Well, I guess I can’t complain about no takers for the “Lost Child of Wallis Competition” over the weekend. If I couldn’t find the inspiration to give up my weekend on the document, I can’t blame anyone else for doing likewise.
I’m glad I bothered this morning, though, because the results are, in a word, shocking. The wanton child has a useful batch of consumer-related reforms but is combined with a range of disastrous regulatory-related recommendations that makes the total package a clarion call for the politico-housing complex to become a permanent feature of the Australian economy.
Recommendations 1-19 look pretty good:
The Committee recommends that a broad ranging inquiry into the Australian financial system be established, modelled on that conducted by the Campbell Committee. The terms of reference should be broad, covering the role of banks and other financial institutions in a post-GFC financial environment. The inquiry should be well resourced and have its own secretariat, independent of government departments.
The Committee recommends that the Reserve Bank publish further regular information on banks’ interest margins and returns on equity; and compare these to returns in other industries to allow an assessment of whether risk-adjusted returns in the banking sector are sufficiently high to suggest that competition is inadequate.
The Committee recommends that the Australian Bankers’ Association meet with small business representatives to develop a code of practice specifically relating to lending to small business.
The Committee recommends that the Government reconsider its decision to ban exit fees, before the amended regulations come into effect, with a view to allowing enough time for the effectiveness of the existing ban on unfair and unconscionable exit fees (as implemented through ASIC Regulatory Guide 220) to be assessed. If it proceeds with the ban, it should only apply to authorised deposit-taking institutions.
The Committee recommends that lenders be required to inform borrowers when they take out a loan of the provisions of the National Consumer Credit Protection Act 2009 which relate to unconscionable charges.
The Committee recommends that borrowers be required to sign off on a form clearly disclosing any exit fees applicable to their home or small business loan before making any commitment.
The Committee recommends that lenders charging exit fees be required to explain on their website how the exit fee relates to relevant costs. As well as excessive exit fees, the Committee identified other barriers to customers moving between lenders, which it believed should be addressed.
The Committee recommends that lenders mortgage insurance always be made either pro-rata refundable or transferable and that this be made clear to borrowers. As an alternative, lenders mortgage insurance should be payable by instalments (eg. monthly, quarterly or annually) rather than as an upfront lump sum payment (as occurs in other jurisdictions).
The Committee recommends that the Reserve Bank and the Australian Prudential Regulation Authority draw on their data collections to publish regular information about the total cost of home loans (based on standardised assumptions on the average size and term) for the twenty largest ADI home mortgage lenders.
The Committee recommends that a working group be set up including Treasury, the Australian Prudential Regulation Authority, the Australian Securities and Investments Commission, the Australian Competition and Consumer Commission, the Reserve Bank, the Financial Ombudsman Service, the Australian Bankers’ Association, Abacus, consumer representatives and relevant academics to develop standardised words for financial products and their characteristics to allow consumers to more readily compare offers from different financial intermediaries.
The Committee recommends that the Government ask Treasury to investigate the feasibility of personal credit ratings to facilitate borrowers moving between lenders.
The Committee recommends that banks should be required to contact customers before the expiry of term deposits advising them of the rate that will apply if they are automatically renewed and the current ‘special’ rates available.
The Committee recommends that the abolition of stamp duties on refinancing of mortgages be placed on the agenda for the forthcoming tax forum and that the agreement on their abolition be implemented.
The Committee recommends that a scheme based on those in Europe be introduced requiring a bank, upon being advised that a customer has left for a new bank, to reroute all direct debits and credits for 13 months and provide the new bank with details of those direct debits and credits.
Subject to the release of the Government’s independent legal advice, the Committee recommends that the Competition and Consumer Act 2010 be amended to include a provision which states that a corporation engages in price signalling if it communicates future price-related information to a competitor, and the communication of that information has the purpose, or has or is likely to have the effect, of substantially lessening competition.
The Committee recommends that an amendment to the Competition and Consumer Act 2010 to introduce a price signalling provision should be accompanied by ACCC guidelines providing:
• examples of the type of communication that would fall foul of this provision;
• examples of the type of communication that would not fall foul of this provision; and
• the protection offered by the exemptions.
The Committee recommends that the Government introduce regulation of mortgage early exit fees (including deferred establishment fees), requiring disclosure of these fees upfront in a simplified and comparable format.
The Committee recommends that mutual financial intermediaries be allowed to refer to themselves as a ‘mutual bank’ or ‘approved banking institution’ and use terms such as ‘credit union bank’ in their name.
The Committee recommends that financial intermediaries not supervised by the Australian Prudential Regulation Authority be required to state clearly that funds placed with them are ‘not guaranteed by government’ but otherwise should not be prohibited from applying familiar terms such as ‘debenture’ where this would not be misleading.
I’ve got no important issues with any of this. More information, more clearly presented and a push to commoditise banking via consumer empowerment. Fine.
Now we get into the sticky parts:
The Committee recommends that, to increase the competitiveness of smaller lenders, the Government immediately standardise the fee for all borrowers under the wholesale funding guarantee to a uniform rate of 70 basis points.
So, no attempt to hand risk back to the big banks. Only a recommendation to remove it from the smaller firms. This is not only a complete corruption of market pricing, it’s entrenching the public risk for private profit moral hazards that caused the GFC in the first place. Next:
The Committee recommends that the financial claims scheme should be retained in its current form pending the outcome of a full inquiry into a deposit insurance scheme, possibly charging risk-related premia. The inquiry should also examine the issue of guaranteeing non-ADI products that are close substitutes for deposits, with a view to being better placed to provide such a guarantee as future need arises.
