TMM - The NZ Mortgage Mag Issue 5 2017 by TMM - The NZ Mortgage Mag

Issue

2017

RIDE OUT THE SLOWDOWN PLUS HIGHLIGHTS OF THE INAUGURAL Better Business Conference

2017 REGULATION GET READY FOR CHANGE

P2P LENDING

WHO ARE THE NEW KIDS ON THE BLOCK?

COVER REPLACEMENT DON'T SLIP UP

CONTENTS RIDE OUT THE SLOWDOWN

LEAD STORY A slower property market is expected to

mean tougher times for some mortgage advisers – but it’s not all doom and gloom. Susan Edmunds looks at what you can do to help your existing clients, add more strings to your bow and keep a healthy bottom line for your business.

UP FRONT ///

FEATURES ///

04 EDITORIAL

08 TMM BETTER BUSINESS CONFERENCE

Change... it’s the word of the moment. Indeed it’s a word all mortgage advisers need to lock in and think about.

People from across the industry gathered for the inaugural event

10 HOUSING COMMENTARY Post-election speculation about the outlook for the housing market is running high so is there anything dramatic looming on the horizon?

12 PROPERTY NEWS

Wellington City Council has been busy ushering some major changes to the city’s housing policy.

06 NEWS A significant player in the mortgage adviser market before the Global Financial Crisis is set to return to New Zealand.

14 REGULATION CHANGES

The latest on the huge job the code working group has ahead of it to write a guide for all advisers.

07 PEOPLE Find out who the new face is in the Mortgage Express team and two new additions to Nest Home Loans.

COLUMNS ///

30 YOUR GO-TO LENDERS

Non-bank lenders are becoming a more important option for mortgage advisers.

26 SALES AND MARKETING Paul Watkins explains why targeting and engaging with new clients doesn’t have to be as hands-on as you may think.

28 INSURANCE

Replacement cover can be a big part of an adviser's job, but you must avoid the pitfalls says Steve Wright.

32 LEGAL

Jonathan Flaws dissects consumer credit contracts.

EDITOR’S LETTER

What does the future hold? PUBLISHER: Philip Macalister GENERAL MANAGER EDITORIAL & OPERATIONS: Adrian Gallagher SENIOR WRITERS: Miriam Bell

hange... it’s the word of the moment. Indeed it’s a word all mortgage advisers need to lock in and think about. One of the biggest changes is with our government. It’s unclear what the odds on a Labour/NZ First/Greens government was, but if you could bet on it, and did, then the return would have been handsome. When you review the commentary around Labour’s win a key theme is that our new government is potentially quite radical. NZ First leader Winston Peters makes that clear when he says: “Far too many New Zealanders have come to view today's capitalism, not as their friend, but as their foe... And they are not all wrong." The new government has campaigned on changing how the Reserve Bank operates. What impact this will have on interest rates is unclear at this stage. But it is also determined to slash immigration numbers. Currently, they been running at more than 70,000 annually (the equivalent to a new Rotorua each year). There is a clear link between immigration and house prices, so you can expect prices to cool and clearly sales volumes will fall, too.

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But change goes beyond the political. This was a clear theme from many of the speakers at TMM’s first-ever conference held in Auckland last month. BNZ chief economist Tony Alexander’s key point was the economic tide was changing and CoreLogic head of research Nick Goodall showed how the housing market was changing. Of course the other area of change is regulation. Delegates were given a good outline of what is happening in this area and the things they need to think about to start preparing for change. Amongst all this change is that TMM will continue to deliver information to help you understand the changes ahead.

Philip Macalister Publisher

CONTRIBUTORS: Susan Edmunds Paul Watkins Steve Wright Jonathan Flaws 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

TMMONLINE.NZ

The latest news from TMMOnline.nz KICKBACKS TO AGENTS SHOULDN'T HAPPEN, BUT DO

elationships between mortgage advisers and real estate agents are being questioned by Consumer NZ, which is concerned about financial kickbacks. The consumer lobby group has released a report on advisers and it suggests some agents are referring clients to advisers who they routinely work with for their own financial gain. It also notes the growing trend for adviser groups to be aligned with real estate agencies – as Harcourts is with Mortgage Express and Ray Whites is with Loan Market – means the ties between them are growing closer.

AUSTRALIAN NONBANK LENDER SET TO RETURN TO NZ

luestone Mortgages, which was a significant player in the mortgage adviser market before the Global

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Financial Crisis has confirmed it is returning to the market. "We think there is a good opportunity set around," Bluestone chief operating officer, Asia Pacific, Peter Wood says. He was non-committal about when the company would return to market saying there were "still some things to piece together." "All things being equal we will certainly be in the market."

ASB KEEPS OWNERSHIP OF SOVEREIGN HOME LOANS

lthough Commonwealth Bank has sold Sovereign to AIA, the insurer’s $7 billion home loan book isn’t part of the deal. An AIA spokesman confirmed the company wasn’t buying the home loan book: “Sovereign’s home loan book is not part of the acquisition deal.” ASB said that: “Sovereign Home Loans, which has been part of ASB for a number of years and is not a direct party to the transaction.” “The intention is for Sovereign Home Loans

to continue its close relationship with Sovereign up to, and following the sale.”

LOOKING AHEAD WITH NEW GOVERNMENT

ew Zealand’s new Labour-NZ First coalition government, supported by the Green Party, means changes are looming that advisers need to be aware of. Commentators believe there will be major changes in a number of housing market related areas. These include house building which will see greater government involvement through the Kiwibuild programme; foreign investment which is likely to include a ban on buying existing dwellings; immigration which is set to be reduced and become more targeted; and monetary policy. Westpac chief economist Dominick Stephens said the new government is likely to be more interventionist in the economy, tougher on foreign investment, and more liberal on social spending than the last government. ✚ To keep up with the latest industry news, views and opinions, visit TMMOnline.nz

PEOPLE

PEOPLE ON THE MOVE Got a new appointment you would like to tell advisers about? Email details and a pic to editor@tmmonline.nz

First Mortgage Trust welcomes new BDM

Mike Tunai has been appointed to the BDM role with First Mortgage Trust. This follows an 18-year career with ANZ where he was a high performer across various roles. In the last seven years, he was the BDM for ANZ's Mortgage Adviser Distribution and made a significant contribution to the growth of the unit. First Mortgage Trust said Tunai’s lending knowledge and relationship skills will put him in good stead in his new role.

John Key

Former PM to chair ANZ

ANZ has announced John Judge will be retiring from its board of directors in January 2018 and former prime minister Sir John Key will become its new chair. ANZ Group Chair David Gonski said “Sir John Key’s strong international career in banking and his understanding of and contacts across the Asia-Pacific – where many Australian and New Zealand companies are increasingly trading will add great value to the governance of ANZ.”

NZHL boosts Hamilton team NZHL has appointed Sonia Coupe as chief information officer and Carolyn Jermone as head of legal and compliance, based in its Hamilton head office. Coupe joins NZHL with extensive international experience in IT implementations, operation management and business strategy. Her experiences include handling global operations of leading MNCs accounts such as Vodafone and Deutsche Telekom, as well as managing top-tier corporate clientele including AXA, Walmart, CocaCola, O2, Orange, Nike, British Airways, the European Parliament and various ministries and government bodies on behalf of Cisco. Coupe has also held the position of VP of client acquisition for a multinational coaching franchise and has successfully ran her own start-up business. Jermone comes with many years of

Marion Sweeney experience working with the likes of AIG (NZ), UBS Wealth Management and ANZ Financial Planning (Australia) where she helped them meet the demands of the changing financial adviser regulations in Australia. The NZHL franchise network continues to grow as well with Marion Sweeney establishing the Newmarket franchise. Sweeney has been with NZHL for more than two years and comes from a career in law and mediation and at this stage of her life she is attracted to the one on one relationship she will have with her clients and to be able to work with them to put them in a better place.

Nest Home Loans appoints two new advisers

Nest Home Loans has appointed Sean Zeier and Graham Bond as mortgage advisers. Zeier started at Nest in June having previously worked at ANZ, Kiwibank and more recently as a lender and 2IC at the Coop Bank in Hamilton. Bond started with the firm in May 2017 having previously worked for the police service. He is interested in non-bank lending and helping people who have been declined elsewhere.

New adviser for Mortgage Express

Sarah Kim has been recruited to the Auckland adviser team at Mortgage Express. Kim has a background in both banking and real estate with seven years’ experience as a retail banker at ASB, and three years’ experience in a marketing and sales role for Harcourts’ group. Kim will be based in West Auckland and the North Shore. ✚

Sarah Kim 07

CONFERENCE

Better Business Conference 2017

People from across the country attended TMM's first mortgage adviser conference at the Novotel hotel in Auckland last month. The one-day event was filled with sessions from industry experts and provided the perfect setting for networking among attendees.

