Issue
02
2017
ADVISERS HAVE THEIR SAY
TAPPING INTO CREDIT UNIONS
DIGITAL CHANGE
BRUCE MCLACHLAN
ASIC
SPOTLIGHT ON COMMISSIONS
CONTENTS
16
UPFRONT 04 EDITORIAL
What's keeping mortgage advisers awake at night?
Penny for your thoughts
06 NEWS 08 PEOPLE ON THE MOVE
24
ADVISERS HAVE THEIR SAY Martin Robinson
FEATURES 10 HOUSING COMMENTARY
The market continues to cool down but what the future holds is still unclear.
12 PROPERTY NEWS
Tenant liability and the scourge of meth contamination.
14 REGULATION CHANGES
Susan Edmonds asks why has there been a lack of submissions on the Financial Services Legislation Amendment Bill.
20 CREDIT UNIONS
When the banks say no there are other options, Miriam Bell writes.
24 MY BUSINESS
Martin Robinson explains his continued success in a changing industry.
COLUMNS 22 SALES AND MARKETING
Paul Watkins explains how advertising is changing and what you must do to ensure you're not left behind.
26 PAA
What's in store at the National Advisers Conference 2017?
28 INSURANCE
Steve Wright explains why retirement funding is so important when designing clients’ insurance packages.
30 LEGAL
Jonathan Flaws breaks down the Enduring Power of Attorney.
03
EDITOR’S LETTER
Penny for your thoughts
F
or this issue we thought it would be useful to do a survey of mortgage advisers to find out what issues are most worrying. We called it the: “What keeps you awake at night survey”. The results break down into a number of groups which Susan Edmunds examines in this lead story starting on page 16. Besides identifying issues we have also tried to provide some solutions to help you as mortgage advisers. It’s probably no surprise the top two issues are turnaround times and regulation. Turnaround times is a topic which gets many people het up in the industry. Lenders say a lot of the delays can be sheeted home to advisers. Meanwhile, advisers say the lenders have insufficient resources to process applications and, sometimes, they give priority to applications that come through their branch or mobile manager networks. There is, arguably, some truth to both of these. Our approach with this feature has been to ask banks for examples of poor applications and some ideas to help advisers put together successful applications. Hopefully our work here will have some positive spinoffs. Regulation is topical as well as timely. Regulation and the engagement from mortgage advisers (or lack of) is something I have been vocal on. But little seems to have changed.
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We asked advisers a number of questions including how much do they know about the regulatory changes being proposed and where do they get their information on regulatory changes from. Dealer groups and adviser associations, (read PAA) came up as the top two sources. While dealer groups are seen as a key source of information, we have yet to find one mainstream, mortgage broker dealer group that has made a submission on the changes. SHARE is the only one we have found. Yet its members are more focused in the life insurance space than mortgages. When it comes to professional associations it will be interesting to see what they have submitted. My guess is their earlier submissions on the FAA review took a few people by surprise. While we are focussed on the FAA review everyone should have one eye on what is happening across the Tasman. The Australian regulator, ASIC, has completed a significant survey on mortgage churn and how advisers are remunerated. While the Australian market is different to ours, don't be surprised if this survey gets picked up. For a full breakdown see our feature on pages 32-33. And to sign off this note we are pleased to announce that TMM is pursuing a long-held goal of running a mortgage adviser specific conference later this year. We have seen demand for such an event for sometime now and our survey reinforced there is a need for a mortgage specific event. We are confident we can put together a good programme and get advisers along. Getting sponsorship dollars to do the event will be the challenge.
PUBLISHER: Philip Macalister EDITORIAL: Adrian Gallagher SENIOR WRITERS: Miriam Bell, Dana Kinita CONTRIBUTORS: Jonathan Flaws Susan Edmunds Paul Watkins Steve Wright GRAPHIC DESIGN: Jonathan Harding ADVERTISING SALES: Freephone: 0800 345 675 Kelly Thorpe kelly@tarawera.co.nz SUBSCRIPTIONS: Dianne Gordon Phone 0800 345 675 HEAD OFFICE: 1448A Hinemoa St, Rotorua PO Box 2011, Rotorua Phone: 07-349 1920 Fax: 07-349 1926 tmm_editor@tarawera.co.nz
The NZ Mortgage Mag is published by Tarawera Publishing Ltd (TPL) in conjunction with the Professional Advisers Association. TPL also publishes online money management magazine Good Returns www.goodreturns.co.nz and ASSET magazine. All contents of The NZ Mortgage Mag are copyright Tarawera Publishing Ltd. Any reproduction without prior written permission is strictly prohibited.
The NZ Mortgage Mag welcomes opinions from all readers on its editorial. If you would like to comment on articles, columns, or regularly appearing pieces in The NZ Mortgage Mag, or on other issues, please send your comments to: tmm_editor@tarawera.co.nz
Philip Macalister Publisher
NEWS
“THE WHOLE MODEL OF MORTGAGES IS BROKEN” Former Co-operative bank CEO Bruce McLachlan is warning big changes are coming to the mortgage industry and the real threat is from digital, writes Philip Macalister.
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hen Bruce McLachlan took over running The Co-Operative Bank it was somewhat of an “old dated almost fuddy, duddy business”. In the past few years it has changed and is a dynamic and progressive small bank. McLachlan has moved on and is now running funds management business Fisher Funds. But in an exit interview with TMM he says like the bank, mortgage advisers are facing huge changes and they must adapt. It’s not a message solely for advisers. All parts of the finance industry are facing change; including the bank. In 2012 the bank had ditched its PSIS name and had a banking licence. “It was a good solid business with some potential but it was in pretty significant decline,” former Westpac executive McLachlan recalls. It did a little bit of business with mortgage brokers, as they were called in those days. It was mainly in low-equity lending; deals over 90%. He says the low-equity lending in those days was totally different to what it is now because people could easily service the debt levels Today it is a much more difficult proposition
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Prepare for change, former Co-operative Bank Bruce McLachlan tells advisers
because the income to house price ratio is much higher. McLachlan says the bank was doing “low equity lending to perfectly good people.” “I can put my hand on my heart and say that we made not one loss from any of those low-equity loans and they were over 90s.” The story illustrates his message about change and he says the whole banking model is being changed by a raft of factors including BASEL and regulations. The way he tells the story is that for years there has been excess capital from banks chasing the mortgage market. Banks previously could choose how much capital they held and how they used it. Now there are much more prescriptive regulations governing these sorts of things including how much capital has to be held against owneroccupied and residential investment loans. “Excessive capital was chasing mortgages that was probably mispriced,” he says. Mortgage brokers also got themselves into a powerful position and became the “customer-friendly face” compared to the notso-welcoming bank face.
There’s no doubt, he says, that brokers did a good job with customers. But looking forward the next 10-20 years will be about limited, not excessive capital and there will be changes. “I just think the whole model of mortgages is broken. “Everything in the model will get reshaped. It’s not if but when. "How that plays out in terms of commission rates and access to funds has to be played out,” he says. “It’s a macro trend that is coming down the track.” While the power has been in customers’ and brokers’ hands that equation is going to change. “When banks truly account for cost of capital they can’t support mortgage margins where they are and they can’t support commission rates where they are. One or both of them are going to move.” The Co-Operative Bank has paid some of the lowest commissions to advisers in the market. While McLachlan doesn’t know what the bank will do in the future, he does believe that customers are ultimately going to have to pay some of the cost of advice. Besides customers paying for advice the changing capital market will arguably force commission changes. The problem banks have with trail commission is that it comes out of future margins and future margins are uncertain. “That is one of the challenges for banks,” he says. “If trails were set at a realistic level, which is quite a bit lower than brokers would want, then I think the system would move to trails entirely.” In one of his more challenging predictions McLachlan says that the whole remuneration model for home loans in Auckland could be different to the rest of the country. He says there is plenty of data to show that the average tenure of home loans is Auckland is half of the rest of the country. As the banks keep those loans on their books for a shorter period time, then the current level of upfront commission is unsustainable. “Trail in the Auckland market makes more sense,” he says. “Something has to change in the Auckland market. "Auckland could easily end up with a different broker pricing market to the rest of the country.” Any change would have to be sold to advisers on the facts. These comments come back to McLachlan’s main theme of change. "I think one thing you can assume now is that banks are looking at everything as revenues are flat,” he says. “Everything comes on the table.” The branch networks are arguably in the brightest spotlight and they may create issues for advisers who work closely with their local bank offices. But the real threat is from digital. “People are running their financial lives off their mobile phone.” It’s all about speed, convenience and convergence. Banks are under threat from digital, but so too are advisers. “I don’t think that their business models are safe by any means. They (advisers) could be disaggregated just as quickly just as they established and disaggregated other flows.” While advisers have become more professional they still run an old-fashioned and traditional business model. “I am not sure that they are waking up to the revolutionary changes which are happening. “They fitted in neatly when the old model was banks and bank branches because they could easily squeeze in between the customer in that model. “How they fit into a social media, data analytics, digital model I don’t know. “My message to brokers is ‘Get future focussed, you can’t live in the past. You have done a really good job in the carving out a really nice profit pool from the banking pool that is not going to count for much in the future world’. “Those who start changing will adapt quicker,” he says. ✚
07
PEOPLE
PEOPLE ON THE MOVE
Got a new appointment you would like to tell advisers about? Email details and a pic to editor@tarawera.co.nz businesses and organisations. And I believe in having sound, long term strategy, developing your vision into obtainable, actionable plans and goals.” Other recent additions to Newpark include skill coach Mike Carr and development manager Raja Sundarajan, who has previously worked as a financial adviser at Insurance People and a senior business development manager at Spark.
Kevin He
Darryl Scott
Wealth of talent for Newpark
Newpark Group has appointed Darryl Scott as its new national sales manager. Scott is currently an insurance adviser at BrokerWeb Risk Services Limited. He will bring more than 20 years' experience, including stints as broker business manager at AMP and as national manager risk sales at Tower, to his role at Newpark. “Scott is well qualified for the role and his knowledge of the financial services industry will provide valuable insight, support and expertise to all members”, the financial adviser group said in a statement. He is set to start his new role in late April. In a move outside of the box, Newpark has also come to an agreement with Sir Bob Harvey, who will become the group’s strategic leader and help to develop new opportunities for the group. Harvey is the former Mayor of Waitakere City (1992-2010), a former President of the Labour Party, and the former chair of the Board of Directors for Waterfront Auckland. He is wellknown for his leadership credentials in both politics and the arts. Another recent appointment is Kim White who has a long background in the financial service industry and the not-for-profit sector. He was the director of marketing at Prudential Assurance and has also worked at Tower Trust, AMP and ASB. In recent years, he has worked as a consultant and has been running his own personal development and motivation business, Dreaming with Purpose. White says he believes in people, their gifts and talents and their potential, as well as the power of building exceptional teams. “I believe in developing enduring and personalised cultures that permeate every aspect of our
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Neil Carrie
New appointments at Mortgage Supply
Neil Carrie has joined The Mortgage Supply Company in the West Auckland office. Neil headed up the TSB Auckland Broker Unit for many years. During his time at TSB, Neil worked very closely with the MSC and was instrumental in opening up TSB to the broker community. Joining up with Mortgage Supply means he will be embarking on a whole new career path. Roshni Singh has joined the South Auckland Mortgage Supply team and will be based out of the new Manukau office. Roshni has extensive banking experience at both Westpac and Kiwibank, and has been a keen property investor for many years. Roshni has great contacts in her local community and is a welcome new addition to the MSC family.
