NEWS Banking insider reveals ‘dodgy’ lending Major banks crack down on foreign borrowers P8
OPINION Reserved for the rich Is owning a house becoming an exclusive privilege? P10
ANALYSIS Broadening horizons How to diversify and reap the rewards P12
MAY 2016 ISSUE 13.10 DIVERSIFICATION ISSUE
SPECIAL REPORT Commercial is the new residential
Embracing the small business lending market P18
MARKET TALK Still no closure on negative gearing
The RBA’s internal briefing note causes a stir P22
MICHAEL SAADAT ASIC’s senior executive leader for Deposit Takers, Credit and Insurers addresses brokers’ fears over the regulator’s review into remuneration P16
FINANCIAL SERVICES Bye bye banks, say fintech CEOs
Fintech specialists predict ‘NextGen banking’ will take market share P24
BORROWER SNAPSHOT 2
NEWS
ASSOCIATIONS
REGULATION
LENDERS
FBAA’s marketing toolkit for brokers P4
ASIC bans fifth Get Approved Finance broker P6
Lenders keep on passing cash rate cut to borrowers P8
BROKERNEWS.COM.AU
REFINANCERS RELY ON BROKERS
EDITORIAL
Borrowers by segment that say they would use a mortgage broker (26,000 households) November 2015
February 2016
Editor Madelin Tomelty
May 2016
News Editor Julia Corderoy Journalist Maya Breen
77.8%
75.9%
73.1%
Production Editor Hayley Barnett
ART & PRODUCTION
62.7%
62.0% 60.7%
53.5%
52.4%
51.7% 38.4%
38.2%
17.0%
37.1%
Design Manager Daniel Williams Designer Martin Cosme Traffic Coordinator Lou Gonzales
SALES & MARKETING Sales Manager Simon Kerslake Account Manager Rajan Khatak Marketing and Communications Manager Lisa Narroway
CORPORATE Chief Executive Officer Mike Shipley Chief Operating Officer George Walmsley Managing Director Justin Kennedy Publisher Simon Kerslake Chief Information Officer Colin Chan Human Resources Manager Julia Bookallil
17.4%
16.7%
EDITORIAL ENQUIRIES
Madelin Tomelty +61 2 8437 4792 madelin.tomelty@keymedia.com.au
Want-to-buys
First home buyers
Refinancers
Solo investors
Portfolio investors
Source: Digital Finance Analytics
tel: +61 2 8O11 4992 fax: +61 2 9439 4599 subscriptions@keymedia.com.au
FIRST HOME BUYERS CONTINUE TO BE SQUEEZED OUT Housing affordability worsened in all but one capital city in the 12 months to the end of March, according to analysis from a global credit rating firm. According to the RMBS – Australia: Housing Affordability Has Deteriorated, But Worst May Be Over report from Moody’s, national housing affordability worsened by 0.6% in the 12 month period. “During the 12 months to 31 March 2016, Australian households spent an average of 27.6% of their monthly income on mortgage repayments, up from 27.0% for the 12 months to 31 March 2015,” said Moody’s analyst Natsumi Matsuda. “Nevertheless, housing prices fell during the three months to 31 March 2016, suggesting that repayment costs may have peaked,” Matsuda said.
The recent cash rate cut could be a double-edged sword for affordability, with Moody’s saying it will help by making repayments cheaper, however low interest rates could place upward pressure on house prices. According to the Moody’s report, affordability improved in all Australian capital cities during the three months to 31 March 2016, but the degree of improvement was insufficient to head off the year-onyear deterioration. Over the year to the end of March, Perth was the only city where affordability didn’t deteriorate. As of 31 March, households in Perth were spending 21.5% of their monthly income on mortgage repayments, compared to 22.6% a year prior. Sydney continued to be the most
SUBSCRIPTION ENQUIRIES
unaffordable city for homebuyers, with households spending an average of 35.6% of their income on mortgage repayments as of 31 March 2016, followed by Melbourne. Households in Melbourne spent an average 30% of monthly income on mortgage repayments, compared with 27.2% a year ago. Affordability also deteriorated in Adelaide (to 23.2% from 21.9%) due to moderate price increases combined with income declines, and Brisbane (to 24.3% from 23.6%). The Moody’s research shows that nationally, housing is currently more affordable when compared to the 10-year average, however buyers in Sydney are paying 1.7% more of their monthly incomes towards mortgage repayments than the average over the past 10 years.
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Simon Kerslake +61 2 8437 4786 simon.kerslake@keymedia.com.au Rajan Khatak +61 2 8437 4772 rajan.khatak@keymedia.com.au Key Media Pty Ltd Regional head office, Level 1O, 1–9 Chandos St, St Leonards, NSW 2065, Australia tel: +61 2 8437 4700 fax: +61 2 9439 4599 www.keymedia.com Offices in Sydney, Auckland, Denver, Toronto, Manila This magazine is printed on paper produced from 1OO% sustainable forestry, grown and managed specifically for the paper pulp industry Copyright is reserved throughout. No part of this publication can be reproduced in whole or part without the express permission of the editor. Contributions are invited, but copies of work should be kept, as Australian Broker magazine can accept no responsibility for loss. Australian Broker is the most-often read industry publication, according to independent research carried out by the Ehrenberg-Bass Institute for Marketing Science at the University of South Australia in December 2008. The research also found that brokers rate Australian Broker as the best for both news content and feature articles, followed by sister publication MPA. Overall, on all categories, Australian Broker ranks top followed by MPA. The results were based on a sample of 405 respondents who were the subject of telephone interviews.
ASSOCIATION HAPPENINGS 4
NEW MARKETING TOOLKIT TO HELP BROKERS ‘DISTINGUISH THEMSELVES’ The Finance Brokers Association of Australia (FBAA) has unveiled an online marketing toolkit for brokers, which the FBAA describes as a virtual one stop shop. The toolkit houses “an enormous” amount of marketing collateral brokers can use to update their websites, send to clients or advertise their business. Features include marketing collateral such as videos, brochures, client checklists and flyers, as well as the FBAA’s $99-per-year calculators. Of all the features, however, the FBAA’s Peter White said he is most excited by the video content the association has produced for its members in partnership with an external marketing company. “Brokers can actually have video
content already done for them,” White told Australian Broker. “They can put it on their website free as it is or they can modify it slightly or put their brand on it before putting it live on their website. It is a great promotional tool that not everybody has access to – to create video content that is relevant to their business and to the industry.” According to White, everything in the toolkit can be individually branded. However, branding will incur a cost. “[The toolkit] is in our member’s area so members can log in and pick and choose the things they want to use for their business. “It is free unless you are paying for the calculators and/or unless brokers would like to brand something with
their own business logo. However, all the generic stuff is free.” White says it is important for brokers to distinguish themselves in an increasingly competitive market. “It is all about distinguishing yourself in the marketplace,” he told Australian Broker. “According to ASIC, as of April, there are 19,438 credit reps in Australia – that is credit reps, not ACLs. There are a lot of people in our industry. “Brokers need to distinguish themselves and they need to show to potential borrowers and their clients how they can help them. “Information is king. Informing borrowers and being transparent with everything is what is king in this marketplace today. That to me is what 2016 is all about.”
\DATES TO WATCH
A rundown of the next fortnight’s events
MAY
27 What: Broker 2020 Series Where: Sydney, location TBC The particulars: The MFAA’s one-day event with a focus on young professionals, back office staff, technology, sole operators, business owners who manage staff and equipment and commercial finance, followed by an awards night recognising local excellence.
WHAT THEY SAID... MAY
Daniel Carde “The more financial assistance a broker provides for a client, the easier it becomes for the client to think of their broker first for all their financial needs” P12
Steve Kane “Now is the time for brokers to explore the small business sector, as they are playing an increasingly important role in small business lending” P18
Siobhan Hayden “Diversification of finance broker businesses is critical to business success (top-line growth), as well as the overall viability of the broker industry, and should be encouraged wherever possible” P18
31 What: Pepper Money Insights Roadshow Where: Adelaide Convention Centre The particulars: Guest speakers and keynotes sharing meaningful insights on the underserved borrower market to enable brokers to help more customers and maximise conversion.