It was a full house at the innaugral Better Business Conference

Jeff Royle (iLender) and Point Home Loans' Janet Harris

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Avanti's Julia Winterbottom and Steven Massey

Mike Allen (NZFSG), Bruce Patten (Loan Market) and Gavin Lendich (Mortgage Patterns)

Michelle Harrison and RESIMAC'S Tracey Warner

Bruce Smith (First Mortgage Trust), Geoff Allen (DBR), and Nigel Staples (Cressida)

Vicki Lenihan and Sasha Grujic from Masters Home Loans

Leigh Atuich-Hodgett and Sarah Johnston from Mortgage Express

Peter Feau and Tenzin Choedon from Mortgage Supply Company

MBIE's Sharon Corbett, TMM publisher Philip Macalister and Derek Grantham from the FMA

Better Business Conference

Joyce He (Joyce He Mortgages) and Brian Greer from Loan Market

2017

HOUSING COMMENTARY By Miriam Bell

Market stability imminent

Post-election speculation about the outlook for the housing market is running high but, according to the experts, it is unlikely there is anything dramatic looming on the horizon, finds Miriam Bell.

nticipation of the traditional spring lift in the housing market has been building for some time. But that lift hasn’t eventuated. Rather this month’s data suggests that heat continues to lift from regional markets following the slowdown in the main centres. Speaking at TMM’s recent Better Business conference, CoreLogic’s head of research Nick Goodall confirmed this trend. He says the Reserve Bank’s third round of LVR’s have led to a big drop off in buyers who need mortgages. This, combined with a significant decline in sales volumes overall, this has led to a cooling of property values around the country.

COOLING VALUES

This has been most noticeable in Auckland although value growth is inconsistent across the region, according to Goodall. While there has been a big drop in value growth in parts of South Auckland and the North Shore, the central parts of the city continue to see some growth. “But Auckland is its own market and the rest of the country is quite different, so it is necessary to look at them differently,” he says. “There was a slight drop in value growth in Hamilton and Tauranga, but now they have started to pick up a bit again. Wellington and Dunedin initially resisted the slowdown, but have now started to flatten. Christchurch is

INCONSISTENT ACROSS THE CITY Central City faring better than the rest of the city. Data from Corelogic.

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different again. Its value growth was out of cycle due to the earthquakes and the rebuild, but now it is dropping off.” Additionally, in those areas where demand is improving there is a lack of inventory. Goodall says that in such areas, which include Wellington and Dunedin, there is not much choice in stock so buyers have to compete and that means price growth is likely to come back in those areas.

NO SPRING RISE

Across the board, September’s data provides further evidence of this. There has been no Spring lift, and sales volumes continue to fall, as do listings.

According to Realestate.co.nz, new listings, total stock and demand were down across the country. Year-on-year, new listings nationwide were down by 11.8% to 9,283 in September and just four regions saw an increase in new listings. The website’s data also shows that demand for property in the former hot spots of Auckland, Waikato, Wellington and Bay of Plenty has plummeted. Those four regions now sit at the bottom of the demand table, with the Auckland region taking the bottom spot. New listings in those regions were also down year-on-year. The Bay of Plenty showed a 21.7% drop in new listings, followed by Auckland (down 17.1%), Wellington (down 13.7%) and the Waikato (down 12.4%). When it comes to sales, this month’s data from REINZ, Barfoot & Thompson and QV all tells a sorry tale. Once seasonally adjusted, the REINZ data shows that sales volumes nationwide fell by 24.1% year-on-year (from 7,352 to 5,428) in September. Further, all 16 regions in the country experienced a decrease in the number of properties sold on a year-on-year basis. In Auckland sales were down by -29.5% year-onyear in September, once seasonally adjusted. REINZ CEO Bindi Norwell says this was the lowest number of sales in eight months and the lowest number of sales in the month of September for six years. Barfoot & Thompson’s data provides a near identical result for the Auckland market. It reveals SuperCity sales numbers fell to the lowest level for a September in seven years. There were 658 sales in Auckland in September, as compared to 777 sales in August and 1051 sales in September 2016. Those sales numbers mean that sales were down by 15.3% on August and by 37.4% on the same time last year. Meanwhile, QV’s latest data shows that the heat is lifting from markets around the country - not just Auckland which has seen a decline in its average value of late (to $1,039,066 in September). The average national value was by 4.3% yearon-year, which left the average national value at $646,378 in September. But, over the past three months, the national value rose by just 1.1%. QV national spokesperson David Nagel says reductions in quarterly value growth have extended from just the main centres last month to almost all the 15 major urban areas.

GLIMMER OF LIGHT

Despite the bleak picture of the market evident in most of this month’s sales data, there were glimmers of better news on the price front. In the REINZ data, once seasonally adjusted, New Zealand’s median price was up by 0.6% year-on-year and by 0.9% on the previous month to $525,000 in September. This was, in part, because six regions saw double-digit median price growth year-on-year. They were Tasman (up 19.3% to $572,500), Hawke’s Bay (up 18.3% to $392,000), and Gisborne (up 14.9% to $270,000, Northland (up 14.4% to $446,000), Wellington (up 10.6% to

$531,000) and Southland (up 10% to $220,000). Norwell says the price growth is evidence that the market continues to grow despite some challenging conditions like the LVRs and the banks tightening up on lending. “Much of the increase has been driven by the buoyancy in the regions.” While the data from both Realestate.co.nz and Trade Me Property shows a flat-lining of the national average asking price, Trade Me Property’s also suggests that the much cooler Auckland market is driving this. Head of Trade Me Property Nigel Jeffries says the average asking price outside Auckland is up by a healthy 6.8% year-on-year. “But the Super City’s slow market is dragging the national average asking price down, given it makes up 35% of the country’s listings for sale.” Auckland aside, markets around the country were performing strongly. Jeffries says every region saw average asking prices increase and six regions recorded double-digit year-onyear growth. Hawke’s Bay was the leader of the growth pack, with a 20.4% jump to a record average asking price of $479,650. The other regions to see double-digit price growth were Manawatu (up 16.6%), Waikato (up 13.1%), Northland (up 12.4%), Wellington (up 10.1%) and Marlborough (up 10%). The news on the price front was not all bad for Auckland. Both the REINZ and Trade Me Property data indicate Super City prices largely remained flat in September, but Barfoot & Thompson’s price data was a bit rosier. It shows that Auckland’s average sales price increased by 1% from August to reach $928,213, while the median price increased by 4.9% from August to hit $860,000. This left September’s average and median prices marginally higher (1% and 1.2% respectively) than they were in September 2016.

MARKET REBALANCING

Many commentators suggest the data shows the market is rebalancing but that underlying supply and demand fundamentals mean prices are likely to remain solid. Barfoot & Thompson managing director Peter Thompson says factors such as high population growth, stable mortgage interest rates and a shortage of supply remain. “The overriding sentiment of sellers is that the fundamentals that have driven the market for the past two years have not changed and that prices are not likely to fall significantly.” For Goodall, the key to what happens next in the property market is what happens with supply and, while there are strong political aspirations to increase supply, building industry constraints mean it may not be possible. “If supply is not going to be able to catch up with demand those price pressures are still likely to be tight and prices should lift again, albeit more modestly and inconsistently across the country,” he says. “It is getting close to Christmas/New Year though, so listings may not pick up until next year.” ✚

REINZ SALES: DOWN

Once seasonally adjusted, sales volumes year-on-year fell once again around the country, and particularly in Auckland, in September.

INTEREST RATES: NEUTRAL

Interest rates remain low, but banks are announcing both small rises and falls in various rates periodically.

OCR: DOWN

The Reserve Bank left the OCR on hold at the record low of 1.75% in September.

IMMIGRATION: DOWN

Annual net migration dropped in August, as compared to July. Meanwhile, monthly net migration continued to ease.

BUILDING CONSENTS: DOWN

Once seasonally adjusted, building consents rose, both nationally and in Auckland, in August. But commentators say further increases are needed.

MORTGAGE APPROVALS: DOWN

Reserve Bank data shows that mortgage lending overall edged up slightly in August. But the share of lending going to investors has dropped significantly.

RENTS: NEUTRAL

The average national rent remained unchanged in September as did the average rent in Wellington. Average rents dropped in Auckland, but they were up in the Bay of Plenty and Northland.

PROPERTY NEWS By Miriam Bell

Capital reforms to tackle housing issues

Wellington City Council has been busy ushering some major changes to the city’s housing policy.

ellington City Council voted to adopt the recommendations of the Mayor’s Taskforce on Housing in late September. The recommendations include incentivising

affordable housing developments, increasing building height limits, simplifying consents, working with developers to convert innercity buildings into apartments and raising rental standards. Wellington mayor Justin Lester says that Wellington is growing strongly and the council needs to make sure they are providing opportunities for new homes to match that growth. “While it won’t be easy we want to see every Wellingtonian well housed and the plan leaves no stone unturned… There will be greater leadership from the Council. We’re not going to sit on the sidelines and leave it to the market.” A month earlier, the Council announced it will be introducing a voluntary Warrant of Fitness (WoF) scheme for rental properties. Lester says it is the first such scheme in the country and aims to make better

accommodation available for people. “This will give landlords the chance to promote their house as being warm and dry, and give prospective renters an assurance the home they are looking to live in meets the standard.” The scheme involves an app that allows tenants and landlords to check their house against minimum health standards designed by experts. It also allows landlords to request a full inspection by a professional to be certified as meeting the standard. The assessment covers insulation, heating, ventilation, structural stability, sanitation, and hazard identification and, if issued, the WoF will be valid for three years. The Council aims to make the scheme compulsory as part of a broader Wellington Housing Quality Standard, which will also incorporate earthquake resilience, in the years to come.

