through financial advisers and investment platforms, Invest Now and Sharesies.

    Having launched in September 2016, Simplicity has $400 million of funds under management through its three passively-managed KiwiSaver funds and regular investment funds that mirror those funds.

    Ultimately Stubbs believes the NZX should ditch its asset management business.

    “We don’t mind having a competitor,” he says.

    "But we don’t want their corporate energy going into running a funds management business as opposed to developing a stock market.”

    NZX CEO Mark Peterson says, "The public capital market plays a vital and active role in the New Zealand economy and a healthy market is one with a growing range of investable product and wide participation." 

    Smartshares CEO Hugh Stevens adds, "It’s fantastic to see another passive fund manager offering access to the New Zealand market.

    "This will help push investors of all stripes to consider passive strategies within their portfolio, and validates the approach Smartshares has been taking for more than 20 years." 

  • Aussie consumer groups cite Facebook-Cambridge Analytica type data dangers for consumers in move to open banking

    The adoption of open banking must include consumer rights to data deletion and should exclude aggregated data sets from its scope, Australian consumer groups say.

    These points are made in a joint submission by the Financial Rights Legal Centre and Consumer Action Legal Centre to Australia's Treasury. An Australian government report has already set out a blueprint for the introduction of open banking in Australia, recommending open banking should be legislated with the Australian Competition and Consumer Commission its primary regulator. 

    Here in New Zealand ASB, BNZ and Westpac are taking part in a Payments NZ trial of software that enables open banking. This comes against the backdrop of a request from Minister of Commerce and Consumer Affairs, Kris Faafoi, for banks to demonstrate they’re doing something in this space to pave the way for greater retail payments competition by April or potentially face regulation.

    In Australia the Financial Rights Legal Centre and Consumer Action Legal Centre pick up on the recent high profile Facebook-Cambridge Analytica scenario, where it emerged the data analytics firm used personal information harvested from more than 50 million Facebook profiles without permission to build a system that could target US voters with personalised political advertisements based on their psychological profiles.

    'The desire on the part of consumers to control their data via strengthened regulations is becoming stronger every day'

    The submission argues the right to deletion is integral for open banking to work in Australia as proposed.

    "If consumers are to have confidence in the open banking regime, this distills down to the need to having control over their own data and to know that if they withdraw consent at any time that data will be deleted. Consumers do not want the situation where their data has been used by a company - with or without consent - and that company holds on to that data to use for secondary purposes, either in aggregated or de-identified form where there is any possibility of re-identification," the Financial Rights Legal Centre and Consumer Action Legal Centre say.

    "The recent news that UK company Cambridge Analytica legitimately gathered some personal data from Facebook accounts and concurrently illegitimately gathered other people’s data, and then, when found out and were requested to delete the data, did not, has raised public consciousness over the potential for data to be misused. Combined with the never ending list of significant and high profile data breaches at Equifax, Ashley Madison, Yahoo and more, the desire on the part of consumers to control their data via strengthened regulations is becoming stronger every day."

    "The Government will be opening consumers up to serious consequences if the right to erasure [remove] is not embedded within the regime from the very beginning. It risks undermining trust and confidence in a system it is promoting as the future. If a right to erasure is not included future headlines will include the names of accredited open banking entities rather than Facebook and Cambridge Analytica," the submission argues.

    Aggregated data

    In terms of aggregated data, the Financial Rights Legal Centre and Consumer Action Legal Centre suggest aggregated data sets should not be included in the scope of open banking, and consumers should be able to withdraw consent for the use of aggregated data sets by a data-holder or recipient with this data destroyed.

    Furthermore they argue consumers should be able to withdraw consent for the use of data that isn’t anonymised or pseudonymised by a data-holder or data-recipient in Australia. This data, they say, must be destroyed and withdrawn because of the threat of re-identification. A right to delete under Australia's Consumer Data Right is "essential" for this to take place. However, this wouldn't apply to genuinely anonymous data.

    "Australia is coming late to the consumer data right party. The European Union (EU) have taken strong strides into bolstering consumer protections in this space with the new General Data Protection Regulation (GDPR) from May 2018 and the Payment Services Directive 2 (PDS2) coming into force early this year in January 2018. Australia does not have to re-invent the wheel and can learn from the lessons hard fought overseas and should follow the EU’s lead or find itself out of step with international practice to the detriment of Australian innovators as well as Australian consumers."