JUNE
1
What: Pepper Money Insights Roadshow Where: Crown Perth The particulars: Guest speakers and keynotes sharing meaningful insights on the underserved borrower market to enable brokers to help more customers and maximise conversion.
REGULATORY ROUNDUP 6
WORLD NEWS
THE PEAKS AND VALLEYS OF CREDIT GROWTH
housing credit growth, six-month-ended, annualised
%
%
15
15 Investor
10
10 Total
UNITED STATES OF AMERICA The Consumer Financial Protection Bureau has proposed a rule that would make it a lot easier for customers to sue their banks. The CFPB’s proposed rule would prohibit binding arbitration clauses. If enacted, the rule would affect hundreds of millions of bank accounts, credit cards and other financial products and services, according to an Associated Press report. Often, bank customers have unknowingly signed away their right to sue the bank. Binding arbitration agreements – which force customers to settle disputes through a third-party mediator – are often buried in the fine print of financial agreements, the Associated Press reported. The CFPB wants to change that process. “Many banks and financial companies avoid accountability by putting arbitration clauses in their contracts that block groups of their customers from suing them... [which] effectively denies groups of consumers the right to seek justice and relief for wrongdoing,” said CFPB director Richard Cordray. The ban would apply only when customers want to create or join a class-action suit. Individual customers could still be forced to settle disputes through arbitration. But the financial industry, which stands to lose billions if the rule is enacted, said banning arbitration will only benefit class-action lawyers, the AP reported. “Arbitration has long provided a faster, better, and more cost-effective means of addressing consumer disputes than litigation or class action lawsuits,” said Richard Hunt, president of the Consumer Banker Association. “The real winners of today’s proposal are trial attorneys, not consumers.”
5
5 Owner-occupier
0
0 2006
2008
2010
2012
2014
2016 Source: APRA, RBA
GET APPROVED GETS STUNG AGAIN ASIC has permanently banned a fifth broker from Perth-based finance brokerage Get Approved. Grant Aaron Parker’s banning follows those of Eric-John Pryor, Lachlan McDonald and Julie Vanzyl, who were also permanently banned, and Rana Hepi who was banned for eight years from engaging in credit activities or providing any financial services for similar conduct whilst arranging vehicle finance for clients. ASIC recently found that Parker, of Alfred Cove, Western Australia, engaged in misleading conduct when brokering motor vehicle financing for four clients in 2012. Mr Parker misled vulnerable clients with poor credit histories to believe they would be approved for vehicle finance if their loan applications were supported by guarantors. He then dishonestly prepared loan applications solely in the names of the proposed guarantors without those persons’ knowledge or consent. ASIC also found that Mr Parker facilitated
the issuing of financial products in his clients’ name and inflated loan amounts by selling and financing insurance and warranty products without his clients’ knowledge or consent. ASIC deputy chairman Peter Kell said the banning reinforces the strong message to any broker considering engaging in misleading conduct. “ASIC will not hesitate to permanently remove those who engage in misleading conduct from the industry,” he said. In October 2015, Esanda agreed to compensate more than 70 borrowers for car loans organised by Get Approved Finance. The total value of the loans financed was more than $1.38 million. As at April 2016, this has resulted in the total benefit including refunds of over $570,000 to approximately 60% of these borrowers with the remaining borrowers at various stages of the remediation process. ASIC’s investigation into the conduct of Get Approved Finance and Esanda is ongoing.
LENDER UPDATE 8
“DODGY” LENDING TO CHINESE NATIONALS The Australian Financial Review (AFR) has reported that according to an insider who wished to remain anonymous, the lending boom to Chinese nationals for residential and commercial property in Australia was always a little fraught. He told the AFR that credit and compliance officers within Australia’s big four banks were never comfortable with their new clients. He added that despite the fact that there was plenty of money to be made, this meant the banks had to acquire a different appetite for risk than most traditional bankers were accustomed to. “We never knew where the money was coming from,” said the insider. “Anyone who said they did was just pretending. It was all a bit dodgy.” This comes following the recent halt on foreign lending that all four major banks have now implemented, putting a stop the recent lending boom to Chinese nationals. Westpac recently halted all loans to foreign buyers, ANZ tightened lending rules, and CBA announced it would no longer approve applications for home loans that cite self-employed foreign income. NAB is the latest in the list to announce strict new lending criteria for foreigners. “NAB has limited appetite for this segment, which comprises less than two per cent of the NAB book,” a spokesman said in response to questions from the Australian Financial Review.
LENDERS PASS ON CASH RATE CUT
NAB’s new rules, which just came into effect, will see increased loan to value ratios and the recognition of just 60% of foreign earnings. According to the insider, all four major banks had pumped up their numbers in recent years by lending to Chinese clients, but when usual changes in the credit cycle occurred and bad debts began to rise, this meant the higher risk Chinese clients had to go. “We never asked too many questions about how they were getting the money out of China and into Australia,” said the insider. “For every one loan we approved there were eight we rejected.” After three years of not asking too many questions, AFR reported, the banks’ appetite for risk was no longer there, which begs the question: is the Chinaled property boom in Australia over? Jason Anderson, the chief economist at property consulting firm Macro Plan, believes there has already been a marked slow-down in the number of Chinese buyers inspecting off-the-plan apartments in Australia. “Previously, developers were selling out a new project on the opening day, but that’s not happening now,” he says. “Now they might sell a third [of the project] and this involves lots of haggling.” Mr Anderson said the feedback from agents was that prices are holding steady.
BY THE NUMBERS
Cash and liquid assets of major banks, March 2016
CBA
$16,213mil ANZ
$17,510mil
NAB
$14,085mil Westpac
$17,847mil Source: APRA
Over 30 lenders have cut their rates following the RBA’s move to drop the official cash rate by .25%. While many lenders have announced they will be passing on the full rate drop to their customers, others have also announced rate cuts of 21 basis points or lower making it one of the most competitive lending environments in Australian financial history. The new 1.75% interest rate is a new all-time low. YELLOW BRICK ROAD ACQUIRES NEW NON-BANK LENDER Mortgage and wealth franchise Yellow Brick Road (YBR) has acquired privately owned South Australian non-bank lender Loan Avenue for $4.1 million. YBR executive chairman Mark Bouris said the acquisition of “one of South Australia’s top three non-bank lenders”, Loan Avenue, will help the franchise diversify its mortgage book geographically, diluting the reliance on Sydney and Melbourne mortgage markets. “Loan Avenue is a respected B2B brand and has been in operation for 10 years with a significant footprint, made up of more than 100 brokers in South Australia and Victoria. This acquisition allows us to quickly build more scale in South Australia, diversify and deepen our distribution network and funding relationships and increase our management capability,” Bouris said. Loan Avenue’s mortgage product compatibility with YBR’s own mortgage manager, YBR Group Lending (formerly RESI Mortgage Corporation acquired in FY2014), also affords “simple integration minus the complexity that often comes with a scale acquisition”, Bouris added. Loan Avenue founders and vendors Paul and Michelle Collins have agreed to stay on following the acquisition. They will assist in maintaining and driving existing aggregator and broker relationships, as well as supporting integration. “We are delighted to join such a fast growing and diversified group as YBR. Our focus will be to enhance our broker relationships and drive further product initiatives with YBR, whilst maintaining the high service levels for which we are renowned,” Paul Collins said. The acquisition of Loan Avenue remains subject to a number of conditions precedent and, assuming the conditions are satisfied, completion of the acquisition is expected to occur on 31 May 2016. The maximum aggregate consideration agreed to be paid for Loan Avenue is $4.1 million. The $2.6 million cash component of the acquisition will be funded out of the company’s existing cash reserves and undrawn portions of its CBA facility. The remaining will be funded by a deferred cash consideration and the issue of YBR shares.