Mortgage Link adds three Three new advisers have joined up with Mortgage Link in different parts of Auckland. Tina Tsui is an Authorised Financial Adviser with 13 years banking experience. Tsui has a wealth of knowledge and expertise in areas of residential mortgage, business cash flow, commercial and property investment/ development lending. She will be working with the Mortgage Link Everbright Team in Newmarket. Kevin He’s background includes 10 years’ experience in the IT industry. He is bilingual
and brings this skill and experience, along with his financial professional knowledge to Mortgage Link. Kevin is also joining the Mortgage Link Everbright team in Newmarket. He says he is reliable, sets a very high standard for himself and does his best to deliver more than expected. “I work to understand every client and their individual needs. Whether it’s residential or an investment I can help people achieve their goals.” David Xu has joined Mortgage Link after a long career in banking. He says this means he is able to help clients with a variety of lending solutions. “I work to provide individual solutions to clients with different lending needs – from first home buyers through to complex investors. I excel at listening and understanding each individual situation, then providing the suitable solutions.” Based on Auckland’s North Shore, Xu understands the area and the people who live there. He says he works to understand every client and their individual needs. “Whether it’s residential or an investment I can help people achieve their goals.”
Mortgage Express to break barriers
Hamilton-based Mortgage Express has appointed Emily Hung as a mortgage adviser. Hung has a solid background in finance and accounting and ran her own mortgage adviser business for three years. She is fluent in English, Mandarin and Taiwanese, and wants to break down the language barrier for clients who struggle with the home loan process. Along with advice around home loans, she provides financial services for business loan/ commercial loans, top up requests, refinance and re-fix requests. Hung says she knows how exciting it is buying a first-home or achieving a business goal. I want to help my clients
choose the best loan structures and products that will benefit them. I am passionate about my work, and my clients know that I will be their support.” “Emily has been active in the mortgage industry for a few years, and it’s great to have her come on board with the team,” Mortgage Express CEO Sarah Johnston says. “She is a highly-regarded mortgage adviser and has a wealth of knowledge in the industry.”
loans and insurance co-ordinator. But he has embarked on the path towards gaining bank accreditation as a mortgage advisor. Once he is accredited Graham, who graduated from Otago University with a degree in accounting and finance in 2015, will become the third adviser in the Roost office along with Mark Pullar and Toby Stanley.
Prosper picks up new group
GJ Gardiner’s mortgage broking business, The Onion Group, has recently joined Prosper.
Supporting
Mortgage Advisers
Since 1991
Loan Market adds to adviser team
Scott Yu has joined the Loan Market team in Wellington as a new adviser. Yu has a strong lending background, having cut his teeth in the car finance game before spending time at BNZ. Scott has a young family and will Loan Market says he will strengthen its growing presence in the Wellington region.
Rachael Lelean
Reigns handed over at Westpac – again
Rachael Lelean has once again taken over running third party distribution at Westpac. Last year she filled in as acting national manager MMM and third party channel, after Colin Smith moved into a different role. This time around, she has been seconded into the role for six months after Therese Jacques was promoted into a new position with the bank.
Branded and Non-Branded Options
Changes at NZ Home Loans
PD Days and Conference
Hamilton-based NZ Home Loans recently announced that it has made some role changes within its ranks. Aaron Skilton is now NZ Home Loan’s chief distribution officer. He is responsible for everything related to the NZHL’s network distribution including sales, training and franchise development. Prior to the change, Skilton served as NZHL’s chief operating officer and, earlier, he was their chief strategy officer. In the past, he has worked as the CEO of Greenstone Inc and associate director of Marsh Mercer Benefits. He has also held senior operations and corporate sales management roles at Sovereign. Chris Wong has moved into a new role as NZHL’s head of customers and product. Previously, he was NZHL’s head of distribution. Before joining NZHL, Wong worked as the regional manager for the Central North Island at Kiwibank, as a banking channel manager for New Zealand Post, and as a business manager for ANZ Bank.
New recruit expands Roost
Queenstown’s Roost Mortgage Brokers now has a new recruit on board. Josh Graham is currently working as Roost’s
Promotion on Website Advice Process and Flowchart Market Leading CRM’s Iress incl Mortgage Tool & Finware Leads
Mark Pullar
A Roost mortgage adviser received top honours at the recent AMP Awards
AMP Financial Services holds the event each year, to recognise advisers’ contributions. AMP managing director Blair Vernon said: “We are proud to celebrate excellence across our industry, because it is a key part of promoting best practice and integrity in financial services. “It is also recognition of the importance of New Zealanders having access to quality advice backed by high-quality products and services. A great adviser will enable you to make the right choices, empower you to take control of your financial wellbeing and help you to protect your family from unforeseen tragedy.” Mortgage lending sales champion was Mark Pullar, from Mortgage South Limited. He is the principal adviser at Roost Queenstown. He trained as a physiotherapist but has been a mortgage adviser since 2007. He is an AFA. Pullar received the same prize last year. ✚
New to Industry Adviser Training Compliance Support Business Planning and Support Succession Planning and Support PI Cover and Disputes Resolution Scheme Package Access to Insurance Link and Insurance Link General
Call Josh Bronkhorst: 027 397 7198 Helena Merson: 027 466 7010
Thinking Mortgages ? Think Link
mortgagelink.co.nz 09
HOUSING COMMENTARY By Miriam Bell
Settling to a different pace Several months into the market’s slowdown, Miriam Bell finds some agreement that fundamental drivers mean the cooler times may not last - although recent history may not repeat.
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nother month, another round of data and anecodotes which reveal slower house price growth, falling sales volumes and increasing numbers of listings. There can be little doubt New Zealand’s recently supercharged property market is experiencing cooler times. The national market may be slower than it was, but it is still in a good place. A number of markets around the country continue to turn in strong performances. It’s just the juggernaut of Auckland has a significant impact on the broader market – and the Super City’s market remains subdued. This has led many to believe the cycle has finally peaked. Others say seasonal factors could still be at play and it is necessary to wait for all of March’s data to get a more accurate picture of the situation. Whatever the case, many commentators believe the property market’s tale has not ended: It’s just that its pace has changed.
NATIONAL OVERVIEW
Stepping back and taking an overview of the country’s market does not return a dismal picture. It is easy to get caught up in the headlines, but the data consistently shows a stable market. It may not be booming, but it is
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trucking along steadily. According to QV’s March data, declining property values were evident in some markets but nationwide property values rose – albeit more slowly. Nationwide, values were up by 0.6% over the last quarter and, once adjusted for inflation, by 11.4% year-on-year. This left the average national value at $631,432. QV national spokesperson Andrea Rush says values in Auckland, Hamilton and Christchurch are showing a slight downward trend, but the Wellington region continues to see the strongest value growth in the country. The Capital’s values were up more than 21.20% over the past year and 3.7% over the past quarter to hit $595,501. “Values also continue to rise steadily in Dunedin which remains New Zealand’s most affordable city.” This somewhat contrary bag of results was repeated in February’s REINZ data which showed healthy price growth in many markets, but an 8.9% decline in sales nationwide in February. Once seasonally adjusted, REINZ has the national median house price rose by 0.3% to reach $495,000 in February, as compared to $490,000 in January. This was a 14.1% year-onyear increase. Central Otago Lakes (up 30%), Northland (up 20%) and Otago (up 18%) all
saw strong year-on-year price growth, with both Northland and Otago hit new record high median sale prices in February 2017.
MARKET DIVERSITY
REINZ CEO Bindi Norwell says they are seeing a mixed picture across New Zealand. “Although there are more houses on the market and median prices are rising on a seasonally adjusted basis year-on- year, sales volumes were down.” She adds that anecdotal evidence indicates that the latest LVRs are having an effect. “Banks are reducing lending, becoming more selective about who they lend to, what properties they will lend on and the term.” Further backing the market diversity at play, Realestate.co.nz’s March data recorded a greater number of new listings nationwide in March than in February – for just the second time in 10 years. Auckland, Waikato, Wellington and Canterbury all saw double-digit growth in listings. Yet the data had price growth varying dramatically in different markets: Auckland’s average asking price remained static, while the Waikato’s hit an all-time high. There was one discordant note in the data picture: Trade Me Property’s asking price statistics suggested signs of a market rebound
in February. Following two months of falling prices, the national average asking price edged up by 1.5% to reach $616,050 in February. Head of Trade Me Property Nigel Jeffries says the national property market was returning to normal after some quieter months over summer. “That growth is always dependent on the enormous Auckland property market which returned to growth in February, albeit by a meagre 1.2% over the past month.”
AUCKLAND DAZE LINGERS
However, while Trade Me Property may have presented a rosier picture for Auckland – with an increase in asking price in February following a two month decline - the bulk of recent data did not. The latest QV monthly house price index shows that the average value in the Super City region came in at $1,045,362 in March, as compared to $1,043,680 in February. Once adjusted for inflation, values rose by 10.8% year-on-year. But Auckland’s quarterly value growth decreased by 0.2% in March, after a 0.7% decrease in February. According to REINZ, once seasonally adjusted, the Super City’s median house price fell by 1.7% to $800,000 in February, as compared to $805,000 in January. It is the fourth month in a row that the median house price has dropped – although, once seasonally adjusted, the median house price still saw yearon-year growth of 11%. At the same time, on a seasonally adjusted basis, Auckland sales volumes were 8.9% lower in February than in the same period last year. Inventory in the region has increased by 20% over the past year and there has been a sharp rise over the past three months. Meanwhile, Barfoot & Thompson’s March data shows that sales were nearly double the February total while both the median and average prices reached new monthly records. But Barfoot & Thompson director Peter Thompson warns that Auckland’s market is changing. An upturn in March, which is traditionally the high point for prices in the first half of the year, was always on the cards, he says. “The rise in activity was due to the higher level of choice available. But the rate at which house prices were increasing slowed markedly in the last part of 2016 – and this has continued into the first quarter of this year.” Further, auction sales where there was clearance under the hammer was down to around 40%. Thompson says they are seeing a growing number of sales agreed on in after auction negotiations where vendors and buyers make modest compromises on their positions.