    "Consumer representatives believe these principles are appropriate. We do wish to see innovation in the financial services sector to drive improved outcomes. However this will need to be balanced by genuinely effective consumer protections and access to justice. We strongly support the Report’s placing of the customer at the centre of the regime," the submission says.

    Specifically, the Financial Rights Legal Centre and Consumer Action Legal Centre want the development of a full consumer right that includes the right to deletion, or erasure.

    "For the past two decades, consumers have experienced the innumerable benefits of new technology, innovation and data with the commensurate positive impact on their private, social, financial and working lives. The speed of these changes has been bewildering, so it is only now that consumer understanding of the full impact of these changes is dawning on them with a growing awareness of the true down-side of digital innovation. From world-wide data breaches and increased direct marketing and targeting, to the rise of price discrimination, the segmentation of populations and even the potential undermining of the political process, consumers are beginning to more fully understand the implications of what they have signed up for."

    "Consumers are therefore entering into the open banking regime with a mix of expectation and wariness. In the development of the open banking regime and introduction of Consumer Data Right consumers see, on one side, banks and existing data holders who wishing to hold on to what is seen the gold mine of the future: our personal data. On the other side we have a fintech sector keen to mine this ore for riches, presenting the innovations they produce as the solutions for many of the ills the financial sector is currently displaying, most prominently in the current Financial Services Royal Commission," the submission says.

    "For consumers, there are many opportunities for improved outcomes, for bank switching and a vast array of new innovative financial services: some they have been yearning for years, others that they don’t even know they need. Development of the Open Banking regime and the Consumer Data Right also provides a once-in-a-generation opportunity to fix issues regarding consent, and the unbundling of reams of unread terms and conditions."

    'The right to deletion is integral for the open banking regime to work'

    According to the submission, other issues that need to be addressed from a consumer perspective include tackling increased complexity and choice, combatting increased economic inequality and financial exclusion, countering increased information asymmetry and predatory marketing, plus addressing a number of basic concerns with respect to privacy, security, unconscionable practices, the impact of non-transparent black box technology, and flawed correction processes.

    Additionally the submission argues that if Australia's Consumer Data Right and open banking regime don't include a right like the EU GPDR, Australian entities wanting to work overseas will have to create dual data handling protocols applying to competing jurisdictions.

    "This is a burden on innovation and will place Australian fintechs at a distinct disadvantage to international competitors," the submission argues. "We note that with respect to the right to delete, the [Government] Report suggests that it is beyond the scope of open banking to mandate a special right to deletion of information. We however strongly disagree and take the position that the right to deletion is integral for the open banking regime to work as currently recommended by the Report."

    The Financial Rights Legal Centre is a community legal centre that specialises in helping consumer's understand and enforce their financial rights. Consumer Action is an independent, not-for-profit, campaign-focused casework and policy organisation.

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

  • Cryptocurrencies are treated like property for tax purposes, the Inland Revenue Department says in new guidance

    The following is a press release from the Inland Revenue Department.

    Bitcoin, Ethereum, Ripple and Litecoin are some of the well-known examples of cryptocurrencies, which is essentially money that exists only in digital form.

    The currency is usually encrypted using Blockchain technology that regulates the generation of new units and verifies fund transfers. It operates independently of any central bank and can be transferred without going through a bank.

    Inland Revenue Customer Segment Leader Tony Morris, who oversees this work programme, says trading in cryptocurrencies may happen in a digital realm but tax obligations still apply in New Zealand.

    “Inland Revenue has responded to requests for guidance by issuing some common questions and answers on our website so that everyone knows their responsibilities.

    “Just like with property - when you acquire cryptocurrency for the purpose of selling or exchanging it, the proceeds you make from selling it are taxable.

    “The purpose is hard to argue here since with Bitcoin and other cryptocurrencies, generally the only time they produce an income is when they change hands.”

    Tax is also applied when one cryptocurrency is swapped for another. You don’t need to cash out to dollars to create a tax obligation.

    Likewise, if you receive a cryptocurrency as payment for goods or services, this is considered business income and is taxable.

    Tax rules for foreign exchange don’t apply when it comes to cryptocurrencies.

    “It’s important to keep good records of your transactions as this information will be useful when filing a tax return,” says Mr Morris.

    “Let Inland Revenue know if you think you haven’t got your past tax returns right so that it can be corrected.