Improving processes a boost for investors

ecent property headlines may have been dominated by the claims and promises of politicians, but, behind the scenes, there have been suggested process changes which could bode well for investors. First off the rank was a new NZPIF plan to make the meth testing process faster and easier for landlords. NZPIF executive officer Andrew King says landlords should be able to conduct their own initial meth tests on a rental property using lower-cost DIY testing kits but in the presence of a witness. This would allow them to determine whether meth was present in the property or not and, if it was, at that point a professional testing company could be called in to do full testing. King says the new standard allows for landlords to do their own testing. But to do so the landlord would have to be trained to do it properly to NZQA standards and they would need to use an approved test kit to do the testing.

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Andrew King The Insurance Council has indicated it would support this approach and the size of the NZPIF’s membership base means they can do deals with providers to offer lower cost training and testing kit options to members, King adds. Further good news on the process front came with announcements indicating the drive to tackle the country’s notoriously

cumbersome consents processes has been picking up speed. October saw the launch of GoShift, an aligned, online consents building process which 20 councils from Western Bay of Plenty to Nelson have signed up to. Supported by MBIE, GoShift aims to improve performance, consistency and service delivery across the building consent system nationwide. Property Council CEO Connal Townsend says GoShift not only provides a simple, streamlined process for builders and developers, but the standardised processes and systems will make participating cities more attractive to investors. “It will give developers and investors assurance that they are engaging with bestpractice processes and standards whether they’re building in the Bay of Plenty, Nelson or in between. This will make investing in new regional areas more palatable and less risky and will benefit smaller regional cities and towns.” In Wellington, building consents can now be handled through a streamlined online application portal and service. In Auckland, which is not part of GoShift to date, it is also now possible for people to lodge a consent application and go through the consent process online.

Optimistic outlook

eanwhile, despite the cooler market and perceptions of an antiinvestor climate, it seems that many investors remain confident in the future of the property sector. In the recently-released 2017 ANZ Property Investment Survey, 74% of respondents are expecting positive changes in property values over the next five years. Further, 50% of investors expect positive property value changes of 2.5% to 10% in the short term. However, this is down from 62% in 2016 and reflects a majority view that there is going to be slower growth in both property prices and rental incomes in the near future. The survey found that only 3% of investors expect property prices to increase in the 11% to 20% range, compared to 19% in 2016. Those who expect zero growth over the next year has risen from 3% in 2016 to 13%. Likewise, 19% of investors are expecting zero growth in rental income in the short term, which is up from 19% in 2016. But 92% of

investors still expect rental income to increase or hold steady over the next year. ANZ head of mortgages Glenn Stevenson says the survey results suggest that an inflection point has been reached in the market. “While most investors continue to expect positive changes in property values over the short and medium term, and in rental income, expectations of growth have moderated considerably since last year’s survey.” Yet the survey also reveals that investors remain strongly committed to the sector, with almost 70% of respondents indicating they would buy again. Auckland investors emerged as the most likely to buy again, with 61% saying they planned to buy again in the next two years. “Off the back of a strong housing market, many of these investors have been delivered a free kick in terms of improved LVR positions from asset price increases,” Stevenson says. “This will have created potential room for them to consider buying further property in the future.”

Investors key to solving crisis

n another positive note, with the release of the Auckland Housing Summit’s report came acknowledgement that investors have a critical role to play in resolving the city’s housing problems. Released in September, the report’s key message is that collaborative action, a “central vision” and engagement of Aucklanders across all sectors is needed to fix the city’s housing crisis. Auckland Housing Summit organising committee chairwoman Leonie Freeman says sensationalist coverage of issues like rental property and tenants’ rights doesn’t help. “People tend to portray developers and investors as greedy and self-interested but resolving the crisis is not as simple as getting rid of investors.” We need developers and investors to build and provide desperately needed housing, she says. “Every one of the relevant sector groups has a role to play. And that means investors need to be a key part of the solution to the housing crisis, especially when it comes to

rental accommodation.” The Summit’s key recommendation was that a new, independent, not-for-profit housing organisation should be established and that the aim should be to build 14,000 new houses each year. Some of its other recommendations were banning foreign buyers from buying existing dwellings; replicating good design on a larger scale; addressing the costs of construction; speeding up the consent process; and provision of assisted financing options. Freeman says that post-Summit it is now about improving the messages that are put out there and better educating the public about how things work and what people can do. One example of this need can be seen in the polarising dialogue over increasing security of tenure in rental properties. “The popular perception is that landlords are opposed to this. In reality, many landlords would like to have greater security of tenure too. But tenants need to understand that security of tenure goes both ways and has implications for them as well as landlords.”

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REGULATION LEGAL By Susan Edmunds / Miriam Bell

Get ready for new rules now

Change is coming for the financial advice industry and mortgage advisers should ensure they not only prepare for new rules, but get involved with their development.

GENERAL PRINCIPLES THAT UNDERPIN THE CODE DEVELOPMENT The working group says it’s working with four basic principles:

RETAIL CLIENT UNDERSTANDING While there will be retail clients who have a high degree of competence and knowledge about financial matters and products, the group considers it appropriate that all retail clients should be assumed to understand significantly less about those matters than any person giving financial advice.

RECOGNISABLE MINIMUM STANDARDS The broad application of the code will influence its approach to both consultation and design. It is important that every person that gives financial advice, and every retail client, can easily identify and understand exactly what minimum standards apply to them and the advice they are giving/receiving, it says.

DELINEATION BETWEEN STANDARDS The working group wants to minimise the number of different minimum standards and to clearly define and delineate when a different standard applies.

DELIVERY AGNOSTIC The working group wants the code’s minimum standards, as far as possible, to be the same irrespective of the method of delivery of the financial advice. The code must work across the entire advice ecosystem (advisers, systems and processes) – allowing for different ways in which competence, knowledge and skill may be demonstrated – so that minimum standards apply consistently to the same type of financial advice however delivered and irrespective of whether that type of advice is provided by a one-person business or a vertically-integrated company.

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he chair of the Financial Advice Code Working Group is urging mortgage advisers to start thinking about what the new financial advice regime, and the code of conduct that goes with it, means they will have to do. Currently, only authorised financial advisers are covered by a code of professional conduct. But that is set to change with the Financial Services Legislation Amendment Bill which will make all financial advisers subject to such a code. The new code will set minimum standards of general competence, knowledge and skills which will apply across the sector; minimum particular standards that will apply to different types of financial advice; and minimum standards of ethical behaviour. Speaking at TMM’s recent Better Business Conference, the working group’s chair, Angus Dale-Jones, acknowledged the high personal impact of the impending changes for people in the financial advice industry. For many mortgage advisers, that includes concern about what the Code will require in the professional competency and qualifications space.

Dale-Jones says the new code is at least a year away and the working group has not yet made any decisions when it comes to competencies. But it would pay for mortgage advisers to get proactive on the professional development front. “While many mortgage advisers will have some existing qualifications, if you haven’t, then now is the time to start doing something about it. More generally, it would be timely to start thinking about whether there is some educational stuff out there that could be helpful to you.” They are not trying to intimidate people by saying ‘that the world is going to change and you won’t be able to continue’, he says. “We are trying to give everyone an opportunity to go through a journey which is going to be beneficial to the whole industry and to clients of the industry.” To that end, the working group is encouraging mortgage advisers to actively engage with the consultative process as the insights and experience they provide will be critical to the development of the code. Dale-Jones says a key question to ponder was how the code could be applied to all advice strands, no matter who was giving the advice, or how. It would have to apply in situations where standardised advice was given in a brochure, when a client wanted advice on a range of similar products or needed a bespoke investment plan. It would also have to cover both straightforward and complex products and work for sole-trader advisers and vertically integrated product providers. “We want the code to focus on retail clients,” he says. “It will be a service code, not an occupational code and it will apply to those giving financial advice in all sorts of ways.” He says the code working group could end up specifying different standards or requirements in respect of different types of financial advice, financial advice products, or other circumstances. “We are able to limit or modify standards or provide for separate standards for periods of transition.” Dale-Jones says the working group was trying to keep retail clients at the forefront of all consideration as the code progressed.