10
OPINION
Douglas Driscoll Douglas Driscoll is the CEO of award-winning real estate group Starr Partners
RESERVED FOR THE RICH With Australian property prices at an all-time high, is owning a house becoming an exclusive privilege, accessible only to the wealthy? Douglas Driscoll shares his two cents
MANY EXPERTS are currently warning of a “property bubble” but I believe this to be a very misguided diagnosis. Last year, the market continued to defy our expectations and we were in unchartered territory, but since then we’ve seen the market cool and start to level off. Sydney is evolving into a new market where conditions are unpredictable, competition is high, and the pool of affordable housing is drying up. While many have expressed their concerns over the recently-introduced macro-prudential measures, I firmly believe they are needed. The market was outperforming even the most optimistic forecasts, with property prices increasing at an alarming and potentially unsustainable rate, leaving scores of investors vulnerable. Recent research has revealed that Australia has the highest number of residential mortgages per capita in the world, with house prices having risen at a rate that far outperforms that of household income and rents. Although I don’t subscribe to the bubble theory, I do believe we are staring an affordability crisis square in the face. ‘Australians have never had it so good’ Australia is one of the best countries in the world when it comes to the quality of living but, equally, it is one of the most expensive in terms of the cost of living. The Australian Government famously said, “Australians have never had it so good” when it comes to income and cost of living. But I just don’t see how this statment is possible when the great Australian dream of owning a home is unattainable for many. The Government might think that today’s Australians are lucky and should be grateful for the standard of living they enjoy, but what about the socioeconomic factors at play? Sure, the upper echelons have it good but there’s a burgeoning underbelly of society struggling to make ends meet. We have to think of creative and sustainable ways of getting people into properties and onto the ownership ladder. Crippling repayments Growing up, it was always instilled in me that the
general rule of thumb when it comes to mortgage repayments or rent on a property was that they should be a third of your income and should not exceed that. At the moment, the average rental and mortgage repayment value is tracking much closer to 40% of a person’s total income, particularly in Sydney, which could be crippling for some. Additionally, the International Monetary Fund puts Australia in the top 10 countries in the world where house prices have grown at a faster rate than incomes, assessed by a house price-to-income ratio. If you also look at the wage price index and inflation against property price growth, you’ll see that over
the last few years, a massive disparity has emerged. The common saying, ‘If you can’t afford it, don’t buy it’ can unfortunately no longer be used as a rule of thumb for Australians wanting to get their foot on the property ladder. If they don’t pay what the inflated market demands, how exactly will they get a house otherwise? Giving handouts is not the answer. The United Kingdom has a number of options under the Affordable Home Ownership schemes. ‘Shared ownership’ is a scheme that allows UK residents to buy a share of their home and pay rent on the remaining share. This helps to subsidise the purchase price. The Government must step up We have to be mindful from a socioeconomic view that property doesn’t just become the reserve of the rich. So how do we fix the problem? In my opinion, the only way for this to improve is by legislation or regulation. We need morphological analysis and subsequent intervention measures. With yet another interest rate cut just announced, the chances of the Reserve Bank lifting rates is highly unlikely for some time to come, and with “cheap money” comes the inclination amongst Australians to take on more and more debt, boosting house prices even further and in turn percolating the housing affordability crisis. What else can be done if not implement legislation? The other alternative is to allow the fundamental economic principals of supply and demand to take effect, but that won’t necessarily help address and tackle the affordability issue. We certainly shouldn’t penalise people who do well financially, but we do desperately need a solution before the problem worsens and in my opinion, intervention should come from beneath, not above.
“The upper echelons have it good but there’s a burgeoning underbelly of society struggling to make ends meet. We have to think of creative and sustainable ways of getting people into properties and onto the ownership ladder” AUSSIES BEST IN THE WORLD… AT ACCRUING MORTGAGE DEBT
SALARIES JUST AREN’T CUTTING IT
Residential mortgages (% of total loans)
Housing prices are growing at a far more rapid rate than household income
Hong Kong Germany Italy UK US Sweden Canada Switzerland Norway Australia
300 Housing prices
250 200
Household income Construction costs
150 100
Rents 0
10 20 30 40 50 60 70 Source: Variant Perception
1986 1990
1994
1998
2002
2006
2010
2014
Source: Variant Perception
12
ANALYSIS BROADENING HORIZONS Cory Bannister and Daniel Carde on why brokers should expand their products and services portfolio, and the rewards that can be reaped from diversifying DIVERSIFICATION . It’s a subject that’s been hot on the lips of brokers for years, and rather than dwindling out, the topic is only gaining more traction and popularity with each passing day. Many brokers are sick of hearing about it, and are content to stick to what they know best – residential mortgages. The MFA A’s June 2015 report backs up this notion, stating that the majority of brokers are still heavily focused on the education and structuring of a single product for their customers, with little cross-sell of other products. The report, written by MFA A CEO Siobhan Hayden, further states that “even customers requiring specialist lending solutions are often not correctly supported due to a lack of expertise in identification and suitability of risk products required to better support these customers.” “Diversification of finance broker businesses is critical to business success (topline growth), as well as the overall viability of the broker industry, and should be encouraged wherever possible,” Hayden clearly states. At the recent Deloitte Australian Mortgage Report Roundtable, James Hickey, Deloitte financial services partner, said that traditional insurance cross sell is less than 10% of a broker’s revenue, and this drops even further when the mortgage market is particularly hot. He added that “no one wants to risk their primary focus – the mortgage settlement,” and this seems to be a strong factor inf luencing brokers resisting diversification. So why should brokers broaden their value chain, and what will it take for them to do so? I’ll stick with residential, thanks very much La Trobe Financial’s VP chief lending officer Cory Bannister and RESIMAC’s Daniel Carde are adamant that brokers who ‘put all their eggs in one basket’ are taking a big risk, and not only that, they are completely ignoring the business opportunities that come with diversifying. But a problem many brokers seem to have is figuring out what exactly they should diversify their businesses into. “One point that is often lost is the very definition of diversification. For some, it may be the one stop shop idea, and for others it may be simply thinking outside the square with regards to traditional lending,” Carde, director of Product, Marketing and Strategic Partnerships at RESIMAC, told
“One point that is often lost is the very definition of diversification. For some, it may be the one stop shop idea, and for others it may be simply thinking outside the square with regards to traditional lending” Daniel Carde, RESIMAC Australian Broker. “Diversification for a mortgage broker can start by simply looking outside of the traditional lending landscape and opening up their business to specialist lending – an area that is often overlooked because of the misconceptions that it is either too hard or in some way in contravention of responsible lending.” Offering specialist lending products, he adds, is a seamless way to begin the process of diversifying your business as a broker. “Diversifying into other forms of residential lending is really quite simple. Whilst the product offering is sometimes a little more
comprehensive… the basic principles of lending still exist. And being comprehensive doesn’t translate to being complicated. Rather, comprehensive simply means offering a broader range of solutions than that of a traditional product range,” he says. This idea is one that Pepper Money’s Mario Rehayem is equally passionate about. “[Rather than] going into a skill set you’re not accustomed to, or trained for, all we are asking is for them to write a home loan that has f lexibility outside of what [they’re] used to. So why don’t we first go there, before we diversify the whole business,” he told Australian Broker recently.
13
“By offering a diversified suite of products you remove any dependency to one market segment that could be severely impacted by sudden economic or regulatory change” Cory Bannister, La Trobe Financial
To assist with this process, RESIMAC has simplified the specialist lending platform for brokers. They now offer only three products, each with a different income verification documentation requirement, with the type of income verification provided determining the interest rate. Specialising: risks and rewards For brokers interested in sticking to residential mortgages rather than broadening their vision to multiple markets, Bannister makes it clear that there are risks associated with this path that brokers should be aware of.