    “Operating in the digital world doesn’t absolve you from your tax obligations. It also doesn’t mean your activity is untraceable.”

    Read the guidance here: www.ird.govt.nz/cryptocurrency

  • IRD releases 'ring-fencing' paper; Revenue Minister encourages feedback on proposal to ensure investors can't offset losses on property investments against other income

    By David Hargreaves

    The Government's progressing its plans to 'ring-fence' investors' losses on residential properties as it continues its push against property speculation.

    An Issues Paper has been released by the Inland Revenue Department on the proposal to change the rules in what the Government says is "an effort to level the playing field between speculators and investors - and home buyers".

    IRD is proposing that the new rules will apply from the 2019-20 tax year and will mean that investors will no longer be able to offset losses on property investments against their other income. It's not definite yet that the new rules will be applied in entirety from April 1 next year as the IRD says it would be possible to phase the rules in over a two or three year period (by gradually reducing the amount of losses that can be applied against other income). However, the IRD appears to favour applying the rules in entirety from next year.

    Revenue Minister Stuart Nash, in "encouraging feedback" on the proposed changes, says the "persistent tax losses" that many property investors declare on their investments indicate that they rely on capital gains to make a profit..

    The changes will "make the tax system fairer" Nash says.

    This move had been widely signalled by the Government and follows on from changes to the bright-line test, extending the period at which capital gains on sale of investment properties are taxable from two to five years.

    "In conjunction with the recently announced extension to the bright-line test, ring-fencing losses from rental properties would make property speculation less attractive and level the playing field between property investors and home buyers. The time is right to test the detail of this proposal with investors and other stakeholders," Nash says.

    What the IRD is suggesting:

    As proposed, the rules would not apply to a "main home", or  a property that is subject to the mixed-use assets rules (for example, a bach that is sometimes used privately and sometimes rented out), or land that is on revenue account because it is held in a land-related business.

    IRD is suggesting that the ring-fencing should apply on a "portfolio basis", which means that investors would be able to offset losses from one rental property against rental income from other properties – calculating their overall profit or loss across their portfolio.

    Also under the suggested changes, a person’s ring-fenced residential rental or other losses from one year could be offset against their residential rental income from future years (from any property) and their taxable income on the sale of any residential land.

    The IRD's also suggesting "special rules" to ensure that trust, company, partnership, or 'look-through' companies can't be used to get around the ring-fencing rules.

    It is proposed that such entities will be regarded as “residential property land-rich” if over 50% of the assets are residential properties within the scope of the ring-fencing rules, and/or shares or interests in other residential property land-rich entities.

    Where that is the case, IRD suggests that any interest a person incurs on money they borrow to acquire an interest in the entity (for example, shares, securities, a partnership interest, or an interest in the trust estate) would be treated as rental property loan interest.

    "The rules could then ensure that the interest deduction is only allocated to the income year in question to the extent it did not exceed the distributions from the entity (deemed rental property income), any other residential rental income, and residential land sale income. Any excess of interest over distributions, rental income, and land sale income would be carried forward and treated as “rental property loan interest” for the next income year," IRD says. 

    This is the statement from the Government:

    Revenue Minister Stuart Nash is encouraging feedback on a proposal to change the rules around ring-fencing losses on residential properties.

    An Issues Paper has been released by the Inland Revenue Department that proposes ring-fencing losses in an effort to level the playing field between speculators and investors, and home buyers.

    “Changes would make the tax system fairer by ensuring that investors could not offset their losses on some property investments against their other income,” Mr Nash says.

    “At the moment, tax is applied on a person’s net income, which means if a property investor makes rental losses those losses reduce their overall income, and therefore their  tax liability.

    “The persistent tax losses that many property investors declare on their investments indicate that they rely on capital gains to make a profit.

    “In conjunction with the recently announced extension to the bright-line test, ring-fencing losses from rental properties would make property speculation less attractive and level the playing field between property investors and home buyers. The time is right to test the detail of this proposal with investors and other stakeholders.

    Mr Nash says ring-fencing losses would be a useful tool to dampen property speculation. “This measure would not preclude any solutions the Tax Working Group may come up with in relation to housing”.

    “I encourage the public to make submissions to Inland Revenue before the deadline of 11 May 2018,” Mr Nash said. For more information, including how to make a submission, see http://taxpolicy.ird.govt.nz.

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