Flexibility would be key, to ensure the document did not become too unwieldly and difficult to understand. Its goal was to minimise the number of different minimum standards that were involved and to clearly define them when they applied. The working group is meeting with a number of focus groups, including banks, financial adviser associations and insurers, and will be asking them how they felt the code should differentiate between advice products. Dale-Jones says, as work progressed, it became obvious how large the scope of the code would have to be. “The only thing that has become more and more apparent is just how broad a spectrum of advice the code covers. The more I think about it the more I realise it is colossal, all the different advice situations.” But he says, while it was complex, there would be benefits to getting it right. "If people are able to use the financial sector in a more trusting way than currently, everyone benefits." There would be benefits for advisers, he says, if the new code was able to improve consumers’ experience of using financial advice. Advisers would no longer be tarred with the reputation of parts of the sector that were underperforming and under-regulated. There was no country that had reached the perfect solution, Dale-Jones says. But he says there were many ways to approach the process of how to create a “step up” for financial advice in New Zealand. “Not necessarily in terms of work for advisers but think what quality looks like across all advice.” Work with focus groups is next and then the working group will embark on wider consultation across the sector in coming months. It will also liaise with the current code committee, the Financial Advisers Disciplinary Committee, the Skills Organisation and relevant overseas bodies. Roadshow presentations will be held around the country. Dale-Jones says they aim to have the preliminary draft code ready by early May next year and they will go public with the draft Code provisions about a month before that. The goal is to have a final draft Code ready by the end of August next year. . ✚

QUESTIONS FOR CODE WORKING GROUP FOCUS GROUPS ➤ Do you agree with the general principles above? If not, why not (and what is the suggested alternative principle)? ➤ How should the working group identify different types of advice? ➤ How should it differentiate between different financial advice products? ➤ Are there any other circumstances that it should identify for the purpose of setting different minimum standards of specific competence, knowledge and skills? For example, between different delivery mechanisms, highly judgmental v highly systematised advice processes, or the nature of the relationship between the financial advice provider and the issuer of any financial advice products that are the subject of the financial advice. ➤ If the group was to have a minimum standard for financial advice that includes designing an investment plan, is the current Code of Professional Conduct for Authorised Financial Advisers a useful benchmark? ➤ Should there be different standards of ethical behaviour in respect of different types of financial advice, financial advice products, or other circumstances? Why? Are there other codes of ethics that contain provisions that would be useful inclusions in this code? ➤ What situations, if any, warrant different standards of ethical behaviour? ➤ Should there be different standards of conduct and client care in respect of different types of financial advice, financial advice products, or other circumstances? Why?circumstances? Why?

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REGULATION LEGAL By Miriam Bell

CONSUMERS FOCUS OF NEW REGIME

Better availabitity and quality of advice for consumers is the goal of the new legisative regime so mortgage advisers should get on board with the change process.

nsuring consumers have access to excellent financial advice in all areas is the objective of the regime change coming in the shape of the Financial Services Legislation Amendment Bill. In a regulation update at TMM’s Better Business conference, MBIE’s Sharon Corbett told the audience the new regime removes confusing distinctions in advice to better help consumers. All advisers will now be able to give their clients suitable advice rather than worrying about arbitrary regulatory boundaries, she said. “It moves away from a system that set to

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professionalise just AFAs to one that plans to standardise the level of financial advice. So everyone who provides financial advice, including mortgage advisers, will have to adhere to a certain standard and competency. “The same standards will apply where advice is provided by a person, roboadviser or a hybrid of the two. But everyone providing financial advice will have to operate under a license provided by the FMA. That license can be provided at a firm level or solo advisers can get a license for themselves.” But, for MBIE, the ultimate goal of the new legislation is to provide consumers with better availability and quality of advice.

Corbett added they are not planning to ban commissions under the new legislation. “That is because commissions themselves are not harmful and banning them could lead to difficulties in accessing advice. Rather the government is focused on the conduct of people giving advice, which does include potential conflicts of interest.” While the MBIE is writing the new regime’s rules, it is the FMA who will be enforcing them. And, in their view, the focus of the new advisory world is on advisers and their relationship with their customers. Speaking in the regulation update, the FMA’s John Botica said they are looking at what

the right sort of competencies are to make advisers as efficient as possible in helping their customers. “The regulatory framework will focus on clients’ needs, so you should think about building their business around your clients’ needs and how the regulatory environment can help you achieve that.” Advisers would be sensible to think about the new regime in a positive way, he said. “You should consider what you do, how that works in the new competency based environment, the level of service you provide, and your relationship with customers. Also, what can help you – for example, technology that can drive efficiencies in your business?” Botica said that another important point for advisers to think about is whether to apply for a license on their own or to join a licensed firm. However, if an adviser decides to join a firm comprehensive due diligence is necessary. “You need to think about if the model the firm operates under works for you and your way of advising. Look at the support services they provide. It is also critical that you align yourself to a firm which shares the same set of values that you have.” In order to ensure they are on the right track, the FMA will be talking to advisers a lot to make sure that what they are planning makes sense. Botica said that, when building the regulatory environment, they need to have

an understanding of advisers’ points of view and experience. That includes trying to learn about mortgage advisers’ business. “We need to look at and consider the models that we build for competencies. We need to increase our knowledge around the way the mortgage business operates so the more time we can spend learning from you the better.” One thing they are sure of is that disclosure and transparency are necessary, he added. “But are there any other influences coming through? All these things need to be made clear. Likewise any limitations we might be making. It is critical for us to get as much adviser engagement as possible.” The Bill is currently in Parliament, waiting for the Select Committee process to get underway. But MBIE’s aim is to have the Bill and the accompanying code of conduct finalised by the end of next year. After the new regime takes effect around May 2019, there will be a transition period and advisers will need a transition license. Corbett says it may take some time for some advisers to meet the competency standards in the new regime and the transition license will allow them to get up to standard. By 2021 all individual advisers will need to be operating under a full license and will have to meet competency standards. ✚

PREPARING FOR THE NEW REGIME At the TMM Better Business conference, FMA principal consultant Derek Grantham had the following five suggestions for what advisers need to do to get ready for the new competency based world:

➤ Find out more about the key elements of the new regime.

➤ Think about the changes, what they mean for their business and their clients, as well as the opportunities and challenges.

➤ Consider what their long term business plan and strategy is.

➤ Utilise the best resources and get help from professional associations to aid their decision making.

➤ Stay tuned into what is happening and what the developments are.

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LEAD STORY

RIDE OUT THE SLOWDOWN A drop in property sales makes life tougher for mortgage advisers but itâ&#x20AC;&#x2122;s not all doom and gloom.

t’s been a heady few years for the mortgage broking industry. The booming housing market meant most brokers were seeing good business. But, over the last year, the market has tapered off and times have got more challenging for brokers. A slower property market is expected to mean tough times for some mortgage advisers – but there are ways to get through. The latest Real Estate Institute statistics show the number of properties sold in September was down 26.2% year-on-year, the lowest number of properties sold in any month of September in six years. Regions with the biggest reduction in volumes were Tasman (down 37%), Southland (down 34%) and Auckland (down 31.5%). Marlborough experienced the lowest number of sales since January 2012 (down 27.4%). Banks said the application volume through the mortgage adviser channel had dropped in line with the downturn in housing market activity, although it is understood that some advisers are concerned at the banks prioritising loans received from their own employees over third-party channels. Director of The Home Loan Group and former chairman of the NZMBA, Darren Pratley said there were two factors potentially affecting mortgage advisers’ business: The number of housing sales dropping “considerably” and the new lending rules that made it harder for investors in particular to get loans. Since last year, investors have needed 40% equity to take out new lending on investment properties. Investors’ share of the market has dropped since 2014 – they are now about 39% of sales. First-home buyers dropped away significantly but have started to return in greater numbers and are now 21%. Pratley said the combination of the two factors made the downturn more difficult for advisers than it otherwise would be. “The good [advisers] are having to work a lot harder in terms of getting their volume,” he said, “But the good ones will be fine. The ones that haven’t built up their referral networks or developed good relationships will struggle. Especially if their client base hasn’t been looked after.” Those who had operated a transactional model and just focused on getting deals written and out the door would have the most difficulty, he said. There would be an increasing need to show clients the value of good advice. Mortgage Lab adviser Rupert Gough agreed. “Finance is harder to get, no doubt about it,” he said. “Although in the last two weeks we have seen some rationality coming back to the banks, they’re making more rational decisions. But the market it quieter, dealing with new buyers would be harder.” How advisers fared would depend on where they got the bulk of their business,

❝ It’s a little bit

painful – the volumes drop but the salaries don’t. You just have to tighten up a bit.❞ -John Bolton he said. Those who received a lot of wordof-mouth referrals from clients or who had good networks with insurance brokers would do better than those relying on new buyers entering the market. He said advisers could get through the downturn by checking with their existing clients that their mortgages were structured correctly. “Talking to accountants, making sure people aren’t paying down their investment mortgages first. Added value to existing clients [is an important area], I would have thought. Look after your existing clients because clients will still have friends who are buying.” Gough said advisers could also work on developing good contacts with real estate agents. “There are still houses selling, just fewer.”

Deputy chairman of adviser group NZFSG, Bruce Patten said about a third of all mortgage advisers dropped out during the last market slowdown, which happened with the global financial crisis. In 2009, the NZMBA reported that its industry had dropped by 10% and new mortgage broking business was down as much as 40%. Patten said he expected to see a reduction in adviser numbers this time, too. “It will have an impact. It’s too early to tell how big.” But he said there would still be business to be done, even with fewer house sales. “There’s two parts to the industry – new purchasers and the refinance market. People have fixed rates coming off.” Patten said there had not been a significant effect on the industry yet but that was likely to come. “It will definitely affect the industry from a turnover perspective.” It could be easier to ride out than previous downturns because there had been a drop in sales but house prices had plateaued rather than falling in a sustained way. “Our actual numbers are holding up at this stage.” He said, when it was tougher to get finance, advisers could play an even more vital role. “We tend to get more referrals from the real estate side because they’re making sure that the client has the best opportunity to get the finance, they don’t want to see an opportunity fall over.” Many advisers had already diversified into insurance or asset finance, he said, which would help them. “They have a number of other avenues of revenue. It’s not all mortgage finance so that should be a cushion for them. Anyone who has only come in recently will find it harder but with well-established businesses I don’t expect them to have issues. We haven’t seen a significant drop in the number in the industry yet within our group and that’s a fairly significant number [of advisers].”