“For brokers, if you choose to specialise then you understand that you are effectively prompting your clients to talk to another finance broker at some stage for the finance requirements you don’t offer, and the obvious risk here is that if the broker they speak to helps them, and can also do what you do, then there is a strong possibility your client will be moving onto the one stop shop, chasing convenience,” he says. Alternatively, a fully diversified financial services business is a nice idea in theory, but brokers may not have the size and scale to do that. This is where looking to partnering with lenders comes in.
Lenders that offer easy access to a variety of products that are engineered for new entrants and can provide hands-on assistance, both in terms of upfront training and ongoing support, make the whole diversification transition smoother. Another option, Bannister says, would be to partner up with other financial service providers in your area that you trust that cover the gaps in your offering, effectively establishing a quasi-financial services network that you can cross-refer into. This is an option that RESIMAC’s Daniel Carde supports. “Whilst the broker may choose to specialise in mortgages and refer out for other services, this is still participating in diversification because they are providing their client with something more than just a mortgage.” Referring in this way is a great way for brokers to expand their businesses, he adds. “Diversification doesn’t necessarily mean going it alone,” he says. The partnership route is also a particularly practical option for those brokers who don’t have the (often significant) training and education that is required in order to offer a full suite of financial products. For those brokers who are adamant on learning it all, however, La Trobe Financial tries to make this process as easy as possible
14
ANALYSIS wPRODUCT POSSIBILITIES Products borrowers would consider getting from a mortgage broker
Home insurance
Credit card
44.1% 38.2% 27.72%
10.5% 9.3% 5.7%
Investment advice
SME business loan
7.1% 5.5% 5.1% Refinancers
First home buyers
11.7% 5.6% 7.2% Portfolio investors Source: Digital Finance Analytics
for brokers. “We purposely use the same forms and documents for all of our products to ensure brokers have familiarity, making it easy for brokers to diversify, and this extends to our Commercial, SMSF, Construction and Development, and Non-Resident Loan products,” says Bannister. He adds, however, that none of this will be possible at all unless brokers have the appropriate support network available, and this can come from their aggregator BDM, lender BDM or lenders’ credit staff direct. “The availability of this support network should be kept front of mind when choosing or reviewing their aggregation group and preferred lender panel.” How diversification can boost business These days, many brokers already carry formal qualifications outside of the mortgage industry, such as accounting degrees, backgrounds in banking and RG146 financial planning compliance, for example. “For these brokers, stepping outside of writing mortgages is, in most cases, second nature,” says Carde, and in offering a diverse product portfolio, brokers will be looking
at a greater value proposition, and in turn, a boosted income stream. “The most obvious opportunities exist around client retention and client attraction, with the end result being increased revenue and improved business value, but the understated, and potentially most important, benefit is revenue protection,” says Bannister. “By offering a diversified suite of products you remove any dependency to one market segment that could be severely impacted by sudden economic or regulatory change.” Carde agrees, suggesting that if brokers don’t expand their product offering, they need to ask themselves the question, will they still be relevant in a few years? “A common question that gets raised in mortgage broking is, who owns the client?” he says. “When a broker offers more than just a mortgage, the relevance of that question starts to diminish. The more financial assistance a broker provides for a client, the easier it becomes for the client to think of their broker first for all their financial needs. When brokers don’t diversify, they run the risk of someone else picking up that client and not only offering the client what the broker didn’t but also potentially
offering the client a different mortgage down the track as their circumstances change,” Carde says. Challenges become opportunities When it comes to that scary subject of regulation, the changes that are today frequently occurring in the mortgage environment have been making times a little more difficult for brokers. However, Carde and Bannister think that these headwinds can easily be turned into tailwinds. “While these continued changes are frustrating for brokers,” Bannister says, “they can also be the catalyst for growth in brokers’ market share, as this uncertainty drives consumers to seek further guidance from finance brokers prior to transacting.” Carde concurs, and suggests that brokers should leverage this somewhat volatile environment. “The key to dealing with any new challenge is recognising it early and then using it to your advantage. Challenges often create new opportunities, and force us to change our way of thinking and/or our way of doing business.”
16
COVER STORY BUSTING MYTHS Is ASIC’s review into remuneration just a fact finding mission, or do brokers need to be concerned about their livelihood? Michael Saadat clears the air. OVER THE last two decades, mortgage brokers have become an essential distribution channel for lenders and now account for over 50 per cent of all loan originations. Borrowers are clearly thinking with their feet when the time comes to fulfil the great Aussie dream of owning your own home. And yet, concern for the borrower is exactly the reason for ASIC’s looming review into broker remuneration, to be completed in December this year. This will be the first time ASIC has ever reviewed mortgage broker remuneration structures in detail, and at the heart of this lengthy process is the protection of the customer. As to what the customer needs protecting from, exactly, is not so concrete. Possible lender bias by the broker? Commissionmotivated customer persuasion? Brokers are unsure, but Michael Saadat, senior executive leader for Deposit Takers, Credit & Insurers at ASIC, is set on removing the panic and emotion from the subject. “This review will help answer the question of whether the current remuneration structures facilitate good outcomes for consumers,” he says. And yet the question on every broker’s lips is, why now? Saadat puts it delicately, adding that past reviews into other financial industries, such as life insurance and investment products, have indeed raised concerns about advice standards, and the impact of commission structures on that advice. Ultimately, a similar concern seems to warrant the current review.
“It is generally recognised that brokers play an important role in ensuring competition in the Australian residential mortgages market, including by facilitating the distribution of mortgages by lenders who do not have a large physical footprint” Discussing the Scoping Paper Certainly, one could argue that it’s a frustrating time to be a mortgage broker in Australia. Because, while there has never been such opportunity for brokers to leverage the property boom, work hard to build customer relationships and consequently make a large chunk of change, there’s no denying that the mortgage-lending landscape is rapidly chopping and changing, and brokers are less confident in knowing where they stand. The intricacies of the subject matter of the review into broker remuneration were finalised by ink in a Scoping Discussion Paper released by ASIC in February. Following feedback from this paper, the regulator is currently finalising an initial request for data from a number of industry stakeholders. Within a month of the paper being published,
however, comments and statements surfaced that were almost palpable with panic. Perhaps the most obvious was the launch of the website and campaign ‘My Broker My Choice’, created by the country’s biggest aggregator, AFG, in March. The website is a comprehensive breakdown of the Australian mortgage broking sector, and includes infographics with industry data, along with lists that outline why mortgage brokers are crucial to the market, what drives them and how they help consumers. The website has a clear call to action for the public to sign a petition to prevent the “loss of the broker-based distribution network”. Clearly, the aggregator has concerns about the upcoming review, and this was further backed up by the 23-page written response AFG also released following ASIC’s
MORTGAGE BROKER REQUIREMENTS AND CONSUMER PROTECTION IN PLACE
STARTING OUT 3-MONTH PROBATION CERT IV ACL OR ACR BUSINESS SETUP/ LEGAL COSTS MEMBERSHIPS OF MFAA/FBAA CPD TRAINING REQUIREMENTS PI INSURANCE SETUP
FIND CUSTOMERS LOAN APPLICATIONS NETWORKING/ MARKETING LEGISLATIVE OBLIGATIONS ONGOING BUSINESS COSTS
SETTLEMENT LODGEMENT THROUGH AGGREGATOR LOAN APPLICATIONS NETWORKING/ MARKETING LEGISLATIVE OBLIGATIONS ONGOING BUSINESS COSTS
POST SETTLEMENT NCCP ASIC CIO FOS LEGISLATIVE OBLIGATIONS ONGOING BUSINESS COSTS
BUSINESS COSTS MARKETING TO CUSTOMERS BUSINESS DEVELOPMENT CPD TRAINING
CLAWBACK PERIOD EXAMPLE BROKER LODGES 10 DEALS
EXAMPLE ON AVERAGE 6.5 DEALS SETTLE
AVERAGE LOAN LIFE
WITH BANK
2 YEARS
4 YEARS Source: AFG
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Scoping Paper. Responses such as these seem to be reflective of the broader broker state of mind regarding the review. However, Saadat wants to make it clear that “ASIC is going into this review with an open mind” and without any preconceived notions regarding the broker channel. Woes over remuneration While Saadat’s previous statement, that “commissions are a form of conflicted remuneration”, was generally perceived as a negative comment, he has no qualms about acknowledging the value and importance of the role that brokers play in the mortgage industry when questioned by Australian Broker. “It is generally recognised that brokers play an important role in ensuring competition in the Australian residential mortgages market, including by facilitating the distribution of mortgages by lenders who do not have a large physical footprint,” he says. There are concerns, he goes on to suggest, over the impact of lender size and vertical integration on outcomes in the broker market, and this is something ASIC is collecting data on. The outcome of this data will also speak to AFG’s concern over market distortion by bankowned aggregators, if a fee for service model is ultimately mandated. Culling the competition So should brokers really be concerned about a fee-for-service model in a post-review world? Whether this regulatory change is warranted will depend on what kind of effect a feefor-service model will have on consumers, according to Saadat. AFG and the MFAA, though, believe that this type of remuneration structure will significantly reduce competition in the mortgage sector, to the detriment of the consumer. Additionally, there is the concern that if upfront commissions were to be restricted, it would take significantly longer than the usual 12-18 months for a new broker to develop a sustainable business and this would severely restrict the viability of mortgage broking as a career for new entrants. Saadat’s diplomatic response to this is that, “It would be up to the Government to consider any broader market/competition issues from any proposed changes” and that ASIC doesn’t