See above. Next:
The Committee recommends that the Government ask the Australian Prudential Regulation Authority to review aspects of its prudential framework to ensure that there are no inadvertent impediments to the issuance and trading of bullet bonds.
Inadvertent? This looks suspiciously like a move to push APRA to include bullets in Level 2 capital ratios. Is it a good idea to allow banks to hold each others assets and count that as capital? Or does that remind you of something? Next:
The Committee recommends that, in order to retain incentives for careful credit assessment, an authorised deposit-taking institution which securitises a loan portfolio be required to keep a proportion of the resultant asset-backed securities on its balance sheet and hold appropriate levels of capital. The proportion should be set by the Australian Prudential Regulation Authority in consultation with the Australian Securities and Investments Commission to balance incentives to maintain credit standards with the desirability of encouraging the recovery of the securitisation market.
Well, this is all right in theory but is much more problematic in practice. How big is the equity slice going to be? I’m not sure there’s an answer. Big enough to exert a credit standards impulse is probably so big that securitisation is no longer competitive. And if the committee doesn’t know the figure, why are they recommending we have one? Next:
The Committee, having more confidence in the Australian Prudential Regulation Authority’s oversight than in the opinions of credit rating agencies, recommends that the Reserve Bank accept as eligible paper for repurchase agreements long term debt issued by any authorised deposit-taking institution rather than just those rated above A.
The RBA’s repo facilities have remained weirdly opaque since the GFC and now we want to let everyone into the fog? Why is it more transparency for consumers and less for financial stability? Next:
The Committee recommends that the Australian Office of Financial Management programme be expanded to include asset-backed securities based on assets other than home mortgages and to include securities rated AA or A (rather than just AAA) or issued by a financial intermediary supervised by the Australian Prudential Regulation Authority.
The Committee recommends that the Australian Office of Financial Management be given the discretion to purchase residential mortgage-backed securities issued by entities with a substantial bank shareholding where it judges this would promote a more competitive market.
The Committee recommends that the Government commission a survey of potential demand for types of asset backed securities.
The Committee recommends that the broader inquiry into the financial system investigate ideas that may further the participation of smaller lenders in the securitisation market, such as greater standardisation and disclosure, liquidity support for securities issued by mutual ADIs meeting certain quality standards and better co-ordination between regulators.
The Committee recommends that Treasury develop a plan to introduce a support programme for RMBS similar to that operating in Canada in case a future deterioration in the securitisation market requires its introduction.
In effect, these five recommendations argue that the AOFM should be able to spend your money on higher risk tranche’s so that securitisers don’t miss out on the moral hazard bonanza being offered to ADI’s. There’s the Chris Joye provision for a full-blown Canadian SwannieMac that keeps buying this expanded high risk melange ad infinitum. Then there’s the John Symond provision allowing AOFM to specifically buy RMBS from securitisers with a bank shareholder (ie Aussie).
I understand the need to balance interest in a democracy but what about those of the tax-payer? Again, why is there no effort to inject greater transparency?
The remaining recommendations are a mix of savings-oriented reforms that make sense:
The Committee recommends that the Government establish a working group with an independent chair, representatives from Treasury, the Australian Prudential Regulation Authority, the Reserve Bank, and the banking and superannuation industries, and also including academic experts, to explore and assess options that could promote investment in deposits and fixed income assets by superannuation funds and other funds managers.
The Committee recommends that the Australian Payments Clearing Association and the Australian Bankers’ Association encourage their members to have their ATMs screens display a real-time warning to consumers where a penalty fee will be imposed if a particular transaction goes ahead.
The Committee recommends that the government deal with the problem of excessive ATM fees in remote indigenous communities by tendering for an ATM provider to install a network of ATMs in these areas which make specified minimal charges for balance enquiries and low charges for cash withdrawals.
The Committee recommends that the Government direct the Australian Competition and Consumer Commission to conduct an examination of barriers to competition in the Australian payments system and publicly report by the end of 2011 on any legislative or other reforms that would enhance competition and efficiency in the provision of payment, clearing and settlement systems.
The Committee recommends that interest withholding tax be abolished as budgetary circumstances permit to increase the ability of foreign banks to compete in the Australian market.
The Committee recommends the taxation arrangements applied to bank deposits and mutual ADI deposits should be reviewed by the inquiry into the financial system.
The Committee recommends that the Government require Treasury to review the GST input tax arrangements for mutual financial intermediaries having regard to the comments in the Henry Tax Review.
The Committee recommends that the Government require Treasury to review the treatment of building societies and credit unions in the franking credit arrangements and report publicly on the advantages and disadvantages of various options.
The Committee recommends that the Government require Treasury to review the abolition of the LIBOR cap to the tax deductibility of interest paid by a foreign bank branch on borrowings from its parent bank.
The Committee recommends that the Government require Treasury to review the operation of the First Home Savers Accounts scheme and report publicly on the advantages and disadvantages of various options.
In sum, good recommendations for consumer transparency, savings and banking competition. These measures would potentially lower the cost of credit. The sensible accompaniment of such measures should be increased incentives and regulations for risk assessment to ensure the stability of the financial system rises with increased competition. Instead, there are series of terrible and contradictory recommendations for the public purse to absorb and hide much greater amounts of private sector mortgage risk. Put together, the Senate Inquiry has basically recommended cheaper, more widely available credit, with you the tax-payer carrying the bag.