SUBDUED OUTLOOK
The sheer amount of different and multilayered data can be overwhelming. This means that, as ever, the question is what does it all really mean? For commentators, there are a variety of interpretations. ASB economist Kim Mundy says that, in Auckland, slow demand combined with a lift in new listings pushed total inventory levels higher in February.
“But still-low inventory levels, sluggish growth in housing construction and high population growth suggests there remains some way to go before the Auckland housing market rebalances. We expect a floor to remain under Auckland house prices over 2017.” When it comes to the national market, sales activity recovered across a number of regions while prices in many regions continued to rise in February, she says. Much as in Auckland, ASB sees various drivers keeping a floor under prices while activity remains subdued in 2017. Westpac acting chief economist Michael Gordon is also anticipating quieter times ahead. Going by the REINZ data, in seasonally adjusted terms, sales were close to flat and the stratified price index rose only slightly, he says. “Prices in Auckland have effectively stalled since the middle of last year, and combined with falling sales and rising inventories of unsold homes, there is a strong sense now that the Auckland market has peaked.” In his view, mortgage rates are on the rise and higher borrowing costs will have a more meaningful, and sustained, impact on house prices than the temporary effects of the latest lending restrictions.
APPETITE & DRIVERS REMAIN
Some heat may have been taken out of the market by the LVRs, but CoreLogic director of research Jonno Ingerson argues that the LVRs have simply curbed investors’ ability to buy rather than their appetite. A major sign of falling investor confidence would be an increase in the number of investors putting some of their properties on the market, seeking to maximise profits ahead of a market correction, he says. “Our analysis shows that there has been no such increase in investor properties being listed. Their share of the properties currently listed for sale is at, or even slightly below, their normal share.” This tells him that investors not finding it hard to secure mortgage finance are still buying, and most investors are continuing to hold, as they still see future house price growth. “Why is that? Most investors look at our high migration, low interest rates, our worsening Auckland housing shortage and expect prices to continue rising in the medium term. I agree.” Squirrel Mortgages managing director John Bolton agrees. He says the housing market statistics of recent months may have been bleak, but important market drivers like high immigration, low interest rates and lack of supply remain. The Reserve Bank’s macro-prudential actions have finally winded the market, Bolton says. “Prices will fall but they won’t collapse. The economy is simply too strong and most vendors will take a property off market rather than sell at a low price.” “We still have 5,000 new immigrants arriving into the city each month. Unless we see an increase in unemployment or a big drop off in immigration, I don’t think the slow-down in the market will translate to a major market correction, more a price adjustment.” ✚
REINZ SALES: DOWN
Once seasonally adjusted, sales volumes were again down around the country, including Auckland, in February.
INTEREST RATES: UP
Interest rates remain low, but banks are now announcing increases on a regular basis.
OCR: DOWN
The Reserve Bank left the OCR on hold at the record low of 1.75% in February.
IMMIGRATION: UP
The Reserve Bank left the OCR on hold at the record low of 1.75% in February.
BUILDING CONSENTS: UP
Once seasonally adjusted, building consents were up, both nationwide and in Auckland, in February. However, the overall consent trend remains on the decline.
MORTGAGE APPROVALS: UP
Reserve Bank data shows that mortgage lending inched up slightly in February. The rise follows two consecutive months where mortgage lending fell.
RENTS: NEUTRAL
The year-on-year trend for rents is up. But rents nationwide remained steady in February as compared to recent months.
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PROPERTY NEWS By Miriam Bell
Tenant liability takes the heat off market cooldown While the media still debates whether or not the market cool down will last, the dominant issues for those in the property sector were different. Here’s our take on what they were. It might currently be experiencing a cool down, but the property market has remained a headline grabbing focus of public opinion. But while popular dialogue may have centred on whether or not the market cool down will last, the dominant issues for those in the property sector were different. Here’s our take on what they were. In terms of investor response, no story generated as much heat as the ongoing saga of tenant damage liability. Kicked into motion by the highly controversial Court of Appeal “Osaki” ruling last year, the issue is one which won’t go away. The Osaki ruling set a precedent for tenant entitlement to their landlord’s insurance cover when unintentional damage occurs to a
rental property. It led to the Tenancy Tribunal adopting a rule which reflected this. And landlords have been struggling with the fallout ever since. Perhaps the most notorious example of this is the case of a Foxton landlord whose rental property carpets were ruined by dog urine. Even though the tenancy agreement had stated no pets, the Tenancy Tribunal found in favour of the tenant. However, in February, this case was overturned on appeal by the Palmerston District Court. Judge David Smith found that the Tribunal adjudicator’s interpretation of the Property Law Act, along with their understanding of the Osaki decision, meant the extent of the damage in the case was not
The scourge of meth contamination
Shocking tales of meth contaminated rental properties continue to strike fear into the hearts of landlords but progress towards a better regulatory regime is being made – albeit slowly. Public consultation on the draft of the new standard for the testing and remediation of meth contaminated properties closed in late February. Since then the Standards NZ Committee responsible been going over all the submissions and making alterations to the draft standard based on the feedback. Initially, the final version of the standard was slated for release towards the end of April.
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examined fully. This meant the adjudicator was wrong to conclude that the damage was not intentional, the judge said. Further, the adjudicator was wrong to decline the landlord’s claims for the costs of the damage and the loss of rent and the tenant should pay the costs. Landlords around the country rejoiced on hearing of the decision. However, NZ Property Investors Federation executive officer Andrew King said greater clarification is needed to resolve the issue because there can be great variances between adjudicator rulings. Meanwhile, the government is consulting on potential law changes to address the tenant liability issues raised by the Osaki decision.
But the sheer volume of comments received (over 1,2000) has meant the release of the new standard has been delayed. Standards NZ principal advisor Bruce Taylor said it was now not likely to be ready till May or even June. While work on the standard has been underway, National MP Andrew Bayly has continued his crusade in support of his Residential Tenancies (Methamphetamine) Bill. The bill, which is currently sitting in the private member’s ballot, would give landlords more power to test and remediate their rental properties where there are dangerous levels of contamination. Bayly said he hopes his bill is picked up as a government bill. Insurers have also been addressing the issue of meth contamination. Insurance giant IAG said that it received an average of 60 claims for meth contamination every month over the past year. Further, across its brands, it is seeing the number of claims related to the meth contamination of properties increasing. For this reason, IAG is clarifying the wording around the issue on different policies and making policy changes which, with conditions, will extend cover to all homeowner insurance policies, including landlord policies. The insurer has also released an e-book on meth contamination, which offers advice and tips for people unsure of what to do in different circumstances.
Flipping not what it used to be While both property price rises and sales activity have slowed down, the level of outrage generated by the practice of flipping properties has not. Some extreme flipping cases – including one where two neighbouring South Auckland properties were sold, with a profit, five times in four days - have hit the news in recent months. This has served to pour fuel on to this particular fire. It also prompted the Real Estate Agents Authority (REAA) to announce it is getting tough on cases of agent misconduct. However, recent CoreLogic data shows that the prevalence of flipping in today’s market is well down on its prevalence in past years and property booms. According to the data, 7% of Auckland sales in 2016 were properties that were sold within a year. But this is as compared to 11.7% at the peak of the last boom in the mid-2000s and 9.2% in the mid-1990s. Recent data from Myvalocity serves to further support this picture. It has just 4% of sales in Auckland in 2016 being due to flipping. This is as compared to 7% in 2015, 6% in 2014, and 5% in 2013. CoreLogic senior research analyst Nick Goodall said the percentage of properties being turned over quickly is well below previous “boom” markets in both the 2000s and 1990s. He put this down to the introduction of the bright line test and higher property prices which make for greater risk. While there might be a focus on flipping as a rampant practice, the facts simply don’t back up the hype, he said. “Yes, there might be the extreme examples we see reported and it is easy to see all the examples touted publicly and think that flipping is a widespread practice. But it is not happening every day on every street in every suburb. That is simply not the case. The extreme cases are unusual.”
Beware the Airbnb pitfalls Post-holiday season, there was a flood of reports on the tasty profits being earned by homeowners in holiday hotspots who provide their properties for short term rental accommodation, via services like Airbnb and Bookabach. This helped to make short-term rental arrangements an increasingly attractive option for investors who have seen their rental property yields eroded by the increase in house prices. Backing this up was data from London-based online agent Nested which showed that, in Auckland, it would take 31.6 years to recuperate the cost of a three-bedroom property bought at last year’s average price of $783,668 if it was leased at 2016’s average monthly rent of $2,062. But if the property was leased through Airbnb at an average monthly rent of $7,252, it would take just 22.6 years to recover the purchase price. Prominent Auckland investor David Whitburn said that investors need to be aware that going down the short-term rental track is a timeconsuming business. “They need to have good systems in place or they will harm the financial performance of their investment.” When it comes to Airbnb there have also been concerns about tenants making money be subletting rental space on Airbnb. But, in March, the Tenancy Tribunal handed down a precedent-setting decision – in favour of landlords - on the issue. In the first New Zealand case of its kind, the Tribunal ruled that two Wellington tenants breached both the Residential Tenancies Act and their tenancy agreement by sub-leasing their rental property via Airbnb. The Tribunal awarded $1,000 to the property owners for “mental distress” plus exemplary damages of $300 as a deterrent from doing it in the future.
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REGULATION LEGAL By Susan Edmunds
Radio silence from mortgage industry
Who’s arguing for brokers in the rewrite of adviser legislation? By Susan Edmunds.
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I
n a few years’ time, your mortgage broking business might look quite different. You may have just finished a level five qualification in financial services, to ensure you meet the new competence requirements imposed on the industry. You could have a full schedule of continuing professional development dates in your diary to fulfil your new annual obligation. You may have new disclosure documents to give to clients, explaining exactly how you are paid. You could be required to keep a register of all the soft commissions and incentives you pick up in the course of your work. There are a lot of uncertainties about exactly how the new legislation for the financial advice sector will play out. But one thing is clear: Mortgage brokers are one of the segments of the industry that are in for the biggest change. But if you were hoping that would mean someone would go into bat for brokers in the latest round of consultations, you would be disappointed. Submissions closed at the end of March on the Financial Services Legislation Amendment Bill. While associations, banks and product providers all offered their views, none of the major mortgage broking groups offered an opinion on what they thought of the exposure draft.