have a view on the industry moving to a ‘salaried’ broker model. Rather, he seems to imply the regulator is more like “the muscle” in the review process, and the final word on regulation, like all things, will ultimately be up to the Government. After all, it was the Assistant Treasurer, the Hon Kelly O’Dwyer MP, that requested the review in the first place. “The Government has indicated that it will consider the findings as a first step prior to any potential change in remuneration structures for the mortgage broking industry,” Saadat says. The focus, then, is on ‘potential’, and brokers shouldn’t panic just yet. Brokers aren’t alone Saadat also makes it very clear that mortgage brokers have not been singled out in this investigation into commissions. He explains that the review will look at “the complete value distribution chain” and will document the flow of remuneration not just to brokers, but also to other firms and the remuneration paid to lenders’ own staff. Again, this addresses concerns that both the MFAA and AFG have expressed regarding referrer commission. “The question of remuneration structures in the broker industry is not just a matter of either a commission or a fee-for-service, nor is the review limited to the remuneration of brokers as it will include an examination of the remuneration paid to lenders’ own staff,” he told Australian Broker. “We will be looking at the specific elements that go into a firm’s remuneration structures. This will range from the upfront/trail commissions, through to nonmonetary benefits or improved lender service levels that are based on volume.” “Importantly, this will include remuneration paid under referral arrangements (whether those arrangements are with the broker or direct to lender),” he says. “If we identify particular issues in relation to arrangements between lenders or brokers with third parties, we may undertake additional follow-up work on those specific arrangements.” The data ASIC receives during the review, Saadat says, will enable ASIC to make informed statements about whether the current remuneration structures are in fact associated with poor – or good – consumer outcomes. And now, the industry waits.
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SPECIAL REPORT
COMMERCIAL IS THE NEW RESIDENTIAL Opportunities in the small business lending market continue to grow as the residential market plateaus. Three top brokers share their experiences and expertise, and explain how you can successfully service this growing segment
SPONSOR MESSAGE
Steve Kane, general manager, NAB
Australia’s small business lending market is aggressively growing and NAB Broker is dedicated to supporting brokers looking to diversify into this flourishing space. When you consider that there are over two million small businesses across the country that employ 49% of the workforce, it is clear that this is a lucrative market and a strong business opportunity for brokers. NAB is proud to call itself Australia’s business bank, and we believe all brokers can tap into the small business segment with the necessary tools, guidance and support. We offer brokers a dedicated small business team to help them through the diversification process, and specifically trained small business BDMs, who are on hand to answer all broker questions. I believe brokers are uniquely placed to help the small business market, as many brokers are small business owners themselves. Brokers understand the passion and energy that drives small business owners, which in turn strengthens the broker/customer relationship. Now is the time for brokers to explore the small business sector, as they are playing an increasingly important role in small business lending. Brokers currently account for around 25-30% of all commercial lending in Australia, and we predict the sector will experience similar growth to residential lending where brokers hold over 50% of market share. I hope you enjoy this feature on diversification, and find valuable insights that will encourage you to consider small business lending as part of your own future growth journey.
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BEVON SINNOTT MANAGING DIRECTOR, INTERCORP FINANCIAL STRATEGIES Through his business into commercial lending, Bevon Sinnott, managing director of Perth-based Intercorp Financial Strategies, is able to secure the future of Australian small businesses. Unlike going direct to a bank, a commercial broker will consider a client’s whole financial picture, Sinnott told Australian Broker, which is why commercial brokers are so important to the livelihood of the two million small businesses making up the backbone of the Australian economy. “For instance, if a client came to a commercial broker and said they need an overdraft because they don’t have enough working capital, the broker will not only review the full range of loan products that are available but consider those that are the most competitively priced and those that use the least amount of assets – type and value – as security. “Not only will this ensure that profitability is improved, but the business will have the capacity for future growth.” Whilst commercial broking can be a very rewarding experience for brokers – both socially and financially – Sinnott said residential brokers cannot expect a quick and easy new stream of revenue. “The most common misconception is that business loans are like home loans – high volumes processed in short time lines. However, business and commercial loans usually have long timelines. An SMSF loan could take 90 days for approval and then a further 60 days to settlement,” Sinnott told Australian Broker. “A commercial broker could work on one complex commercial loan application for over six months. Although the commissions can be
attractive, the cash flow can be a problem for any new broker.” He also said residential brokers looking to make the move into commercial should invest in education and upskilling. “If you cannot read a balance sheet and a profit and loss statement, you will have trouble understanding some of the concepts required to structure a commercial or business loan. “If this is the case, then some additional education will be required by any residential broker looking to diversify into this market.” However, Sinnott said there are plenty of opportunities for residential brokers serious about diversifying into small business lending. “There are a number of segments that fall into the business/commercial area, including cash flow products like overdrafts, commercial credit cards and debtor finance, asset finance for the purchase of plant and equipment and vehicles, SMSF and traditional loans for business
“The most common misconception is that business loans are like home loans – high volumes processed in short time lines” Bevon Sinnott, Intercorp Financial Strategies premises, commercial loans for the expansion of businesses, lines of credit, home loans for company directors and staff, and insurance products.” His advice would be to pick a particular area and specialise in it. “There are a number of established brokers who are already in this market so it will not be easy for new entrants to break into the segment,” Sinnott told Australian Broker.
“Any new entrant should base any expansion on their existing expertise and concentrate on one segment of the market.”
CANG DANG SENIOR FINANCE BROKER, POSITIVE LENDING For Cang Dang, senior finance broker at Sydney-based Positive Lending, there is no better time than now to diversify into small
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SPECIAL REPORT business lending. “Lenders have become more innovative in their product offering, which means that it is easier than ever for small businesses to get access to business or commercial lending,” he told Australian Broker. “Competition among the banks is very high at the moment, so regardless of the scenario, you will usually be able to find a lender that can assist the client with the funding that they are looking for.” In fact, Dang said, lenders are investing heavily in their third-party relationships within the business lending space. “Most brokers that give commercial a try will see that, unlike a residential loan application in which you have to do everything yourself, in the commercial space the lenders have relationship managers who are there to help you from the moment you have a conversation with your client until the deal settles. It feels more like a partnership with the lender. “The lenders will help you every step of the way and work closely with you to get the loans approved.” However, greater lender competition in the small business lending sector also means there is more for a broker to keep up to date with – a challenge that Dang said will be the biggest obstacle for brokers this year. “Staying on top of what each lender is able to offer for different clients in different scenarios is one of the biggest challenges in the current environment,” according to Dang. “So not only do you have to stay on top of what is happening in the residential space, you alsov have to do the same for the commercial space. The pace [at which] changes are occurring in today’s market means there is so much information that has to constantly be reviewed.” Building relationships with commercial lenders may be Dang’s most important piece
“Staying on top of what each lender is able to offer for different clients in different scenarios is one of the biggest challenges in the current environment.” Cang Dang, Positive Lending of advice for residential brokers interested in diversifying their business, however, once they have built those relationships he said brokers are already sitting on gold mines with their current database for lead generation opportunities. “Firstly, setting up relationships with commercial lenders is the most important thing – they will give you the confidence to start the conversation with your clients,” Dang told Australian Broker.