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LEAD STORY

Director of the Mortgage Supply Co and recent Mortgage Adviser of the Year, David Windler said his firm was still busy. Because it was harder to get loans approved from the banks, borrowers were more likely to seek help, he said. “We’ve got a good client base, a loyal client base. They’re potentially talking to more people about using our services because they recognise that it’s not easy and people need some help. Our volumes have come off the peak but they’re still really solid and good. The biggest issue is it’s tough to get things done. It’s taking longer and a bit more frustrating.” The Mortgage Supply Co advisers had put more emphasis on perfecting the application process over the past couple of months, he said. “We’re prepping client sup for what they’re about to go through a lot more carefully and – putting together the diary note and supporting information, making sure that is’ really thorough, making sure we’re not sending anything that’s not complete. We’re giving ourselves the best chance of approval because that’s something that’s within our control.” In some cases, clients were being offered different solutions to what might have been proposed a year ago, he said. “That’s okay, at least we are going back to clients with options to consider. We’re dipping into the non-bank market a bit more. It’s better than saying no. It gives clients a choice, whether they take a slightly different option to what they expected but at least were going back and informing them and they can make a better decision as to what they do.” Founder of Squirrel, John Bolton said his business’ volumes were down about 20% or 30%. That was challenging for a business that paid salaries. “It’s a little bit painful – the volumes drop but the salaries don’t. You just have to tighten up a bit.” He was not expecting a turnaround any time in the immediate future. “Sales volumes dropped in about October last year and the election was deadline quiet. We’ve already adjusted to that. I don’t think it’s going to drop any further, it’s already low. What we’ve experienced over the past six months is probably the new normal. The crazy thing is we’ve had a whole lot of people come into the industry, they’d be struggling, or sitting around refinancing people, which is not good business.” He said he would expect some of those new advisers to drop out. “The only thing that will be saving them is their ability to refinance their mates but that only lasts so long.” The slower market combined with new regulatory requirements looming would reduce adviser numbers more heavily than might otherwise be the case, Bolton said. “Especially as we’ve got full employment. Our market is reasonably tough but there are reasonable job opportunities out there.” He said the current barrier to entry as a mortgage broker was low, so people tended to flow in and out of the industry with the movements of the market. “It’s a shame because it’s part of what ruins our reputation.” Founder of Kris Pedersen Mortgages, Kris Pedersen said he had heard anecdotally that people were still “pouring in” to the industry

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this year, particularly from the banks. “What I have heard lately is that is starting to flip and we have had people going.” He expected to see acquisition opportunities for established businesses to pick up the books of smaller players who decided to get out of the industry. “There’s still business out there. The issue is stock. There’s low stock and obviously banks are being a bit tight which makes it more difficult.” Pedersen said it might be March or April before there was a clear picture of the outlook for the next couple of years. Bolton said brokers needed to realise the housing market was cyclical and volumes would eventually return. “It always has its ups and downs and volumes can move dramatically, you’ve got to plan for that. As mortgage advisers we’ve got to be careful not to over-extend. What catches advisers out if they have a good patch and get carried away, lots end up going into property... This is not dissimilar to 2009 and 2010 when we had a sudden slowdown in the market and everyone got caught out by it. The reality is most advisers have been here before in a slow market. You know it’s a slow market and you adjust to it.” It would not be long before things picked up again, Bolton said. “People have been sitting on the fence now for a good six months, that pent-up demand ultimately has to go somewhere. People don’t sit on the sidelines for every. At some point they will come back into the housing market. It could be a slow patch for a couple of years but it will always come back. You’ll always have population growth, people move to Auckland, people getting divorced, buying and selling – life goes on.” Bolton said mortgage advisers were in a unique position. “What other industry deals with 30% swings in volume within six months? It’s pretty full on.” ✚

WHAT TO DO 1

Contact existing clients and check their loans are structured properly.

Keep on top of when clients’ loans are due to refix and re-engage, don’t leave it for the bank to pick up.

Ask their plans for the future and remind them how you can help.

Develop a good network of referrals, including real estate agents, insurance advisers and existing clients. Incentivise those who send you new business.

Show how you can help people navigate a tougher lending environment. Promote some of the non-bank options you have access to, as a way for people to get deals done. Work on developing your business networks to increase your referral rate. Incentivise those who can send business your way.

Consider diversification to offset future downturns.

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PEER TO PEER LENDERS

New kids on the block

Itâ&#x20AC;&#x2122;s been all quiet on the peer-to-peer (P2P) lending sector front of late so Miriam Bell talked to the major players to find out what they are up to these days.

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t’s just a few years since peer to peer (P2P) lenders burst on to the New Zealand money market scene. Harmoney was first off the blocks, back in 2014, and much talk about the disruptive potential of P2P lending followed. Since then, Harmoney has been joined by Zagga (formerly LendMe), Lending Crowd, Squirrel Money and Southern Cross Financial. These lenders are still the new kids on the block and yet these days there’s not much noise on the P2P front. It may be due to the fact that the wider public simply does not know much about them. But iLender’s Jeff Royle, who specialises in non-bank lending, says P2P lenders are another funding option for advisers to suggest to their clients. In his view, P2P lending will continue to grow – given the current lending environment. “In the medium term, traditional bank lending is going to come under more and more regulatory control, both internally and externally,” he said. “Many loan applications which would once have been accepted by the banks are now being declined and a lot of people are falling out of the bank mould. And that is likely to mean an increase in providers in the non-bank sector – especially as the current big non-bank lenders have only got a finite funding line.” So we talked to the major players in the P2P lending market to find out what they can offer to those looking for property loans of various types.

P2P – AN OVERVIEW But, first up, a recap of what P2P lending is. Essentially, P2P lenders match up people who want to lend money, or investors, and people who want to borrow money. It’s much like the way Trade Me matches up sellers and buyers of products. P2P lenders operate via a secure online platform, which has been licensed by the Financial Markets Authority (FMA). This keeps overhead costs down and allows them to offer lower interest rates than traditional lenders. The lenders make their money by charging fees for

are dissatisfied with what mainstream financial institutions have to offer them.

SOUTHERN CROSS FINANCIAL

❝ We probably do a couple of hundred loans a year. That’s probably about $110 million to $120 million a year❞ -Luke Jackson

matching the borrowers and lenders and for managing loan repayments. While P2P lenders offer borrowers cheaper finance, they also offer lenders higher returns on their investment than they would get on a traditional bank investment. However, investors take on a more direct risk of losing money on the loans that they make. When a borrower applies for a loan, the P2P lender assesses their credit history and financial situation, often alongside other criteria. The riskier the lender finds the borrower to be, the higher the interest rate. If a lender does default on their loan, the loss is carried by the investor rather than the lender. P2P has been promoted as a more current and flexible alternative to traditional lenders. This “disruptive” aspect has a lot of appeal for a growing number of borrowers and lenders who

The Southern Cross name is well known to New Zealanders, but Southern Cross Financial (SFC) is the newest P2P lender to arrive on the scene. Formerly an old-style contributory mortgage broker, it transitioned into a P2P lending business in December last year. SFC CEO Luke Jackson says that changes in legislation meant the old contributory mortgage model was no longer an option for them. “We needed to choose how we were going to move forward, so we looked at all the options. The P2P model was the closest to the way we had been operating so we decided to go down that path.” In fact, they see P2P mortgage lending as a continuation of what they were doing, he says. “We still marry up borrowers with investors. That is the basis for P2P lending. It’s just there’s now a more modern structure to operate under and it’s a bit more flexible.” However, there is one big difference between SFC and the other players in the P2P market. SFC pre-funds its loans. That means it fronts the risk by lending the money first, before offering investors an opportunity to buy the mortgage. "We only provide loans through our platform that we have initially funded ourselves. While all our loans are equally made available to all our investors, if for whatever reason a loan is not taken up by the investors we are more than happy to retain it.” Another point of difference for SFC is that, because of the similarities between their old and new operational models, they already had in place tried and tested systems, processes, experience and backing which had survived the GFC. Jackson says this means they had a solid base to start their P2P business with. “We probably do a couple of a hundred loans a year. That’s probably about $110 million to $120 million a year. It’s quite high churn because they tend to be transitory loans.”

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PEER TO PEER LENDERS

Borrowers targeted

Range of rates

SOUTHERN CROSS FINANCIAL

ZAGGA

LENDING CROWD

SQUIRREL MONEY

HARMONEY

Consumers

Consumers, business, rural - trusts, companies

Consumers, small to medium businesses

Consumers

From 7.90% to 19.10%

From 8.95% to 17.95%

From 6.99% to 29.99%

From 7.95% to 10.95% From 5.44% to 12.79% for first mortgages;

Secure or unsecured loans

Secured

Amount that can be borrowed

Not specified

$25,000 to $2 million

$2,000 to $200,000

$3,000 to $70,000

Up to $70,000

Repayment period

Can do longer term loans.

Different repayment options for different types of loans. Most loans have 1 to 5 year terms

3, 5 year

2, 3, 5 year

3, 5 year

Fees for borrowers

Loan application fee; Up to $125 per hour for the management of any loan in default, plus any associated costs; Dishonour fee of $10.

Platform fee charged once loan has been fully funded;Legal fees for security establishment in Trust.

Platform fee based on the amount applied for; Default interest of 20% is charged on all overdue loans.