“Anyone who has been around long enough has seen even though you might get reasonable guidance from the regulator prior to any changes, they seem to do a complete about-face before something is implemented.” – Jenny Campbell
What are your options? If you are currently a mortgage adviser, you will have to make a decision about how you want to continue. Carrying on as you are will not be an option. RFAs, QFEs and AFAs will not exist anymore but you could choose to become a financial adviser under the new rules. That will mean that you have to place the interests of the client first, and comply with disclosure rules that will cover everyone in the industry. You will have to abide by a Code of Conduct, which will include standards of knowledge, competence and skill. Financial advisers will be individually accountable for complying with their legislative and code obligations. You will also need to work for a licensed firm, whether that is your own firm or someone else’s. That firm will also have some liability for you. Under the new regime, firms will be subject to the FMC Act’s
Jenny Campbell, chief executive of the Mortgage Supply Co, and former general manager of the PAA, said the lack of submissions from the mortgage broking industry could be driven by a feeling that they would not be listened to. She said the industry’s voice seemed to have been largely ignored in the rewrite process so far. Instead, she said, all the focus had been on AFAs – who may suffer the least amount of upheaval. There was no trust that what was being proposed would end up being implemented, anyway, she said. “Anyone who has been around long enough has seen even though you might get reasonable guidance from the regulator prior to any changes, they seem to do a complete about-face before something is implemented.” She was disappointed with what had been proposed but said it was not worth worrying about until it was clearer what was going to happen. Details such as the Code of Conduct will paint a fuller picture of how life will change for the broking sector. "For all the time and resources that have gone into it, we've ended up with very little change from the status quo. It's just tinkering around the edges, it's a major win for the big financial institutions. It's given very little thought to how special we think the word 'advice' is and the value of that. "Now anyone in a QFE will be able to use
compliance and enforcement tools (such as civil pecuniary penalties and licensing actions), bringing them in line with other licensed financial services. The Financial Advisers Disciplinary Committee is being retained for breaches by individual financial advisers. The other option would be to go to work as a financial advice representative, for a financial advice provider. These representatives will answer first to their provider, who will be responsible for their conduct and disclosure. The provider will have to have in place clear and effective processes, controls and limitations. The representative’s scope of advice is likely to be more limited than an independent financial adviser. That might mean going to work under the umbrella of a product provider, although groups such as NZFSG are mulling getting a licence to cover their members.
it just by tacking the word representative on. It's just a nonsense. If you ask anyone that works in a bank or insurance company they would specifically tell you they are not giving advice. But now they can? I think it's an epic fail all round." She said she did not think working as a financial advice representative would be the right course of action for most brokers. Those who had fled to the security of a QFE under the Financial Advisers Act had been those who were running less robust businesses, she said. “If you need protection from regulation, you need to look at your business.” Bruce Patten, who is deputy chairman and a shareholder of NZFSG and runs his own broking firm, said he would apply for a licence for his business. That should mean his firm retained its value for when he wanted to sell it, he said. He said there would probably be some "collateral damage" in the industry if the new code brought in requirements such as the level five certificate for every adviser. "Across the industry, some will say they can't be bothered even if they have until 2019, it's too much hassle and they'll leave the industry." The bill proposes that the code will come into effect in 2019, and all existing industry participants would need to be engaged by a firm with a transitional licence by February that year. Two years later, they will need to have a full licence. ✚
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ADVISERS HAVE THEIR SAY
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eing a mortgage adviser in 2017 is no easy ride. The world in which an adviser operates is constantly changing – whether it’s the introduction of new loan-to-value rules making lending to investors trickier or new laws for the advisers themselves.
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TMM asked brokers what were the most pressing issues on their minds, and discovered some clear themes. We found turnaround times are a big problem for many advisers. Banks have offered some tips on how to put together an application that will receive an answer quickly. Regulatory changes and updates to bank
policies were also a headache for some advisers. Industry commentators said there could be a bigger role for associations and groups to play here, to inform their members. We also discovered that while the outlook for most businesses is good, finding leads is still hard work for some advisers – and the market for broker services is changing.
WHAT'S ON YOUR MIND?
A
dvisers ranked the turnaround times at the banks as their most pressing concern. More than 65% said the time it took to get an answer on an application was either keeping them awake at night or was of “some concern”. There was frustration that borrowers had to wait longer in some cases for an answer when they went through a broker than they might have to if they applied direct. Advisers described waiting up to a week when the branch itself could give a customer an answer within a day. Jenny Campbell, chief executive of the Mortgage Supply Co, said it was a tricky issue for brokers. “Some banks are quiet and some are still pretty slammed. It totally depends.” She said there were efforts being made to address the issue – ANZ will this year stop taking handwritten applications from mortgage advisers. “That’s a really good move, it will speed up turnaround time sand save them trying to decipher someone’s chicken-scratch handwriting.” She said producing clear, accurate applications was part of the professionalism that should be expected of the industry. Westpac said it targeted turnaround times for brokers of three to four days but it was working at the upper end of that because of an increased number of applications. Adam Ward, head of third-party banking at BNZ, said the bank was averaging turnaround times of about three days. He said it had dropped as low as 24 hours in recent times but the pipeline of applications had started to fill up again, pushing the time out.
What Is Your Designation?
Improving turnaround times? The banks offered this advice: Westpac:
The best way to speed up the processingtime, is to ensure that all of the documentsand supporting information is accurateand completed in full. “We are spending a lot of time going back to the adviser to clarify information or to ask for more information especially around the financials, which slows downthe whole process.”
ASB:
Understand, from the start, the driver from the customer regarding what it will take to convert the deal after approval. Send the deal to the bank that best matches this Present a fully completed application with all supporting information first time. Understand the deal in full and cover this off with the information submitted. Be sure about the deal at the start, the facility structure and borrowing entity to minimise re-work and re-documentation. Own your conversion ratios and proactively work to improve them. Embrace change and remain agile.
BNZ:
The quality of the diary notes that check out the position of the customer is key. It is important that adviser can write a diary note that is factual and specific in its intent. Head of third-party banking Adam Ward said some adviser wrote very little, or what they wrote was not relevant to the bank making its decisions. “If the customer is really nice, or the home is looking nice or
they have lovely children, that’s not helpful in making a decision.” Quality does not mean long: It can be hard to pick out the relevant information in pages and pages of data. Put yourself in the position of the credit assessor, who has a couple of hours to make a decision. The information might be in your head but what will they need? On paper it’s harder, so are you giving them the information that will help them reach a decision quickly? Provide good quality, well-documented applications each time so that the creditassessors can build confidence and trust in you.
ANZ:
Advisers should use a digital or electronic application form rather than a handwritten form to prevent confusion and/or the need for clarification due to the handwriting being difficult to read. Clearly mark if the application is urgent including a valid reason for the urgency, and note in the email subject line or covering narrative that it is a business banking or retail/personal proposal. This will ensure it is directed to the correct team for assessment in the first instance. Set clear customer expectations with regards to turn around times. It is always better to under-promise and over-deliver. If lenders are busy, tell the customers that it may take a few days. This will prevent customers constantly chasing advisers or engaging an alternative channel of the bank for an approval.
WHAT KEEPS YOU AWAKE AT NIGHT?
AFA 10.95% QFE 2.19% RFA 86.86%
KEEPS ME AWAKE
IT IS OF SOME CONCERN
MILDLY CONCERNING
NOT AN ISSUE
Turnaround times
20.15%
50.00%
20.15%
9.70%
Regulation changes and compliance Keeping up with policy changes Getting applications arpproved
12.12%
46.21%
36.36%
5.30%
5.43%
39.53%
34.88%
20.16%
12.59%
23.70%
37.04%
26.67%
Finding new clients
14.18%
26.12%
26.12%
33.58%
Securing finance for property investors
6.06%
27.27%
41.67%
25.00%
Succession planning
0.78%
14.73%
31.78%
52.71%
KEEPING UP WITH CHANGES T FACT! here are significant legislative changes ahead for the mortgage broking industry as the Financial Services Legislation Amendment Bill becomes law. Advisers will have to become financial advisers or financial advice representatives, and meet a range of new standards. But only 16% of those surveyed said they had a high level of understanding of what was happening. More than 11% said they were not well informed. More than half said it was likely they would become financial advisers under the new rules, and 10% expected their businesses to become financial advice providers. The most common source of information on the changes was advisers’ industry association or aggregator. A quarter said they were informed by the media. NZFSG deputy chairman Bruce Patten said many people had to rely on getting online and researching the information themselves. “There is a lack of knowledge out there in terms of where to go to find out stuff.” But he said some seemed to deliberately be avoiding the information. “Advisers are putting their heads in the sand a lot of the time, not actively trying to seek the information, just going ‘she’ll be right’.” Campbell said it was hard for some advisers to wade through the information that was being disseminated. She said there was a level of scaremongering that was not helpful before the full extent of the changes was known.
How well informed do you feel about proposed changes to the FAA?
72.79% Some idea of what's going on 16.18% High level of understanding 11.03% Not well informed
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46.2% of those surveyed said regulation changes and compliance was of some concern compared to only 5.3% who said it was not an issue Campbell said adviser associations would have an important role to play to help people understand. “They should be the first port of call but there hasn’t seemed to be a lot of detail coming from them regarding what their submissions are likely to look like.” She said, while advisers worked well together, most were small businesses who would work on their own in some way much of the time, and many felt no one was advocating for them. A spokeswoman for the PAA said it kept members informed of issues, changes and options. “The PAA is extremely active in advocating for advisers during the regulatory review process. We keep members up-to-date with any potential and confirmed changes, on the association's view on changes; what advisers need to know and how we are working with the regulator. On an ongoing basis we keep members informed with copies of responses to issues and our submissions.” Banks’ appetite changes – and the rules they work under – can also be hard to keep up with. One adviser responding to the survey said it was hard to remain up-to-date with banks’ changing approach, and their attitude towards advisers. “Just because a lender might say they potentially lend up to 95% it doesn’t mean they will,” Campbell said. She said aggregators should spend more time working through banks’ policies and feeding the information back to members. “That’s something we do a lot of, we get a weekly feel for what the appetite is like because it does change week-to-week. I don’t know how free-range advisers would know without the help of a group.” Jodhi Wharfe, a former bank manager who
Under the proposed changes AFA, RFA and QFE designations will be replaced. Which one of the new categories will you apply for? 52.55% Financial Adviser (FA) 29.20% Don't know 11.68% Financial Advice Firm 6.57% Financial Advice Rep.
now works in broker support, said much of what they relied on came direct from the banks. “We would usually call to clarify as and when things come up as there are so many variables involved. It is kind of hard from the banks’ side as well as it wouldn't help by bombarding brokers with information that they may never use so it's usually easier to discuss with the banks when a scenario we are unsure of comes up.” The new rules are likely to introduce continuing professional development requirements for mortgage brokers. But almost 10% said they planned to invest nothing in CPD this year – and 75% said they would spend less than $5000. More than half said they were happy with the amount of mortgage advice education available.