“Once you have that relationship established, look through your database and start a conversation with your self-employed clients about their goals. Self-employed people tend to be the ones looking at growth or stability for their business.”
DAN PETERS PARTNER, EDGEVIEW GROUP Finance brokers are vital to Australian small business, said Dan Peters, the founder and
“More than ever the notion of loyalty is diminishing, so businesses are hungry for a trusted adviser they can rely on to support their business, which is exactly the niche an effective commercial broker fulfils” Dan Peters, Edgeview Group partner of Brisbane-based Edgeview Group. All businesses need easy access to new capital to fund growth, maximise opportunities and sustain efficient operations, but without brokers, he said, small businesses are often left behind. “Small businesses are often in a difficult position because they are time poor due to the heavy involvement in the crucial day-today operation of their business,” Peters told
Australian Broker. “Too often we see clients take on debt facilities not suited to their business simply because they didn’t have the time and expertise to understand what was available to them. A commercial broker provides clients with the time to breath. We become an important part of any business we work in partnership with. We bring the missing expertise to effectively fund their growth.”
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On top of the importance of brokers in helping small businesses prosper, Peters said the market itself is also aligning to give brokers a better opportunity than ever to diversify. He said Edgeview Group – which specialises in commercial lending – has noticed an increased appetite for risk in the commercial lending market post GFC. “Firstly, lenders are increasingly looking to leverage the largely untapped potential market that small businesses offer. This has seen changes in credit policies in the sub $1m lending space with streamlined verification and assessment, increased unsecured lending appetite and overall a more commercial perspective by viewing businesses on their merits,” Peters said. “Secondly, the tightening in the residential lending space appears to have translated across to the commercial space with more aggressive pricing and innovative products offered to capture market share. “Thirdly, fintech companies in the business lending space are influencing the commercial lending landscape. Businesses who don’t meet bank lending criteria are now able to access this relatively new funding source. I expect this space will continue to become more innovative and competitive, leading to a reduction in the cost of funding over time.” However, despite the big opportunities in small business lending, Peters said it can be a steep learning curve without the comfort of “standard practice” you often find in residential lending. His advice for residential brokers looking to diversify their service offering is to learn from experience and be patient. “Properly understanding commercial finance takes time – years. As a starting point I recommend mentoring with an existing commercial broker to leverage their knowledge and expertise. There is a vast new range of products, concepts and terminologies that must be understood and practiced to be effective. “In addition to aligning with an experienced commercial broker, I would recommend seeking a formal qualification in understanding financial statements. Once there is the strong knowledge, a broker can focus on breaking down the complexities of commercial lending.” But what is Peters’ secret to being a truly successful commercial broker? He said a broker must redefine the “financial relationship”, especially in a market where banks are fighting fiercely to dominate a consumer’s ‘wallet’. “The challenge and opportunity as a commercial broker is to reinvent what a ‘financial relationship’ means to their existing and prospective clients,” he told Australian Broker. “More than ever the notion of loyalty is diminishing, so businesses are hungry for a trusted adviser they can rely on to support their business, which is exactly the niche an effective commercial broker fulfils. “Once the relationship is established, having the capability to deliver a superior customer experience through systems and expertise will be a major factor in negotiating the ups and downs of the industry.”
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MARKET WRAP NEGATIVE GEARING HELPS AUSSIES SECURE THEIR FINANCIAL FUTURE?
MARKET TALK
STILL NO CLOSURE FOR NEGATIVE GEARING DEBATE
1.2 million Australians who use negative gearing
2 million
A Reserve Bank of Australia internal briefing note shows that the RBA believes the abolishment of negative gearing could be good for the nation’s financial stability IN THE GOVERNMENT’S Federal Budget announcement last week, Treasurer Scott Morrison vowed not to touch negative gearing, saying its removal would “increase the tax burden on Australians just trying to invest and provide a future for their families”. However, despite the official announcement, the negative gearing debate doesn’t appear to be over just yet. An RBA internal briefing note, obtained by the ABC under freedom of information laws, states: “Any change which discourages negative gearing may be good from an FS [financial stability] perspective.” The memo went on to blame negative gearing for speculative investment, stating the combination of negative gearing and the capital gains tax (CGT) discount “may encourage chasing of capital gains”. On questioning, however, the Federal Government dismissed the internal memo from the RBA, with Finance Minister Mathias Cormann telling the ABC it is an “entirely unremarkable document” and does not represent the official position of the RBA. “This is an old document, it is an internal document, it is a document that outlines historical perspectives,” he told the ABC. Treasurer Scott Morrison also weighed in. “It should be noted that since this memo was written, APRA has made changes to deposits on loans. As well, the Reserve
Bank’s recent financial stability report noted the possibilities of risk associated with foreign investment in property, stating ‘there is little evidence of either occurring so far’,” he said. While the memo lent support to the abolishment of negative gearing in one respect, however, the document also stated there could be a “potential increase in rents” if negative gearing was curbed. CEO of the Property Council of Australia, Ken Morrison, entirely agrees with this prediction. “We accept that the Reserve Bank were not modelling the Federal Opposition’s policy – but this memo clearly flags that changing negative gearing would impact rents,” Morrison said. “This memo confirms that policy makers have real concerns about how renters would fare under policies that make negative gearing less effective. “We again call on the Opposition to release its modelling on the impact of its proposed tax changes on rents and the property market.” The ABC reported the RBA internal memo was produced some time between March 2014 and April 2016, but it is unclear whether it was written before or after Labor announced its proposal to limit negative to new housing in February this year.