Early repayment fee

Not specified

None

SFC’s loans are secured by the property they relate to and they also offer loans under longer terms than many of the other P2P lenders. Rates for borrowers depend on the individual’s LVR, story, location and circumstances, while the terms and conditions of the loan are established on a case-by-case basis. Most of SFC’s borrowers are there for the short term – an average of 12 months or less, Jackson says. “Probably 99% are referrals from registered financial advisers, which is a positive from which investors can take confidence.” For investors, risk is tied to the property securities they chose as opposed to the total investment book. SFC’s lending platform is transparent with deal information readily available to enable investors to make an informed decision. Every deal also has to have an exit strategy of some type, such as refinancing to a major bank or the sale of an asset. SFC is expecting growth in the P2P market, especially as knowledge of what is on offer increases, Jackson says. “A lot of the public don’t know much about P2P lending and how it works, what is there. But the more they do the more growth there will be. So our push is to build awareness and to educate on the product and the opportunities that are available.”

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ZAGGA SFC isn’t the first P2P lender to offer secured mortgages. Zagga (formerly LendMe), which launched in late 2015, also fills this space. Since its inception, it has pitched itself as being a valid alternative for home loan borrowers who don’t meet the banks’ criteria. Zagga CEO Marcus Morrison says banks won’t lend on various things, especially now that the regulatory environment has tightened up. “But we focus on low risk borrowers. Our loans are not just ones where by the bank doesn’t want to lend because the borrowers is high risk. They are where for some reason a low risk borrower can’t get a loan and that’s where we come in.” They aim to enable people to borrow for all sorts of property purposes – as long as there is security behind the loan application to back up the loan and the borrower meets Zagga’s requirements. That means they have facilitated loans for residential and commercial properties, as well as for construction and for plant and equipment. Zagga is big on comprehensive due diligence when it comes to loan applications. Morrison says the unsecured lending of simply looking at someone’s credit rating and score is not what they are about. They have an A to F risk matrix for borrowers and that determines the rates and terms.

Unsecured or secured Unsecured or secured

Two different Up-front, one-off establishment fees platform fee; Overdue (for under $30,000 fee of $20 on each of or above it); Default fee 6, 36, 66, 96, 120 days of $25 a month until after the payment amount is paid; date, if the account Dishonour fee of $15 remains outstanding; per transaction Dishonour fee $15. None

None

“Due diligence needs to be managed vigorously in order to understand what a borrower’s situation is and what the property is like. We are very thorough in the checks and due diligence that we carry out. Borrowers’ also need to have an exit strategy in place for their loans in case something goes wrong as this minimises the risks for our investors.” Loans are secured by an asset belonging to the borrower - typically a registered mortgage over property. In some cases, there is a specific charge over assets. Each loan is placed in an independent bare trust with the lender assigned beneficial interest in the security. Morrison says this process means there is more work involved for Zagga. “But it is worth it as it means we can loan larger amounts for a greater range of purposes, as the credit risk to prospective investors is mitigated. It means that we do a lower volume of deals than some other P2P lenders, but we are confident the deals we are doing are good ones.” To date, Zagga has taken a slow, conservative approach to its business – although it has also branched out into Australia. Morrison says there is no shortage of borrowers around but they want to make sure their systems are locked down and not putting anyone at risk. “There is demand in the market from a

mortgage perspective and there is a genuine place for us. I’ve talked to enough borrowers and advisers to know there is opportunity out there and that is not likely to go away in the foreseeable future. “What we are finding is that when people understand what we can do, how flexible we are, what due diligence we do and the level of service they get, then they come back. So now it is about education and understanding – for borrowers’ and advisers.”

LENDING CROWD Lending Crowd has a broader focus than property. It targets business loans, particularly for small to medium sized businesses, and it also offers specialised vehicle finance. But it also promotes the fact that it offers an attractive alternative to banks when it comes to personal loans. The lender’s managing director, Wayne Croad, says that, to date, those personal loans, which are secured, have included plenty of property lending which has ranged from houses to bare land to commercial property. “We don’t directly compare or compete with the banks on the mortgage front. We have 36 to 60 month terms, not 25 year terms. So we haven’t seen a noticeable increase in loan applications as a result of the banks tightening up on their lending around property.” But that’s not what it’s about for Lending Crowd. “It’s all about giving greater opportunities to borrowers and investors. Our genuine aim is to lower the cost of borrowing, provide investors with great returns, mitigate risk and be 100% transparent.” That is the disruptive aspect of P2P – the challenging of the status quo and the freeing up of finance, he says. “We have the objective of driving down the cost of borrowing money while working for investors. That is disruptive because it goes against the general vibe from banks.” It is possible to do this because Lending Crowd’s retail investors are getting a favourable rate of return, usually about 4 to

SQUIRREL MONEY

❝ For us the bigger, long term picture is about building capacity and a trusted technology platform.❞ -John Bolton

5% more than the banks although there is more risk than with a bank. Croad says they developed their platform around secured loans to attract retail investors. “The more retail investors we have the less risk there is and that works better for everyone. In nearly two years of operating, we have not yet had to write off a loan, which is encouraging.” Lending Crowd’s loan book looks healthy with around $20 million in loans written to date. But Croad is expecting further development. “We’re seeing exponential growth each month. More and more people want to operate via a digital platform these days. It just makes everything easier.” In his view, it would be wrong for an adviser to not let their client look at a P2P lender as an option when borrowing money. “Advisers have a key obligation to let their clients know the best deal in the market and that is often a P2P one, especially at the moment.”

For Squirrel Money, the P2P side of the business is secondary to the primary part of their business which is mortgage brokering. This means that while they have written about $15 million in personal loans since launching in late 2015, the company is approaching their P2P lending pragmatically. Squirrel’s managing director, John Bolton, says they want to be grass-roots and make sure real people benefit from both borrowing and lending. “We haven’t gone down the route of using investment bankers or banks for funding lines. It’s better for both parties that way and lives up to the ethos of person-to-person lending.” Instead they are 100% retail funded and, for this reason, they take a high quality, low risk approach to their P2P loans. About 75% of applications are declined and they manage the risk using a reserve fund to prove to their investors they are trustworthy. Bolton says that while P2P is a new and exciting area, it is also a challenging business to scale profitably because it has low margins and the loans turnover quickly. “Loans repay at about 30% per year and with 2.00% margins it’s hard to recover the high origination costs. For us the bigger, long term picture is about building capacity and a trusted technology platform.” As a result, Squirrel is taking its P2P business slowly, aiming to grow it at the same pace as their investors. Bolton says borrowers and investors need to trust them and feel that what they do is a bit different to everyone else. “To that end, it is about educating the public. It is about building trust. And it is about demonstrating, over time, that we are good at what we do and that we are effectively managing the risk. But we are very confident that in the long term it will turn into something good.” Overseas P2P lenders are morphing into banks, he adds. “Ultimately, the technology will head us towards that path to a greater or lesser degree.” ✚

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SALES & MARKETING LEGAL By Paul Watkins

Put your marketing on autopilot Targeting and engaging with new clients doesn’t have to be as hands-on as you may think, says Paul Watkins.

ou visit a website that offers books for sale on Word War II. While browsing, a pop-up appears that offers you a free e-book on “How the Japanese could have won in WWII.” This piques your interest, and all you have to do to get it is give your name and email address. You enter these and moments later an email arrive with the book in PDF format. One day later you receive an email from them, thanking you for the download and hoping that you find it insightful, particularly the revelation on page 11. Three days later you receive another email from that site asking what you thought of the free book, and providing a link to give a review. A month later you receive another email

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offering three books on the War in the Pacific at “Special member prices, including free delivery.” This process is called Marketing Automation and is increasingly being used as a very effective marketing activity. Why does it work? Because it is all about you! As a visitor to the website, you enjoy the high level of personalisation. Any good online bookstore will have millions of books available, but this way, they single you out to receive notifications about the category you are personally interested in – in the example, this being World War II in the Pacific. Set up right, Marketing Automation reveals who specifically is visiting your website, what sort of information that person is after, how often that person interacts with your website content and in many cases, how close they are

to making a purchase decision. Now relate this to your mortgage brokerage. Prospect A is in the market for their first home. They visit your site as a result of either an organic search (for which you need good Search Engine Optimisation) or clicking on a paid ad, such as Google Adwords. They find a blog entry for first time home buyers, at the bottom of which is a link to a “FREE booklet on the “Five Biggest Mistakes First Home Buyers Make When Taking Out A Mortgage!” They click the link and after giving their name and email address, they receive that booklet as a PDF in their inbox. Three days later they receive another email asking a bit more about them. It is a checklist to help them make the right decision. It asks, “Are you considering using your KiwiSaver to help fund your first home.” If they check Option 1 “YES”, they receive a PDF flyer called, “Update On The Critical Things To Know About Using Your KiwiSaver For Your First Home” If they choose Option 2, “NO, I do not have KiwiSaver” then they receive a PDF flyer called “No KiwiSaver” No Worries – Your Options” Now what do you know about them so far? This has clearly qualified them for your next email, since you know which of the two options they clicked. Your next email is a personal one from you, offering them a no-obligation free chat about where to from here to get your first home. Let’s say Prospect B now sees your website. They click on the page that talks about refinancing as their mortgage term is ending. The system will leap into action again, but this time the free booklet no offer is called “5 Critical Things To Consider Before Re-Fixing Your Mortgage!” The process that follows is a mirror of the one for Prospect A, but relevant to their need to refinance, as opposed to financing a first home. Get the idea? The prospect wins, as their