FACT! 5.43% of those surveyed said keeping up with policy changes keeps them awake at night while 20.16% said it was Not an Issue
WHAT DOES THE FUTURE HOLD FOR YOUR BUSINESS? Will the volume of loans settled this financial year (to March 31) be higher than last year? 68.89% Yes
23.70% No
7.41% Not sure
Will the volume of loans settled this year be higher than last year? 31.34% / 25% more than last year 10.45% 16.42% 11.94% 8.96% 20.90%
A
tougher lending environment is not necessarily bad news for adviser businesses, the survey indicated. More than two-thirds said they would settle more loans this financial year than last. Almost 30% said the turnover would be at least 25% higher than last year. But slightly more than 20% said they expected to settle fewer loans this year. Advisers said the environment they were working in had changed significantly over the past year as banks pulled back and their risk appetite cooled. “[It’s a] more difficult lending environment – more time consuming,” one said. Another said a slower housing market would have an effect on the number of clients coming through the doors. Most are still heavily reliant on doing deals rather than just servicing clients - 70% of respondents said only up to a quarter of their commission was trail. Other advisers said they were increasing their marketing efforts to compensate for any market volatility. Many said it was harder to get deals done and more work was involved in doing so. But they said banks turning away more clients was good for the advice sector. People were seeking independent guidance, especially when they wanted to find a way around things such as the loan-to-value restrictions. Patten said the challenge for any advisers was to have a steady stream of lead sources.
“That will continue to be the one major thing, how do they find clients. Especially now there are all these opportunities for roboadvice and online advice. Looking at how to go about generating leads is a significant thing and will always be the case. It doesn’t matter if you are a real estate agent, insurance broker or mortgage adviser, anywhere you rely on your network that will always be a challenge.” Campbell said any time it got tougher for someone off the street to get a loan, it was good news for brokers. “More than ever we are seeing people knocked back by the bank they’ve been with for years. Banks are quick to say no at the moment. The general public can’t access a lot of the alternative funders we can.” Glen McLeod, of Edge Mortgages, said most of his customers still came from referrals, but the type of deals had changed. “I see a lot more first-home purchasers and commercial building purchases, and a lot more with scratchy credit history. The market has definitely slowed down. It generally does right on the end of tax year and through the Easter/ school holiday period.” Another adviser, Emma Johns, who runs NZ Home Loans in Whangarei, said she had started to encounter more people who wanted advice about their finances rather than a straight transaction. “We still have a lot of first-home buyers looking for help but we are seeing an increase in people looking for advice around their existing mortgages, with rising interest rates.”
15-25% more than last year 10-15% more than last year 0-10% more than last year No change from last year Less than last year
Are you satisfied with the amount of mortgage advice education available?
YES 54.48% NO 34.33% DON'T KNOW 11.19%
She said most would convert into clients. “We are more financial planners so we refinance into our system and structure people's mortgages to help them pay it off as fast as possible. Create budgets and goals for future financial well-being. People need help to manage their finances and they are not getting it in most cases from the banks.” ✚
019
FINANCE LEGAL By Miriam Bell
Turning to the unions It may be harder to secure finance from the banks these days but, although they fly under the radar, credit unions present a viable lending alternative.
Q
uayle said that mortgage advisers interested in working with credit unions should get in touch. They are approachable and some have full-time BDM’s who are the key liaison / support for advisers. “We like to build relationships. That means getting to know your adviser business – who your key prospects are, the types of housing they generally look for, etc. We also like to be up front with the things we are going to need to look at so we can access a loan. Understanding each other helps improve service and speed.” Credit Union Central business services
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manager Darrin Walsh agreed that relationships with customers, advisers, service partners and the community are the lynch pin for credit unions. In his view, that model also dictates the best approach for interested advisers to pursue. “Banking is a relationship game. So advisers should get to know the staff at your local credit unions. They should learn and understand their appetite for various lending proposals and match them with their clients. Ultimately, they should get to know what each credit union has to offer, their criteria and then work with the key personal on deals to deliver win/ win opportunities for your clients.”
However, Walsh did sound a note of caution for advisers. He said that while credit unions can apply certain degrees of flexibility and operate in certain niches that banks simply can’t, they are not “lenders of last resort”. “Generally speaking, if your client is being declined due to credit or debt servicing difficulties then you will generally get the same response from a credit union. Also, applying flexibility to lending situations tends to increase risk and, therefore while priced to be competitive, you will find credit union rates will be higher than main stream banks.”
“Credit unions can apply degrees of flexibility and operate in certain niches that bank can’t, but they are not ‘lenders of last resort’.” – Darrin Walsh
OLD WORLD ETHOS
Cut from the same cloth as credit unions, building societies are another viable finance option for those interested in a smaller, more personal lender. Technically, credit unions and building societies operate under two distinct pieces of legislation but, in a practical sense, there is little that separates them. Nelson Building Society general manager Ken Beams said they see themselves as a retail bank and offer all the services that a bank does. “So we do things like debt consolidation, mortgages, terms deposits, although we have universal debit cards rather than credit cards. But we have built the NBS on the bank customer.” Their priority is on the funding side rather than the lending side though. “But we are competitive with the bank rates for rates. There might be a 10-20bp difference now and then. But if you want to be in the market you have to be competitive. Credit levels are similar.” In Beams’ view, they offer a big difference at bank management level. Their managers can still make credit decisions and don’t need to go to central to get approval, he said. “That is very attractive to customers – especially rural ones. People want to deal locally, with people they know. Our managers are not about sales, they are about customer service for people. We follow the old world banking model.” Following the tightening up of bank lending, NBS is seeing more enquiries from potential
customers and approaches from advisers. Beams said they do work with advisers on a limited scale but – because they tend to operate through their existing network – such business would tend to come to them rather than vice versa. “Advisers who are interested need to approach us personally and we interview them and look at their credentials. There are some great advisers out there and those are the ones we want to work with. Ultimately, it all comes down to relationships and good communication, he said. “We have that ethos. That is our point of difference too: it’s all about personal relationships and the ability to make decisions. A customer can walk in and we will say yes or no straight up.”
CURRENT CLIMATE
While times have got harder for the banks, they have also got more difficult for credit unions, too. In KPMG’s recent Financial Institutions Performance Survey, it is stated that credit unions’ legal structure limits where they are legally able to source funds. They can only source funds from mutual parties, the report said. “This means attracting sufficient funds from the local deposit markets is vital for their growth and profitability. This is increasingly a challenge.” While those in the sector acknowledge that the current environment is more challenging, they are confident in their ongoing ability to operate highly effectively. It is also worth noting that both credit unions and building societies been around for well over a hundred years. And, on top of that, during the Global Financial Crisis (GFC) no credit union went under or needed to ask for a government handout. Perhaps the final word should iLender’s Jeff Royle who is a big fan of credit unions. “They are focused, they give you straight answers, they don’t spring surprises and they have a can-do attitude. Banks tend to be very much tick all the boxes. But credit unions tend to give a bit more leeway. They take the attitude of ‘you want to make a deal work so what can we do to make it work?’”. ✚
INSIDE ADVICE Here is NZCU Baywide GM sales and marketing Andrew Quayle’s advice for mortgage advisers interested in working with credit unions:
1
..Don’t be shy! Make ..contact with your local credit union and talk about your needs. They are always receptive to looking at feasible lending opportunities for customers with a good credit history but who may fall outside of main bank criteria.
2
....Think personal
..lending opportunities.
Every home loan application is also an opportunity for a credit union to tidy up an applicant’s existing consumer debt. Credit cards, hire purchase or vehicle loans all at different (high) interest rates impact on serviceability. Adviser commission is often payable on this.
3
..Credit unions’ strength ..is personal lending, with debt consolidation being a key focus. Rates are also often market leading. Consolidating debt at a sharper interest rate can reduce weekly outgoings. This helps an applicant’s home loan application, be it with a credit union or a main bank.
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SALES & MARKETING LEGAL By Paul Watkins
LISTS RULE!
ADVERTISING SUCKS! The world of change around us is accelerating and unless you adapt how you connect with your clients, you could get left behind.
W
hen you next stop at a set of red lights, glance around at the other cars. Most of the passengers will be looking down at their phones and sadly, some drivers, too. So billboards don’t work like they used to. We live on our phones. We do our banking on them, message on them (incessantly), play games on them, listen to music on them, find places with them (Google maps) and critically, we search for places to buy things. Being glued to those little screens is one of the reasons advertising is fast losing its effectiveness. We ignore TV in favour of video games and computer screens, we don’t read newspapers any more as we scan the front page of Stuff.co.nz and similar sites. It’s now possible to listen to radio without ads for a
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"You must re-programme your brain to the new way of promoting your services. Traditional advertising is losing the battle"
few dollars on the likes of Spotify. We are becoming blind to advertising, not only due to the demise of the traditional mediums, but due to the way we buy things now. We use the Internet. If you make a cold call or follow up a lead, the person you care calling will have their phone in hand Googling your firm to check you out. When the call is over, they will check out some of your competitors. They will go to sites like interest. co.nz to check compare interest rates. According to a 2016 study in the USA, a whopping 97% of individual consumers will search for services online before making a significant buying decision. If it’s a large purchase, consumers are known to access the web sites of an average of eight or more providers first. That is a massive shift in behaviour in a relatively short amount of time.
I have written about this before, but each year the trend is accelerating and 2017 is regarded by a lot of marketing professionals as the crunch year. It has now gone well beyond the tipping point and the Internet, commonly accessed via phones, rules everything. One significant use of the Internet is social media, in its increasing number of forms. Mainly through their phones, ‘Millennials’, being defined as those born after 1990, are talking to one another. They use Facebook, Snapchat, Tinder, WhatsApp, WeChat… the list is growing. This social media behaviour means that they ask their friends for recommendations for service providers ahead of any advertising message. So what should you be doing? Well, at the risk of offending some of you, I am regularly asked by brokers for that “better press headline” or “clever sponsorship idea” or “should I voice my own radio commercials?”. The answer to these is entirely up to you, as changes to these will make little difference. The issue is not your headline, it’s your choice of media. Online rules. In the new media, your choices are email, a website with good search engine optimisation, a regular blog, social media, Google Adwords and business social media such as LinkedIn. You could also text. Incredibly, text campaigns do work for a wide variety of products and services. But there is a catch, being that you need permission to text or email them. How do you gain that permission? Lists. Build lists. Lists rule the online world. This is the true secret of online marketing activity. You should be forever building lists. Here is an example of how some have been very successful at this. First, create a landing page on your web site. On that page, offer free downloadable e-book guides to mortgages, or create a five-minute video guide called “Critical traps to avoid for first home buyers when taking out a mortgage” for which they have to put in their email address. You will all have done this at least once yourself, getting a copy of an e-book or access to a course or similar. These are simply designed to get your contact information. And by definition, they are a warm lead. Why else would they have downloaded your e-book on mortgages? It’s not just as simple as this of course. The e-book you write has to genuinely add value. It also has to be totally relevant to the person downloading it. Perhaps you publish variations, such as one for first home buyers, one for those with bad credit ratings and one for people 50+. Segment your market based on your own preferred client base for this purpose.