Australians owning an investment property
840,000
Australians who earn less than $80,000 per year
Source: Property Council of Australia
TRANSACTION VOLUMES TRENDING LOWER AS HOUSING MARKET COOLS
Monthly house and unit sales, national 50,000 Houses (12-mth average)
Units (12-mth average)
40,000 30,000 20,000 10,000 0 Apr-96
Apr-00
Apr-04
Apr-08
Apr-12
Apr-16
Using a year-on-year measure to April 2016, annual sales volumes were -5.7% lower over the year for houses and -12.2% lower for units Source: CoreLogic RP Data
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CHINESE DEMAND FOR AUSTRALIAN PROPERTY WON’T LET UP Demand for Australian residential property will continue to increase this year, with Australia being labelled the most popular country for Chinese investors, despite the banks’ foreign lending crackdowns A RECENT SURVEY of 150 Chinese member agent companies of Australian-based business-to-business off-the-plan marketing firm Investorist has revealed that Chinese demand for residential property across the globe is set to increase in 2016, with Australia identified as the most popular option. “Globally, demand is going to increase and the demand in Australia should increase,” Investorist founder and chief executive officer Jon Ellis said. “The popularity of Australia as an investment location is strengthening in China and the number of businesses that are making Australian property available to Chinese consumers are growing,” Ellis said. According to the Investorist survey, there are four drivers behind the demand for offshore residential property among Chinese buyers: investment, education, migration and lifestyle. Sixty per cent of the respondents identified Australia as the number one market for Chinese residential buyers, though Ellis said recent changes could jeopardise that. Ellis said a recent crackdown by Australian banks on lending to foreign buyers, and the decisions by the Victorian government to hit foreign buyers with higher land tax and stamp duty charges, could impact how Chinese buyers view Australia. “We do domestically have some challenges with things like banking and the state government of Victoria making some fairly unfavourable new pieces of legislation,” Ellis said. “I still say, based on an economics point of view, the [Victorian] decision is still not a bucket of cold water. But it is a clear message and it’s a clear message at a time when Australian banks are saying no foreign purchases and then you’ve got a state government saying we’re going to penalise you again. I think it’s crazy.” Ellis said the Victorian decision will likely see Brisbane become the chief target for Chinese buyers in the near future. “I think it will take the focus off Melbourne and certainly put it onto Brisbane. Sydney doesn’t have the market mechanics of Melbourne or Brisbane – the sales focus there is much more locally orientated, so Sydney has to do a bit of pivoting for it to become a global investment hotspot. “I think it will send more focus on to Brisbane, which we’ve already been seeing over the last six months anyway. This year, Brisbane has really
CHINESE INVESTMENT DRIVES DEMAND
58% Apartments
Most popular dwelling type among Chinese buyers
16% Houses
THERE’S NO PLACE LIKE HOME
24%
Townhouses
Drivers behind the demand for offshore residential property among Chinese buyers
41. 8% Investment
26. 7% Education
12.Lifestyle 2%
19. 3% Migration
2%
House and land packages
Source: Investorist
increased it favourability.” Conditions in China could also impact demand, with Ellis saying the Chinese government’s efforts to stop capital leaving the country are something that needs to be monitored. “It’s increasing. There was a range of banks – depending on who you speak to, some people call them illegal banks and others call them private banks – who were helping Chinese people expatriate funds. Now there are only two registered financial institutions that are helping Chinese people expatriate funds, which are Standard Chartered and HSBC. “Bank of China and some of the other Chinese banks have got various different schemes to assist people, but it’s something that’s certainly caught the eye of regulators in China and it’s certainly something that people need to keep an eye on.” According to the Investorist survey, apartments are the most popular dwelling type among Chinese buyers, followed by townhouses, houses and house and land packages.
Source: Investorist
While apartments are the popular choice among Chinese buyers, their attention has moved away from micro and one-bedroom apartments as they look to replicate how Australian investors approach property. “Your first-time purchaser of property will look very much at price. The first decision you make is around price and dipping your toe in the water. Your second- and third-time investors that have dipped their toe in the water and have realised that it’s ok starts to look at fundamentally what makes a good long-term investment. “The Australian property market is about capital growth. The mindset of a property investor here is very different to other parts of the world. “In Australia, yields are not as important and yields of 3% or 4% are considered acceptable. Anything above that is considered good and Chinese investors here are not playing the yield game, they’re playing the long-term buy and hold and capital growth game.”
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MARKET WRAP FINANCIAL SERVICES
BYE BYE BANKS, SAY FINTECH CEOS Fintech specialists speaking at the Fintech CEOs on the Future of Finance seminar in Sydney have made bold statements that ‘NextGen banking’ will take market share and talent away from incumbents over the next 20 years ACCORDING to a panel of the nation’s leading fintech entrepreneurs speaking recently at the Fintech CEOs on the Future of Finance seminar, people can expect ever-popular fintech companies to move in on traditional financial services providers, eventually taking market share and valuable talent, while forcing down costs. Traditional jobs may be lost and even one of the big four banks could disappear, said the panel. Panellist Ben Bucknell, chief executive officer of OnMarket BookBuilds, an Australian fintech behind OnMarket – an innovative online portal giving retail investors direct access to IPOs – said fintech is reshaping the investment industry and opening up career opportunities for today’s university students. “Investment opportunities that were only previously available to the very wealthy just five years ago are increasingly available to everyone
through financial technology. There’s never been an easier time to transform a good idea into a business plan. That creativity is very attractive to young people. We’re aiming to draw them to fintech before they get trapped in a middleoffice role preparing PowerPoint presentations just to feed an outsized mortgage,” Bucknell told the seminar, hosted by OnMarket with the University of New South Wales’ University Network for Investing and Trading (UNIT). Jost Stollmann, fellow panellist and chief executive officer of Tyro Payments, said the bank of the future will be a technology company with a banking licence. Tyro calls it the ‘Nextgen Bank’ and Tyro is already building such a business. He predicts one of the big four banks will disappear with the ‘fintech onslaught’. According to a recent Frost & Sullivan study, Fintech in Australia – Trends, Forecasts and Analysis 2015 – 2020, the Australian fintech
sector is set to take $10 billion in aggregated revenues away from the big Australian banks and contribute $3 billion of new revenue to the Australian financial services sector from 2015 to 2020. “This train is coming fast. Can an old-style bank respond and stay competitive? Maybe. Can all of them? Probably not. Just think: one of the big four banks could disappear in the next 20 years. The only question is, which one will it be? Unless the banks can unbundle their products, overcome their legacy infrastructure and compete with low-cost ‘provider agnostic’ digital platforms, they might well cease to exist,” Stollmann said. “Australia cannot afford to be complacent. More and more of this country’s best and brightest minds are leaving the big banks in order to start their own business and reinvent banking. The government, regulators, and the
FINTECH IS THE FUTURE
$10bn $3bn
The predicted aggregated revenue the Australian fintech sector is set to take away from the major banks between 2015 and 2020
The predicted revenue the Australian fintech sector will contribute to the Australian financial services sector from 2015 to 2020 Source: Frost & Sullivan
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wider community should encourage and enable these entrepreneurs and their efforts. We are well-placed as a country to lead ‘Nextgen’ banking and it will take courage and commitment to get us there.” Brendan Malone was also on the panel, as the chief operating officer of Acorns Australia, an app that automatically invests a person’s spare change. He said disruptive business models will survive and thrive, forcing down costs for customers while taking some business away from the banks. “Fintech companies will not only be able to capture bank customers, but drive down fees across the industry – in a similar way online stockbrokers did at the beginning of the century across the whole stockbroking industry,” he stated. “However, a big challenge for fintech start-ups is winning the confidence of customers – winning confidence about providing a seamless and reliable service to our customers. People automatically have that confidence in the banks, but as a fintech, we’ve had to earn the trust of our customers.” The panel also consisted of Doug Morris, chief executive of Sharesight, a leading online share portfolio management software business, who agrees costs will be forced down, but only gradually. Traditional financial services jobs, too, will be lost. “Technology companies can truly provide lower cost and better solutions, but the overall impact on finance won’t be a massive upheaval of the banking system overnight. Instead, you’ll see a constellation of apps that will have more of a slow burn effect. Remember that it takes wilful and passionate consumers to truly change an industry,” he said. Like OnMarket’s Bucknell, Morris said the fintech industry is drawing talent away from the banks and other incumbents. “It’s clear that there are fewer qualified candidates joining investment banks, for example, and they are going to tech companies instead. Moreover, traditional financial services distribution and marketing jobs are under threat. I’d encourage [university graduates] to gain experience in analytical, data-driven marketing if possible. This skillset permeates most fintechs,” he said. Georgia King-Siem, a senior manager with KPMG, said the disruption caused by fintech will continue as financial services become automated and commoditised, but only fintech businesses that truly innovate will stand out and win market share. “Understanding and embracing innovation and the disruption it brings is necessary for survival – we must evolve or face extinction. On the flip side, those that innovate effectively will have a greater opportunity to increase profitability, productivity and develop a sustainable competitive advantage,” she said.
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SPOTLIGHT ONE YEAR ON
THE LONG JOURNEY: SMSF BORROWING From the Financial System Inquiry’s recommendation in 2014 to ban borrowing through SMSFs, to recent reports that show SMSF borrowing is surging more than ever, is the rhetoric over, or just beginning?
29 MAY 2015 Firstmac CFO James Austin ceases SMSF lending “in response to recent tightening of policies targeting banks.”
29 JULY 2015 Sydney-based law firm Townsends Business & Corporate Lawyers respond to ASIC’s information sheets, stating their view on SMSFs is “completely incorrect, arbitrary and deeply ill-informed.” “ASIC’s focus on short-term costs is simply naïve – it effectively says it is better to pay 2% fees in a public offer fund that yields a 5% return in the long run, compared to say 7% fees in a SMSF that yields 20% returns over the same period,” the online statement said.