❝ Marketing Automation is a

series of processes that combine web analytics, lead generation items (such as e-booklets) and automated emails.❞ search has not become personal, relevant and has very much added to their understanding of what to do next. You win, as you now have highly qualified leads that will welcome a personal email inviting them to a free chat. And the best part is that you basically did nothing. It was all automated. In technical terms, Marketing Automation is a series of processes that combine web analytics, lead generation items (such as e-booklets) and automated emails. These send out pre-written emails at pre-set times. It assigns a specific tracking cookie to each website visitor and can be integrated into your CRM. This results in visitors being categorised as cold, need more incentives or hot. Taking the example above, if they do not respond to your offer of an informal free chat, they stay on your database and continue to receive emails at regular intervals, once again based on the type of prospect you now know them to be. They will only come off the list if they choose to unsubscribe – an option you are legally obliged to include at the bottom of each email. You will be surprised how many simply don’t bother ever taking themselves off your list. Now you know how it can work and the obvious benefits, the question is how do you set this up? There are two parts to this. One is the content that you need to offer to engage with the prospect, the other being the technology. You focus on the first part and let your website developer do the other. For the content, segment your client base into first home buyers, refinancing an existing loan, buying a new (but not first) home, investment home finance or whatever you see as your key segments. Don’t choose too many to start with. Create a flowchart for each segment as they find your website. Add each piece of the puzzle, for example writing an added-value piece that can be made to look flash by a graphic designer and turned into a PDF for a download for each segment. Make sure they have a compelling headline. They do not have to be epic productions. 500-1,000 words is fine, with pictures and/or infographics and a good cover is fine. This article is about 1,200 words, so that gives you an idea of the maximum you would probably write. This is to be your added-value download that requires them to give their name and email address. Next step is to write the subsequent emails that the automation will trigger. Now plan to run some Adwords or Facebook ads and make sure your SEO (Search Engine Optimisation) is working or they won’t find your site. You may require help with these, which is one again where your website developer comes in. Last step is to take your flowchart and items to your developer and have them set up the automation. You may wish to involve them upfront as they may have ideas to add. HubSpot, Infusionsoft, Volacci Automatr and ActiveCampaign are just a handful of the many automated website software options that can be incorporated into your site. Have your developer recommend one that meets your requirements are budget. Like all promotional activity, there is cost and time to set it all up, but it’s worth it. Costs will vary depending on your developer’s costs and the chosen software, but just one or two sales can cover the cost for a year in most cases. This is the way online marketing is going. Do not ignore it, as your competitors are possibly already using automation and unlike broadcast advertising, you would never know. ✚ Paul Watkins writes blog content and newsletters for financial advisers.

INSURANCE By Steve Wright

COVER REPLACEMENT

Assessing exclusions and premium loadings is a vital part of any insurance adviser’s job writes Steve Wright .

ou recommend replacing a client’s existing policy with one with better features and benefits but the underwriting comes up with an exclusion or a premium loading, does this mean moving the client is wrong…? Not necessarily… this is where good advisers really become worth their salt! An underwriting exclusion should be compared with the exclusions the client currently has, which are there even if initial cover was issued with no special terms!

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What do I mean? Usually existing cover has many built-in exclusions. Exclusions can be specifically detailed – under the exclusions clauses; or simply exist due to the lack of a benefit that will be covered under the proposed new policy. Let’s consider some examples… ➤ Your client’s new trauma cover application comes back with an exclusion under the TPD benefit for a dodgy knee. The new trauma cover includes built-in ‘own occupation’ TPD. If the clients’ existing trauma cover does not

include ‘own occupation’ TPD as a covered condition, the new exclusion means nothing – no claim for disability caused by knee issues would have been covered under the existing policy! ➤ Your client’s Partners Life trauma cover application comes back with an exclusion under TPD benefit for the dodgy knee. However, the client’s existing cover has TPD. Is this the end of it? Probably not, it depends on the likelihood that the dodgy knee (which might already be covered by ACC)

would ever affect the client’s ability to work, while remembering that every condition covered by the new policy but not their existing one, is in effect an existing exclusion on their existing policy also. Aneurysm, Hydrocephalus, Lupus, Benign Tumour of the Spine, Pneumonectomy, to mention some for example, are conditions not universally covered by trauma policies. Just as every trauma cover condition not covered by the existing policy is an exclusion, deficiencies in the existing condition definitions relative to the new policy trauma condition definitions are an existing exclusion. Good examples of which are, early stage cancers, as I pointed out in the previous two issues of TMM. Of particular importance is breast cancer requiring breast conserving surgery, not a full mastectomy – quite an important claim occurrence! It’s not just an issue for trauma insurance though, let’s say your clients’ new medical insurance application comes back with an exclusion for any number of the following conditions… ➤ Allergies ➤ Pre-existing conditions ➤ Weight loss surgery, Breast reduction surgery etc. Their current medical policy doesn’t cover these – they are specifically excluded. The new exclusion means nothing – condition not covered! Restricted coverage for nonPHARMAC funded drugs is a particularly very large and risky ‘exclusion’ because if a drug is not funded the client cannot fall back on the public health system because it won’t be funded there either. Also remember, some medical insurance policies can be amended unilaterally by the insurer, usually on as little as thirty days’ notice. This means your client has no certainty – ‘new’ exclusions can suddenly arise! As is the case with all client existing products, the existing product weakness or deficiency in cover is effectively an exclusion. Good advisers will compare all these inherent existing exclusions with any new underwritten exclusion and advise the client. Often underwritten exclusions are existing problems which might be well managed and unlikely to result in a claim or the unexpected! This may be a risk client can afford to take! An analysis must be made about which exclusion is least risky for the client? Leaving them

where they are may mean less cover and less likelihood of a claim even after accepting the new underwritten exclusion. What if the underwriting delivers a loading? Loadings are good news, usually better than exclusions. Loadings mean the client gets cover, cover they really need because they are at higher risk. Clients are unlikely to complain about the loading at claim time but they will complain if their condition is not covered. So if the client is already covered at standard terms why should they accept the loading? Well simply put, the new policy premium with a loading may yet represent better value for the client. Let’s consider an example… ➤ The client is a 40-year-old male nonsmoker. The client has existing agreed value income protection, the ‘good’ version with the optional add-on benefits ($5000 per month, to age 65 with a four week wait). Their premium is $209 per month. The ‘same’ income cover costs $155 with the new company, but… underwriting requires a 50% loading, meaning the premium will be $232. Do you just leave the client where they are?

❝A policy with

better benefits will represent good value for money if the clients’ existing cover does not include them.❞ The existing premium is more expensive than the new company’s standard premium, so the loading is really only 11% and if the income cover is just part of a bigger package of covers the new policy may yet be less expensive. In any case, if the premium structure is rate for age (stepped) then who knows what the premiums will be after the first year anyway! In this case is the loading significant? The new policy’s many additional benefits may well be worth the extra premium. A policy with better benefits will represent

good value for money if the clients’ existing cover does not include them. There are several valuable benefits that are not universally included in income protection policies, even with their ‘up-grade’ optional benefits, for example…critical illness benefit, ‘own occupation’ additional lump -sum paid on TPD, specific injury benefit and so on. The new policy may also offer a TPD booster option (make sure its own occupation TPD) typically increasing monthly benefits by a third if totally and permanently disabled. This can efficiently deliver big TPD benefits at tiny cost, allowing significant savings on TPD benefits. This may allow clients to reduce existing separate, now redundant, TPD cover the client might have. For example, our proposed client (40 year old male nonsmoker, Occupation class 2, with $5,000 to age 65 and a 4 week wait) will pay just $13.93 (with the loading) per month for what is effectively…$600,000 TPD Cover (0% indexing), or, better still… $1, 3 million (if you select a minimum indexing option – an option which might cost the client nothing to add!). Separate standalone TPD cover of $1.3 million without loading would cost this client around $95 per month! That’s more than the 50% loading and more than a third of their total proposed new income cover premium. Great efficiency and value for money! There are other matters to consider though, the new income cover benefits might allow a longer waiting period. Many income cover policies pay monthly benefits in advance, not arrears so they could be paid benefits sooner. Some policies will pay the specific injury and critical illness benefits without the waiting period applying! These two benefits, combined with Accidents – ACC generally has a two week wait – represent a large number of disability claims. These benefits might make an 8 week wait instead of a 4 week wait much more tolerable and affordable (The premium for our proposed client with an 8 week wait (plus loading) drops to $185 per month.) This is less than the client is currently paying even with a loading, and they arguably get much better cover! Great value for money cover! Isn’t that why they use you? ✚ Steve Wright is General Manager Product at Partners Life.