Run Google Adwords or Facebook ads to generate traffic to the landing page. There are literally thousands of Youtube videos on how to do these, so no need for me to explain them. They do work with the right headline and supporting text. This is the one area that a good headline definitely makes a difference. What you may not know is that this is how many authors launch their books. They offer a free first chapter or short story to those who visit their landing page, traffic being generated by various forms of online advertising. I met one author who generates well over 10,000 email addresses within the first two months of a new book release! She markets her books worldwide, so those numbers will not be achieved by you locally, the example was just to illustrate how other products are promoted this way. Similarly, tertiary education institutions use this list-building technique to create prospect lists, with a view to encouraging them to study at their place. This is also very successful for them. A third example is a business consultant who specialises in human resource issues around restructuring. He offers an e-book that has been downloaded by hundreds of businesses, which form his pipeline of leads. It’s worth taking the time to write an e-book (or get one commissioned) or put a camera to your face and produce a short informative, value-adding video. A video can be quicker and easier and there are dozens of free video editing tools available. This is not an advertisement remember. Do not end it with “Call me” or “Ask me how I can help”. It is an item that adds real value to the person downloading or viewing it. The value to you is that you are seen as the one who can genuinely help them – and you know have their email address. The email can be used to contact them with an “added bonus” in the form of a ‘Mortgage Checklist’ or a second video or another e-book on a related matter. It’s only after that second point of contact you would make a soft sales pitch to them. And they will now stay on your monthly email newsletter list forever of course. You must re-programme your brain to the new way of promoting your services. Traditional advertising is losing the battle and the winners are a great web site, excellent search engine optimisation, list collecting and a monthly newsletter to the list and existing clients. And none of this is expensive if you know where to get them done for you. ✚ Paul Watkins writes blog content and newsletters for financial advisers.
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MY BUSINESS By Dana Kinita
The evolution of an
ADVISER
Martin Robinson, mortgage and financial adviser with SHARE, remembers his first client in 1988. That’s because he has kept a record of every application he has submitted to a lender. He speaks to TMM on the changes he’s seen in the industry and how learning to adapt and upskill has been the key in his durability. HOW DID YOU GET STARTED IN THE INDUSTRY? I worked for a finance company, a subsidiary of Investment Finance Corporation (an Olly Newland business). It was the first Public Company to fail after the October 1987 share market crash. The receivership was announce at 6pm, Christmas Eve, 1987. On the bright side of that, we had a fantastic ‘In Receivership’ party in late January 1988. The only job I could find of similar interest was in Wellington. That was with AGC – I was their first commercial property rep in the Capital. Unfortunately the effects of the share market crash negated any attempt to write business. So I rang my boss, Chris Barry who some will remember, probably the day before he was going to call me and resigned. With no other jobs in the market apart from collecting bad debts I went out as a commercial mortgage broker, it was really the only thing to do. There was no demand, other than people wanting money to get out of trouble. With rapidly declining values in property, it was basically a nightmare. When I went out, I didn’t realise how bad it would be and it took several years before the commercial market recovered.
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WHAT WAS YOUR NEXT MOVE? I went into a partnership with an existing mortgage broker. Three months after I started with him, I worked out he was a drinking alcoholic. After a further three months he left the business and I took it over. While we were together I had worked out, there wasn’t enough business in the commercial market and we had to look at residential. Critically I realised good customers wouldn’t bring their residential mortgage to me as I would have to charge them a fee. So I put a package to ANZ in late 1989 which was shortly after they had bought Post Bank. Lo and behold after three months they agreed to split their 1% fee, which they charged on every loan, 50/50. This made me ANZ’s first broker to have a formal commission arrangement with ANZ. The average loan was probably $60,000 to $80,000 so I was making $300 to $400 a deal. Loose change now but that’s how I survived! My records show interest rates from the banks, back then, were 14% to 16%. So I approached NZ Guardian Trust who were charging a little less and they agreed to split their 0.75% fee 50/50! I therefore had three lenders who paid me commission, ANZ, Post Bank and Guardian Trust.
With my business partner gone I needed new premises. A referral source suggested I could get a free office if I sold a bit of life insurance. So in mid-1990, I joined Prudential to sell life insurance. Unbeknown to me their products also included income protection, total and permanent disability cover and importantly superannuation. An NZI Fire & General Agency also came with the Prudential connection. This meant I went from being a one-trick pony to a GP. Now I’m happy to call myself a GP in the financial sector, but that’s both positive and negative. Positive, as if mortgages go quiet I ramp up Insurance or KiwiSaver work. Negative, as continuing with the analogy of a doctor, specialists make more than GPs.
WHY ARE YOU PASSIONATE ABOUT THE INDUSTRY? I say to my clients I like dealing with good people, that’s what I enjoy. That’s about 80%, the other 20% are the ones that give you aggravation, a lot of work for little return. So one of my tips is don’t be afraid to say no. In fact when you do turn business away it proves you are doing okay!
DO YOU REMEMBER YOUR FIRST CLIENT? I have a red book that has a list of every loan I’ve submitted. The first one is dated 20th December, 1988 and was for $450,000. It was a commercial loan, I can tell you who it was referred from, which lender it was submitted to, the interest rate was 16% and I got a fee of $3,500! I still write in the book every time I send an application to a lender. I’ll go electronic when the pages run out – shortly!
FROM: Murrays Bay, Auckland but Lyall Bay, Wellington since 1988 FAMILY: Wife, Jan. Children: Son, Phillip, 24, Builder: Daughter, Emma, 22, Olympic swimmer. INTERESTS: Surf Life Saving, Swimming (currently I don’t have a choice), Football be it playing for Seatoun Masters div 6 (you can’t get lower or slower!) or following the Wellington Phoenix and Wolverhampton Wanderers.
BEST TIME IN THE BUSINESS? I now consider myself a Financial Adviser, I don’t believe in the word broker as I see my role as providing the best possible advice. In the mid-1990’s two colleagues and myself formed a buddy group. One was in Auckland, one in Wanganui and I was in Wellington. Every Monday morning we would fax (no email in those days) what work activity we had done the previous week. This included number of phone calls made, number of appointments completed, number of sales and the amount of commission earned. At the end of every quarter, we would meet, review where we were and set some goals for the following quarter. To finish we would do an activity like go for a sail, do a spin class together and we even ran the Rotorua Marathon in 2004. The Buddy Group morphed into our families coming along and we’re all still good friends. Motivational wise this worked as the three of us didn’t want to get beaten by each other. Perhaps critically we were in different cities so we weren’t competing for the same clients.
CHALLENGING TIMES? The ebbs and flows of the economy catch me out. Reasonably recently the GFC curtailed my business more than it should have. Looking back, I just kept believing the next month would be okay and I wasn’t proactive in making changes quickly enough. But that’s been rectified in the last couple of years.
Whilst not realising it at the time, what I’ve learnt from some of the people involved in surf life saving is astounding. As a 14-year-old I trained with Steve Tindall (founder of The Warehouse), I used to be coached by senior managers from Fletcher Challenge, NZ Forest Products, I can go on and on. That’s where I see I received a lot of benefit in life rather than from an individual business mentor.
LOOKING BACK, WHAT WOULD YOU HAVE DONE DIFFERENTLY? I have at various times had associates work with me. I think I should have tried a bit harder or been smarter in an effort to retain them. This may have moved me from being a sole practitioner to a small sized firm.
WHAT CHALLENGES DO YOU SEE AHEAD? What’s happened over the past few years in respect to Regulation has been great for the public. I’m well pleased with deciding to become an Authorised Financial Adviser as soon as I could. I’m afraid, RFAs are going to have to pull their socks up because a lot of their advice is not in writing and shortly it will have to be. I hope the QFEs are involved in that as well. A challenge for Mortgage Advisers is the continual love/hate relationship we have with our Financial Service Providers. Especially the banks, who say we’re working together but they often get quite aggressive in chasing our clients directly, despite the initial introduction coming from us. As soon as mortgages go quiet the banks have a history of tapping up Advisers clients for insurance. It just frustrates the hell out of me. Contradicting this a little is my long held belief that the lenders are my clients. I try to treat them as such. My theory being there are only half a dozen or so of them and I can’t afford to lose one of them. If I do it sure limits my ability to provide the best outcome for a customer.
BEST BUSINESS BOOK? The best business book is a detective novel as far away from business as possible.
IS THERE A TYPICAL WORKING DAY? Most of my days start with some sort of exercise then to the office by 8.45am. I then work through until 6.15pmish. I do some evening appointments but they have declined markedly over the last 10 years. I also have a bad habit of calling into the office on Sunday mornings for a couple of hours. I compensate for this by aiming to have seven weeks holidaying each year. ✚
DID YOU HAVE A MENTOR? Not really but I’ve learnt from a lot of people over the years. A major benefit to my life came through joining Surf Life Saving as a 14 year old. That’s when I joined the Mairangi Bay club in Auckland. I’ve stayed in surf lifesaving and have been with NZ’s oldest patrolling club, Lyall Bay for nearly 30 years. I’m pleased to say I’m still competing and am currently training for the World Masters.
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Book Today and Save –
National Advisers Conference 2017 Don’t Miss the Advice Event of the Year.
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or the second year running, the PAA and IFA are teaming up to co-host the National Advisers Conference - 3-4 August 2017, SkyCity Convention Centre, Auckland. Here’s a quick snapshot of what’s in store and how to get the most of Conference.
A Big Theme for Changing Times - The Value of Advice.
It’s a big theme in response to changing times in our industry - The Value of Advice. What is it? What does it mean to you? What does it mean to your clients today and what will it mean to them in the years to come? What do you need to be thinking about today, to thrive tomorrow? There’s no two-ways about it; to thrive in the changing world of financial services, we need to re-assert and grow the value of advice. If you want to know how – don’t miss Conference. Conference this year is all about ‘what’s next’ for advice, advisers and the clients we work with. A future-thinking programme packed with insight to create a path for success in changing times – for you and your business, for your clients and for your industry.