24 AUGUST 2015 Assistant treasurer Josh Frydenberg announces the Government does not agree with the FSI’s recommendation to prohibit LRBAs by SMSFs and that there will not be a ban on SMSF borrowing to purchase property. 30 OCTOBER 2015 Jonathan Street, CEO of Thinktank says SMSF lending enquiries have increased more than threefold in the short time since the publication of the government’s official response to the FSI, and that it is “most likely the release of some pent up demand which had been on hold pending the government making an announcement on the future of SMSF borrowing.” 6 MAY 2016 The Australian Financial Review reports that accountants and wealth advisers predict a spike in risky property borrowing by SMSFs because of tougher superannuation rules following the crackdown on super caps proposed in the 2016-17 budget. Experts tip the changes will force SMSFs to load up on debt to buy property under the new rules, which are limiting the funding of investments through equity. The latest available ATO data shows SMSF borrowing remains on the rise.
24 JULY 2015 Five months after the Financial System Inquiry (FSI) announcement, ASIC releases two information sheets to improve the quality of advice provided by advisers on SMSFs. The information sheets state ASIC’s view that an SMSF with a starting balance of $200,000 or below is “unlikely to be in the client’s best interests”. 31 JULY 2015 Director of technical and professional standards at the SMSF Association, Graeme Colley, states that limited recourse borrowing arrangements (LRBAs), as a percentage of total SMSF assets, are a small percentage of the pool and while increasing, are in no way a threat to the system. “The Association’s view is that by implementing some measures to mitigate risk, LRBAs have a viable role to play in SMSFs.” 23 OCTOBER 2015 The FBAA’s Peter White states he welcomes the government’s decision, saying there is little evidence of abuse of LBRAs and that it’s property spruikers who create the problem in the SMSF lending space. 9 MARCH 2016 New data shows SMSFs hit a record over the December 2015 quarter, with net assets of SMSFs growing to a record $594.6bn, rising 2.7% from the previous quarter. The funds represent 30% of the total superannuation pool. There were also a record number of SMSFs in the same quarter.
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COALFACE
NO FUSS EQUALS HAPPY CLIENTS Sydney broker Kathy Dundas of No Fuss Home Loans recently won a Readers’ Choice award for Mortgage Broker of the Year. Australian Broker discovers why AWARD-WINNING NSW broker Kathy Dundas established No Fuss Home Loans 12 years ago as a new-to-industry broker, coming from a background in asset finance, leasing and conveyancing. She started her brokerage after a broker friend told her what it involved and the flexibility it offered. Having a young
the flexibility was there. So that’s probably the reason I got into it to start with,” says Dundas. Last year, she won the Your Investment Property 2015 Mortgage Broker of the Year award, an accolade based on voluntary recommendations from clients rather than loan volumes.
“Having a happy customer and someone who you’ve actually helped achieve something – that makes it all worthwhile” family at the time, Dundas’ interest was immediately piqued. “I thought, that’s really a perfect fit with my financing and conveyancing background… and
“I was really honoured when my clients considered me worthy of that award. This award has given my business a huge boost. It’s enabled me to promote No Fuss Home Loans as a brand,”
Dundas says. “It’s opening doors, it’s gaining me more referrals and getting a lot of traction social media-wise as well.” Considering what exactly she does differently as a broker to warrant such an esteemed award, Dundas explains that she goes above and beyond to make sure her clients have a stress-free experience. With 25 lenders on her panel, she is able to find the absolute ideal solution for her clients, from traditional prime loans through to non-conforming. “I really enjoy helping clients out of sticky situations, so I guess my philosophy has always been not to have a small group of lenders. I’ll work out from all of them which are the ones that are going to be able to help my client.” Her process, Dundas explains, involves narrowing down her panel to a choice of five lenders with the best offerings for her clients, talking it through with them and then, she says, the majority of the time the client will pick the lender themselves. “They’ve got all the information, asked all their questions and they pick the one that they’re most comfortable going with.” She says that although 25 lenders, along with their respective price, regulation and policy changes, is a lot to keep up with, it’s simply a matter of putting in the hard work. “It’s research and it’s having really good relationships with the BDMs,” she says. As for the ever-evolving property landscape, Dundas says she has noticed a shift in focus from the investor to owner-occupied borrowers recently. “The previous 18 months to two years it was all about the investor and I think that’s just where the market was. So I’ve had a lot of people build their portfolios over the last few years. I’m finding at the moment that it’s much more difficult to place an investment loan than an owner-occupied. I’m noticing more owneroccupiers in the market, for me.” When asked what we can expect from Dundas in 2016, she says she plans to keep building her brand with a focus on social media, because so far this has been a great strategy for finding new leads. “I’m finding the lead generation I’ve been getting via social media has been increasing. For me, it’s the best way forward to track clients. It’s great for keeping in touch with existing clients. I think it’s an invaluable tool for keeping in touch with people, considering most people are using it these days.” For brokers thinking of starting out from scratch like Dundas did, she recommends having a mentor or being part of a network of experienced brokers to exchange ideas. “You need to be true to yourself, you need to believe in yourself and you need to back yourself, because it is very difficult when you’re a lone broker, especially when you’re starting out.” But as it always does with broking, at the end of the day it all comes back to the client. “There’s nothing nicer than having that conversation with the customer after settlement (or approval) and they’re so excited, because that lead up to the approval is so stressful. Having a happy customer and someone who you’ve actually helped achieve something – that makes it all worthwhile.”
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PEOPLE CAUGHT ON CAMERA The national MFAA Broker 2020 Series kicked off in Brisbane on 5 May, and Australian Broker was there to capture all the highlights. Delivered in each state and key regional locations, the s eries examines the digital learnings in international markets, potential digital disruption within our markets, referral networks and peer-to-peer learnings that will ensure a clear plan of action for brokers’ businesses.
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PEOPLE HOT SEAT
MARDEE THOMAS 1st Street Home Loan Specialists broker Mardee Thomas on travelling by boat to visit a client and what superpower she wishes she had What is your most memorable client experience? One client stands out but it wasn’t because of their loan; it was because of their location. Many of my clients live on the Northern Beaches and A one of the less well-known areas in Pittwater is Scotland Island, which is accessible only by boat. I was always used to making the process simple and convenient for clients and I didn’t want this particular loan to be any different. My first contact with the client was when I arrived by boat at their local jetty and in the weeks that followed there were three trips back and forth. Luckily I have a boat license and access to a boat. It was a beautiful way to do business and the weather was so glorious on our last meeting that we stayed on the boat and signed the documents right there. That was a memorable moment.
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What will be the biggest innovation in the mortgage industry in 2016? Technology seems to be involved in many of the innovations and I think, A generally speaking, we will see developments in lender software and platforms, including apps. We are moving towards a point in time in which brokers can submit applications entirely online. As processes are heading this way, it will be important for the platforms to be as user-friendly and as simple as possible.
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If you were the head of the MFAA or FBAA, what would be your first priority? I’ve been a member of the MFAA since I began as a broker 15 years A ago and they have consistently done a great job. The MFAA has helped to build the reputation of the broking industry and they are dedicated to helping current and future brokers with offerings such as mentoring and seminars. So, if I became head of the MFAA, I would hope to keep up the good work.
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What was the toughest or scariest decision you have ever made in your life? When I finished high school I was offered a five-year tennis A scholarship at a university in the USA. I was 18 years old, leaving home for the first time, having to fend for myself, and at the time it was all very daunting! Looking back, it was one of the best decisions I ever made. I have fond memories of my student days in the US, and I still keep in touch with the people I met during that time.
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If you could have one superpower, what would it be and why? I try to maintain a good work/life balance but sometimes A I would love to be like The Flash. With super speed I could get all my paperwork done in seconds and whizz through all my chores, leaving more time to spend with friends and family whilst having everything covered.
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