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NON-BANK LENDERS By Miriam Bell

Thinking outside the box The tightening up of bank lending means times are heady for nonbank lenders as borrowers’ look for alternatives to the mainstream. This is part one of a series on non-bank lenders.

e all know that the mainstream banks have tightened up on their lending and become more selective about who they will finance, making life much harder for those seeking a mortgage. In this growing vacum the non-bank sector is thriving and presents a very viable financing option for mortgage advisers to help their clients. The return of Australian non-bank lender, Bluestone Mortgages, to the New Zealand market shows how the sector is widening to meet the real demand out there. RESIMAC Home Loans is one of the leading non-bank mortgage lenders and is about to celebrate its fifth year in business in New Zealand. RESIMAC general manager mortgages Adrienne Church says non-banks offer a good alternative for advisers to use because they offer different products. “That creates opportunities for borrowers to get lending that they would not otherwise be able to.We are not as cheap as the banks but, now the banks are enforcing increasingly

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stringent lending criteria, our rates are pretty attractive.” RESIMAC has standard prime products, but a key strength is its more specialised products on offer which can help people who have adverse credit ratings. There are also low doc products which are aimed at self-employed people who may not have the level of documentation the banks want. Church says they provide options for people. “As the mainstream lending environment gets tougher for investors and others, the nonbanks provide people with the opportunity to borrow, to get finance that they would not otherwise have.” “For us, the volume of loan applications that we are receiving and processing is going up month on month, and has been for the past nine months.” While RESIMAC is one of the bigger and higher profile lenders, there are also smaller, more specialist players in the market like Core Finance. It specialises in second-mortgage finance and mainly does bridging finance, with six or 12 months interest-only terms. The loans are then taken back to the bank by the adviser or refinanced.

Core Finance director, Grant Donoghue, says they have a strong appetite for lending on property and these days there is a lot more business for lenders like them in the non-bank space. “I absolutely expect demand to increase. Finance is the second-oldest profession in the world. People need to get money. If they can't get it from banks they have to look elsewhere and they are looking at non-banks.” Avanti Finance chief executive Mark Mountcastle says non-bank lenders offer a wide variety of options for mortgage advisers. Often if they can’t do the deal they will refer advisers to another lender who may be able to provide a solution. He says the main bank credit rationing won’t change any time soon and that means there’s lots of interest in serving this space. “More companies are coming on to the market to provide products that fill the gap and that means more flexibility for borrowers in terms of what is on offer.” ✚ TMM will be providing advisers with a comprehensive guide to the non-bank sector in a future issue of the magazine.

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LEGAL By Jonathan Flaws

CREDIT LAW PROPHYLACTIC LEGISLATION Confused about consumer protection provisions? Jonathan Flaws dissects the difinitions in light of a recent court decision.

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can imagine that sitting on the bench, writing judgements, can be a rather tedious occupation for a Judge. I can also imagine that the urge to break out and write something creative must be lurking just below the surface. Hammond J, sitting in the Court of Appeal and considering the case that Mr and Mrs Bartle brought against GE, obviously couldn’t restrain this urge when he said about the Credit Contracts and Consumer Finance Act 2003 (CCCFA): “the legislation is prophylactic”. I assume this means it is designed to prevent debtors from becoming pregnant with unwanted debt. It is an interesting turn of phrase, and even more interesting when the case he was looking at was not concerning the pre-emptive protective provisions in the parts of the Act that are designed to protect consumers before they entered into a “credit contract” but the oppressive provisions in the part of the CCCFA that give the Courts the power to reopen a “credit contract” that is claimed to be oppressive. Notwithstanding their age, apparent or assumed vulnerability, and the fact that they were borrowing against their family home, they were not “consumers” for the purposes of the CCCFA. And only “consumers” can take advantage of the prophylactic provisions, as Hammond J referred to them. Interestingly, the consumer protection provisions include another definition, “lenders” that is used to describe a “creditor” under a “consumer credit contract”. Only “lenders” are subject to the Lender Responsibility Principles. Confused? You’re in good company. So, it appears, was Hammond J when he used his flowery language to describe the legislation as a whole in a case that wasn’t concerned with consumers and their protection. Defined terms are used in legislation for a purpose. One defined term can save having to repeat a longer descriptive phrase each time the thing represented by the defined term is referred to. In some cases, the thing described by a defined term can only be explained by a much fuller description contained in a section of the Act or a number of sections that define and explain the thing that the defined term refers to. In the CCCFA, the defined term “consumer credit contract” is such a term. It is defined to have the meaning set out in section 11 of the Act. Then sections 12, 13, 14 and 15 are used to explain when a contract may not be a consumer credit contract. The significance of being or not being a consumer credit contract includes: ➤ lenders under consumer credit contracts must comply with the Lender Responsibility Principles; ➤ debtors must be given disclosure of the terms of the consumer credit contract; ➤ if disclosure is not given then section 99 of the CCCFA prohibits a lender from enforcing the contract or any security or requiring part or full repayment as a result of default; ➤ the costs of borrowing (interest and credit

fees other than credit fees paid to a third party) are not payable for the period during which disclosure is not made. All credit contracts are subject to the oppressive provisions and can be re-opened if the contract terms are oppressive or if the creditor any person on behalf of the creditor has acted in an oppressive manner. In addition, if the creditor should have been but is not registered under the Financial Service Providers (Registration and Dispute Resolution) Act 2008, like the failure to disclose, the costs of borrowing are not payable for the period that the creditor is unregistered.

❝If a credit

contract is not a consumer credit contract, the only steps a borrower can take is to bring proceedings claiming oppression. ❞ Therefore, if a credit contract is not a consumer credit contract, the only steps a borrower can take is to bring proceedings claiming oppression. The chances of a lender not being registered is likely to be small.

What is a Consumer Credit Contract? Under section 11, four conditions must be satisfied to make the credit contract a consumer credit contract. (a) the debtor must be a natural person (b) the credit must be used, or intended to be used, wholly or predominantly for personal, domestic, or household purposes (wholly or predominantly is further qualified to mean more than 50% of the credit is intended to be used for these purposes) (c) nterest or credit fees must be payable or a security must be take (any one of these will suffice) (d) the creditor must be in the business of providing credit; make a practice of providing credit in the course of its business; makes a practice of entering into credit contracts; or the parties were introduced by a paid adviser or broker. If any one of these four conditions are not present then the credit contract is not a consumer credit contract. The following section 12 explains that borrowing for investment purposes is not personal, domestic or household. As in the

Bartle v GE case, a mortgage for making an investment such as an investment property is not consumer even if the mortgage is over the borrowers own home. Section 13 presumes that a contract is a consumer credit contract if the borrower claims it is. Section 14 provides that if the borrower, before entering into the contract, signs a declaration (which cannot be included as part of the contract but only as a separate document) that the contract is for commercial purposes this rebuts the presumption in section 13. In the case of Burke v Advanced Securities Ltd, a declaration was signed after the contract was made and was held to be ineffective. However the Court found that the presumption can be rebutted in other ways and in that case there was clear evidence that the contact was for the purposes of a subdivision of land and evidence that this subdivision was personal was rejected. Section 15 contains an exemption from a consumer credit contract that seems to be misunderstood. It say that if the debtor is a trustee acting in his or her capacity as a trustee of a family trust, the contract is not a consumer credit contract. There have been cases where natural persons have claimed the protection of a consumer credit contract notwithstanding that other debtors have been trustees of a family trust. In Haddon v GE Custodians, guarantors even claimed this protection on the grounds that the CCCFA requires disclosure to Guarantors. The Court of Appeal rejected the claim because the borrowers included trustees of a family trust as well as individual natural persons. The Interpretation Act 1999, which is used to help in interpreting all legislation, says that the use of the singular includes the use of the plural. So, when section 11 requires the debtor to be a natural person, this means that all of the debtors must be natural persons. The same applies if the debtor or one of the debtors is a company. It is very unlikely that any credit contract you come across will not involve neither security, interest or fees, but there is a recent example of such a contract. In July of this year Consumer NZ warned of new companies that provided a buy now pay later service. It complained that the companies did not have to comply with either the Fair Trading Act layby sales regime or the CCCFA because the goods were delivered immediately by the retailer and no interest or credit fees were charged and no security taken. Yet if there was a default, default fees could be charged of up to $20.00. On a small retail purchase this could be proportionately very high. Personally, I think this is a great concept and provides a good service. It is an example of the prophylactic legislation being unnecessary. Consumers will no doubt just lie back and enjoy goods without having to pay for them in one lump sum. ✚ Jonathan Flaws is a partner at legal firm Sanderson Weir.

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Intelligence

LVR IMPACT ON INVESTORS LAID BARE Restrictions on loan-to-value ratios have hit investors hard as the latest ANZ NZ Residential Property Investment report reveals.

47%

47% of investors say that the limits on high Loan-to-Value ratio lending have significantly impacted on their strategy in the last 12 months. This is a significant increase on 2016 when 31% of investors felt they had been impacted (and only 16% in 2015).

30%

Nearly two thirds of these investors (30%) have said they have not bought a property they likely would have otherwise, this is up from 2016â&#x20AC;&#x2122;s 14%.

49% Of investors say their LVR has decreased in the last 12 months

13% Only 13% of investors have an LVR over 75% versus 18% in 2016.

Aucklanders feel the most impacted by regulatory changes (54%), and significantly up from 2016, 35% now have said it stopped them from purchasing a property.

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Around half of investors say debt-to-income restrictions would not change their strategy in the short or medium term. For higher leveraged investors this is lower however (36%), and a higher number would be less likely to purchase an additional property.

50%

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TMM - The NZ Mortgage Mag Issue 5 2017

Articles inside

INSURANCE

PEOPLE

EDITORIAL

NEWS