Thought Provokers. Business Tools. Mortgage Advice Specific ‘Aha’ Moments.
Want to spend the full two-days diving into the big issues facing your business and advice? Or perhaps you’re looking for business practice ‘quick-wins’ and tools? Or, maybe you’re thinking that by August, with Winter setting in, the most important thing you’ll need is a shot
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of inspiration from hearing about some truly remarkable real-life triumphs… Choice is the word and Conference 2017 has it all: 8 CPD hours, six powerful keynotes and 16 adviser sessions to choose from - check out a small sample of sessions on the page to the right. As well as renowned international speakers, Conference offers a great range of topical and highly relevant sessions specifically for Mortgage Advisers, plus plenty of opportunities to soak-up insight on the big theme, and sessions that tackle key challenges advisers face in running a successful advice business. And of course, we’ll be once again celebrating excellence and announcing the 2017 winners of the Adviser Awards, and putting on a great night of entertainment, music, humour and more at the Gala Dinner. Take five and go to www.nationaladvisersconference. co.nz for the full programme.
Get the Most Out of Conference - Top Five from the Conference Team
▶ Starting with an obvious one - Register early and save! ▶ Take some time to think about what you want to get out of the sessions you’ve chosen – you might even like to pre-prepare some questions for the speakers. And don’t miss the opportunity to chat with a speaker after a session – seize the moment! ▶ Relationships, relationships, relationships: Conference is an exceptional opportunity to create new connections, and just as important, to strengthen existing relationships. Catch-
up with colleagues; learn from each other’s experience; talk referral… ▶ An opportunity for face-to-face time with many of the providers you work with - in one spot at one time - doesn’t come around often enough. Make the most of your time in the Sponsors area; find out about new innovations in product design and client needs; learn about what’s coming up in the industry and product development; get answers to your specific questions, and of course, enjoy the goodies, competitions and experiences offered on-stand. ▶ Think about how you’re going to record and action the array of insights you’ll glean during the sessions you attend. There’s plenty to take in over a two-day Conference so it helps to plan how you’re going to apply the ‘wow’ moments and take-aways when you get back to the office. ▶ Make the most of Socialising: Sure, Conference is all about getting value that will have a positive impact on your business; but let’s not forget, it’s also a great opportunity for socialising, having a laugh, getting the dancing shoes on and just generally enjoying your involvement in an exceptional industry. ✚
We hope to see you there. Find out more at www.nationaladvisersconference. co.nz and don’t forget to take advantage of the Super Early Bird Pricing - a $170 saving on a Standard Ticket if you book before 30 April. Plus, for our South Island attendees, book before 30 April and get an additional $100 Travel Subsidy.
INSURANCE By Steve Wright
Don’t forget clients’
retirement needs When designing clients’ insurance packages it is essential to take into account retirement funding, or they could be left short.
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nsurance, particularly disability insurance that pays a monthly benefit, does a pretty good job of looking after families financially if they can’t work. Yes, it is true that cover is usually restricted to 75% of income but that is still a very large proportion of income replaced. One issue we should be aware of though is that this generous benefit will suddenly stop – at the expiry of the payment term. This raises an obvious question, what about ongoing
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money needed to enable a reasonable retirement? Disability does not magically stop at retirement age but disability benefits will. As insurance advisers we must recognize that there will be a need in retirement and we have the opportunity to design our insurance recommendations with retirement needs in mind. Clients who are disabled long term and whose income earning ability is depleted, will probably not get the time or financial means needed, to set aside enough money for a
comfortable retirement. Now I’m not suggesting insurance advisers provide investment advice or retirement planning services (you may not be authorized to do that) but simply recognising that disability benefits will stop and that Government Super is modest (maximum is around $780 per fortnight after tax for a single person living alone, less if in a relationship or married) allows you to structure an insurance package with benefits that can
improve financial security in retirement. Ignoring retirement needs may leave clients well looked after during working years but destitute in retirement – surely not what we want to achieve!
So what can we do?
Well, on income cover and mortgage repayment cover, we can… ▶ Select Retirement Protection optional benefits: The most obvious strategy is to consider income cover and mortgage repayment cover policies that offer an additional retirement protection benefit and then select these at the maximum level allowed. These optional benefits typically pay additional funds (over and above the usual 75% limit) into the client’s KiwiSaver account. The great danger of being disabled and suffering disruption of income earning, even if part of that is being replaced, is cessation of retirement saving. Selecting a retirement protection benefit ensures KiwiSaver balances continue rising even while disabled. ▶ Select payment terms of ‘to age 70’: It is true that most disability claims are fairly short term but not all are. There are many incidences of serious disability, lasting much longer and some last forever. Clients who are disabled once only and for a short period, can recover retirement savings lost while disabled, but those disabled for a long time or permanently, cannot. To help cover the retirement provision of those disabled permanently, especially at a young age, the ‘to age 70’ payment term is an excellent insurance tool. Income and mortgage protection policies that pay benefits ‘to age 65’ are popular, but consider how much more valuable those with ‘to age 70’ payment terms would be for clients disabled through to retirement. The receipt of significant income cover or mortgage repayment cover benefits from the insurer for an additional 5 years (in addition to Government Super payments – ensure these are not offset from disability benefits - generous policies won’t offset Government Super) has a very large impact on retirement provision needs. It reduces the amount of cash required to retire comfortably by a very significant amount because not only are benefits paid for an additional 5 years, but,
❝ A prudent
parent may want to consider paying their financially independent child’s insurance premiums to protect their own financial position. ❞ for retirement funding purposes, the amount of years in retirement is reduced by 5 years, so less needs to be set aside. ▶ Select TPD booster benefits: Some income cover products include benefits that ‘boost’ the client’s disability income benefits if they are totally and permanently disabled. Getting paid the extra ‘boosted’ benefit will make setting aside a bit extra for retirement that much more feasible. For young clients this can be exceptionally efficient (the additional premium required is typically relatively insignificant considering the benefits that could be payable for a long term of disability). As usual though, make sure though that you understand the definition of disability required to trigger a boosted benefit. Is it an inability to perform ‘own occupation’, ‘any occupation’ or something much harsher, like inability to perform activities of daily living! Also make sure the same benefit is available across all disability products, something particularly important if combining income cover and mortgage repayment cover for a client. ▶ Top-up with trauma and TPD type lump-sum covers: Providing an additional lump-sum to top-up monthly disability benefits is necessary but these additional funds will most likely need to be consumed before retirement. Large sums insured are required if a lump-sum claim benefit is to make a meaningful difference to retirement provision needs and great discipline needed to ensure additional lump-sums needed for retirement are duly set aside and not consumed until retirement.
▶ Carefully consider the medical
insurance product you recommend: Some medical insurance products will be more user friendly to clients in old age than others. For instance, high excess options give clients a better ability to afford their medical cover in old age. High excess options can be more palatable if the chosen excess is waived or limited for claims for certain conditions. ▶ Consider paying your children’s insurance premiums: One thing sure to impact anyone’s retirement plans is a child suffering a severe disability, unable to earn an income and never able to leave home (or one who moves back in, perhaps with a family of their own). People are slowly coming around to the realisation that the severe disability of a child, one that is likely to leave them dependent on their parents forever, represents a significant financial risk. It’s not only about having the cash to care for them, but having enough cash so that the parents can afford to retire at some stage. It’s not only about dependent children either. Adult children should naturally have their own insurance but what if they don’t? It is likely the parents will end up helping out financially. Insurance can help but only if it is in place. A prudent parent may want to consider paying their financially independent child’s insurance premiums to protect their own financial position. As far as dependent children go, reasonable amounts of trauma cover and terminal illness cover is now available in New Zealand, even for very young children. While the discussion is often difficult to have with parents, bad things do happen to kids and the financial consequences can be devastating – have the discussion at least! ✚ Steve Wright has qualifications in Law, Economics, Tax and Financial Planning and is General Manager Product at Partners Life. This article is for information purposes only. Its content is intended to be of a general nature, does not take into account your financial situation or goals, and is not a personalised financial adviser service under the Financial Advisers Act 2008. It is recommended you seek advice from a financial adviser which takes into account your individual circumstances before you acquire a financial product.
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LEGAL By Jonathan Flaws
Enduring Powers of Attorney The EPA regime has a special set of rules that you need to be able to identify and deal with, writes Jonathan Flaws.
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power of attorney is a useful way for someone who has difficulty looking after their own affairs to appoint someone else to do this for them. A “difficulty” in this context could simply mean the person is out of New Zealand or out of communication for periods and still needs to transact business during that period. But it also means a difficulty as a result of age or physical or health issues. In an earlier article I looked at powers of attorney generally and things to be aware of when dealing with an attorney rather than the borrower direct. Most of that article was directed at the standard power of attorney. But there is another type, the Enduring Power of Attorney, that you will come across, mainly when dealing with senior citizens. This type has a special set of rules that you need to be able to identify and deal with. A standard power of attorney only lasts as long as the donor has mental capacity. It is deemed to be revoked when this capacity is lost. Legislation recognises that this is not helpful and thus the Enduring Power of Attorney (EPA) was created by statute to allow an attorney to act for the person even though the person has lost the mental or legal capacity that would normally revoke the power. Because the EPA is a creature of statute, strict rules set out in the statute apply. The rules were changed with effect from 16 March 2017. As a result, every EPA entered into after that date needs to be in the new and improved form. To understand an EPA you need to first understand the terminology. First, there are two types of EPA. It is important to know which type you are dealing with. The first type, and the only one that can be used in relation to a mortgage, is the EPA for “Property”. This enables the attorney to deal with money and assets of the donor. This can operate like a general power of attorney and can be effective both before and after the donor loses their mental capacity. The donor can appoint multiple attorneys under a Property EPA. The second type is for “Personal Care and Welfare”. Unlike the property EPA, there can only be one attorney for a Personal Care and Welfare EPA. This type gives the sole attorney the power to make decisions for donor about health, accommodation, and care decisions. More importantly, a Personal Care and Welfare EPA can only operate if the donor has been determined to be have lost their mental capacity. This is determined by a relevant health practitioner issuing a medical certificate or by a Court.
Resource material The following website contains information that may help you work with the borrower and their attorney: http://superseniors.msd.govt.nz/financeplanning/enduring-power-of-attorney/ This is published by the Ministry of Social
❝While it
would be good if everything always stayed the same, the reality is that change is inevitable. ❞ Development and contains useful information as well as downloadable copies of the new forms of EPA and standard explanation guides. The guides are worth reading and referencing.
Making sense of the terminology There are various players involved in the EPA environment. These are: (a) Donor - the person owning the property and giving the EPA. power. The donor can often be referred to as the “Grantor” or the “Appointor”. (b) Attorney – the person who is appointed to act on behalf of the grantor. For a property EPA there can be more than one Attorney. The form now provides that if there is more than one the Attorneys can act either jointly (all Attorneys must act together) or severally (only one Attorney is required to act) or both. It is important to check the EPA and see which box has been ticked in this regard for if the attorneys can only act jointly then all will be required to sign. (c) Authorised Witness – The only person who can witness the Donor’s signature on an EPA is referred to as an Authorised Witness. This can only be a lawyer, a registered legal executive employed and supervised by a lawyer, or an authorised officer of a trustee corporation (such as The Public Trust, Trustees Executors, Guardian Trust, Maori Trustee or Covenant Trustee Company), (d) Successor Attorney - When granting the EPA, a Donor can appoint other persons to take the place of the Attorney if the previous Attorney’s appointment ends. The Successor Attorney needs to be named in the EPA. (e) Relevant Health Practitioner – Not all health practitioners qualify to be able to determine mental capacity although a New Zealand GP does.
Form and signing In the case of an EPA the form used and the way in which the form is signed is important. After 16 March 2017, the new form must be used. Look at the suggested website for a copy of this and familiarise yourself with it. It will be useful to be able to see at a glance if the form is not in the approved format. The new form is in plain English and is
much more user friendly in that it contains explanatory notes and guidance in the left column. It also contains tick boxes for all of the provisions. It is worth looking at the provisions for in many cases there are options. For example, the Attorney can be appointed in relation to all property or only some. If only some property is ticked, then you will need to review what parts are affected. The Attorney can be limited to only carry out specific tasks. For example, it may limit the Attorney to operating a bank account but not entering into a mortgage. The EPA need to be signed correctly and the Donor need to sign before an Authorised Witness. Signing correctly means that all Attorneys and all Successor Attorneys must sign before the EPA is deemed to be effective.
Purpose of the borrowing This can be a trap for a mortgage broker or mortgagee. One of the occasions when you are likely to be presented with an EPA is when younger borrowers are being assisted by parents to obtain a mortgage. Either the parent is a guarantor or a guarantor giving an additional mortgage or is a direct borrower against their own property and intending to lend the money or gift it to their children. An attorney can only use the property of the Donor for the Attorney’s own benefit if the EPA specifically authorises the Attorney to do so. The new form also contains a section under which the Donor can elect to permit or not permit the property to be used to provide gifts or charitable donations. The donor my a be a child but the funds are used for gifts to grandchildren. Unless this is permitted in the EPA it cannot be used for this purpose.
Pre March 16 EPAs All of the above applies to an EPA entered into after this date. Does this mean that an EPA signed before March 16 EPA has no effect? The answer is no – they are still effective. The only difference relates to the certification by a medical practitioner – it now has to be carried out in accordance with the new regime. I suggest that if you are presented with a pre March 16 EPA and you are in doubt as to whether it remains effective, you should ask the Attorney to obtain legal advice. One instance where it will not be effective occurs if the signing straddles the March 16 date. In other words, if the Donor signs before but one of the Attorneys signs after March 16. In this case the EPA in the old form is not effective.
Summary While it would be good if everything always stayed the same, the reality is that change is inevitable and the changes to the EPA regime, while making it easier and more user friendly in an operational sense, are yet another development that we need to keep on top of. ✚ Jonathan Flaws is a partner at legal firm Sanderson Weir.
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AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION REVIEW LEGAL
By Susan Edmunds
Time to change commission:
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The latest report into mortgage broker remuneration in Australia has highlighted the need for major change.
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ustralia’s corporate watchdog is calling for an overhaul of mortgage broker commission structures, saying the current model creates poor outcomes for consumers. The Australian Securities & Investments Commission review of mortgage broker remuneration was carried out last year. The Government asked it to consider the role of mortgage brokers in the context of the wider home loan market, ownership structures and their impact on consumers’ access to products, loan performance and outcomes. ASIC said its report sought to identify and value the remuneration arrangements in the market, including commissions and soft dollar benefits, and the outcomes for consumers. ASIC said, in a well-performing market, brokers could help match the needs of a consumer with the right home loan product, navigate the home loan application process and boost consumer financial literacy. It said consumers had reported that they wanted a broker to give them access to a wider range of loans and to get a better deal for them. But it said the remuneration and ownership structures at play in the market were limiting the benefits of using a broker.
CRITICAL ON COMMISSIONS
ASIC said the commission model for brokers, which was standard across the industry, could create conflicts of interest. In Australia, about 50% of home loans are handled by mortgage brokers. There were 520,000 new home loans written by brokers in 2015, compared to 340,000 in 2012. Lenders paid A$175 billion in upfront commission on those home loans in 2015, and trail of $984m. For a $500,000 home loan, a typical upfront commission of 0.62% would result in a $3100 payment from the lender to the aggregator. The report said a trail commission of 0.18% would also be paid and would decline each year. The aggregator would then take their share and pass the rest to the broker. ASIC said this was problematic for several reasons. “Firstly, a broker could recommend
❝ A broker could
recommend a loan that is larger than the consumer needs or can afford to maximise their commission payment. ❞
a loan that is larger than the consumer needs or can afford to maximise their commission payment. This may also involve recommending a particular product or strategy to maximise the amount that the consumer can borrow. “Alternatively, a broker could be incentivised to recommend a loan from a particular lender because the broker will receive a higher commission, even though that loan may not be the best loan for the consumer.” It found that loans written by brokers were on average larger, with a higher loan-to-value (LVR) ratio than loans arranged directly by the lender. Brokers were writing 50% more interestonly loans than bank staff and brokers’ loans were more likely to fall into arrears. It said there was also the potential for poor outcomes because there was variability between the amounts of commission paid by each lender. Brokers might seek to place business with the lender that would give them the biggest payment. “The differences in rates of upfront commission paid to individual broker businesses tended to vary between lenders by at least 0.10%, while variations of up to 0.30% were not uncommon,” it said. “An increase of 0.10% commission on a $500,000 loan equates to an extra $500 paid to the broker business. These differences were also evident for trail commissions, where variations in the rates of commission tended to be between 0.05% and 0.15%. “In some cases, the broker’s commission could be negatively affected if they arranged a further (non-advertised) discount on the interest rate to be paid by the consumer. This creates a clear conflict of interest.” Instead, it wants banks to move to a model where brokers are not paid solely on the size of the loan. “Lenders could reflect the LVR of the loan (and other considerations such as compliance metrics) in how they calculate upfront and trail commissions. We also propose that lenders do not structure their incentives in a way that encourages the creation of larger loans that initially have large offset balance.” It said there should be public reporting on the value of remuneration received by aggregators and the potential value if all criteria for remuneration are satisfied, the average pricing of home loans that brokers obtain, the average pricing of home loans provided by lenders according to each distribution channel and the distribution of loans by brokers between lenders. ASIC also wants aggregators to monitor consumer outcomes obtained by brokers.
BONUSES BACKLASH
Bank staff and brokers were in the gun when it came to the bonuses associated with hitting targets.
ASIC said lenders would pay commission to aggregators for reaching a target in loan settlements over a period. “The closer the aggregator gets to the target, the greater the incentive they have to write additional business for that lender.” The report found clear signs that bonus commissions affected behaviour. One lender offering higher commission for a short period found they sold four times as many home loans. But bank staff are also incentivised in this way. ASIC said some bonuses were more than A$300,000 and sometimes were many times what the person would normally earn in their base salary.
❝ There is a need
for all industry participants to place greater importance on fostering a consumer-centric culture.❞ It also pointed to soft-dollar benefits, such as loyalty programmes and travel and hospitality-related benefits. “The conflict from broker clubs may be direct; such as higher commission rates directly incentivising the broker to recommend the lender’s home loans. It may also be indirect; for example, improved service levels will allow the broker to have more loans approved by the lender in a shorter time, which will result in more commission being paid to the broker.” It said the industry should move away from both bonus commissions and softdollar incentives. “Bonus commissions have raised concerns in other parts of the financial services industry,” it said. “The prohibition on volume-based commissions introduced by the Future of Financial Advice (FOFA) reforms is now being extended to life insurance as part of the Government’s reforms to life insurance commissions.” ASIC said it expected lenders, aggregators and broker businesses to focus on good consumer outcomes as the guiding factor in the design of their remuneration. “To reduce the risk that remuneration structures may result in poor consumer outcomes and inhibit competition, there is a need for all industry participants to place greater importance on fostering a consumer-centric culture and take more care in the design and monitoring of remuneration structures.” Submissions on the report can be made until the end of June. The Government said it should not be viewed as a statement of the Government’s final policy position. ✚
033
ER
enough loans TRAIL
0.18% / $900 pa
S
Intelligence Brokers play a critical role in the home loan market IN 2015 OUR REVIEW DETERMINED THERE WERE
520,000
$545 BILLION
LOANS WRIT TEN
54
I N O U T S TA N D I N G LOA N S
i t ’s b i g b u s i n e s s
.3%
$175 BILLION $173 BILLION
600k
I N N E W LOA N S O F N E W LOA N S
of home loans sold
500k
53% growth
400k
went through a broker
300k 200k
$2.4 BILLION
100k 2012
I N C O M M I S S I O N S PA I D BY L E N D E R S T O AG G R E GAT O R S
2013
2014
2015
N U M B E R O F LOA N S W R I T T E N
How do broker loans compare? W H E N TA K I N G O U T A L O A N , B R O K E R C U S T O M E R S
borrow more
have lower
have higher loan
property values
to valuation ratios
A F T E R TA K I N G O U T T H E L OA N , B R O K E R C U S T O M E R S. . .
pay down the loan slower
$451k
$699k
75%
W I T H B R O K E R VS $420K (LENDER)
W I T H B R O K E R VS $780K (LENDER)
W I T H B R O K E R VS 70% (LENDER)
spend more of their
take out more
get the same rate
wage on the mortgage
interest only loans
as direct consumers
%
$
% %
%
16
%
less additional payments made
F O R L O A N S TA K E N O U T I N
4.1x A N N UA L I N C O M E WITH BROKER VS 3.8X (LENDER)
at least
50%
MORE BROKERED FOR EACH LENDER REVIEWED
Equal GET THE SAME I N T E R E S T R AT E AS GOING DIRECT TO THE LENDER
2012 BROKER CUSTOMERS MADE $36,000 OF A D D I T I O N A L P AY M E N T S C O M PA R E D W I T H $ 4 3 , 0 0 0 BY THOSE WHO WENT DIRECT TO THE LENDER
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