TMM - The NZ Mortgage Mag Issue 3 2019

Issue

03

2019 Working together to create tomorrow's advisers today

Advisers welcome

NEW ERA - TMM's annual roundtable -

BROUGHT TO YOU BY:

Stand out from the crowd

New code of conduct largely supported

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CONTENTS

ROUND TABLE How regulation will change the shape of the industry

UP FRONT

FEATURES

04 EDITORIAL

The future is bright

12 REGULATION

24

New code of conduct largely supported

16 HOUSING COMMENTARY

06 NEWS Reforms: advisers on alert; Tech key for Astute

10 PEOPLE

19 FIRST MORTGAGE TRUST

Special Report pull out

Who has moved where in the industry?

14 PROPERTY NEWS

A CGT reprieve COLUMNS 18 KIWISAVER

There is much focus on Auckland’s slowing market

Advised v non-advised schemes

32 SALES AND MARKETING

30 MY BUSINESS John Keenan of JK Mortgage Solutions speaks to TMM

Gaining trust and securing new client leads

34 LEGAL

The impact of FSLAB’s recommendations

36 INSURANCE

Genetic testing: what you need to know 03

UPFRONT

From the Publisher

The future is bright

In this issue of TMM, we bring you our Annual Round Table discussion of key industry issues.

One of the big takeouts for me was that the future looks good for mortgage advisers in New Zealand.

On the one hand, advisers are accounting for a bigger share of mortgages written each year. The latest results from ANZ and BNZ for the six months to March 31 demonstrate this very clearly. In this period last year, advisers wrote 38% of all ANZ’s loans originated, this year that number has grown to 41%.

BNZ had a similar tale to tell, although it was a smaller number.

While advisers are writing more business, the number of advisers in the market may well shrink once the new licensing regime comes into effect.

My guess is there will be some shrinkage, but it will be short-lived, as the prospects for the sector are strong.

Since the previous issue of TMM, one of the biggest concerns for advisers seems to have been put to rest. There had been fears that trail commissions would be banned, judging by the response of the Royal Commission in Australia.

However, our Commerce Minister Kris

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Faafoi has made it clear he supports trail commissions as they are a way of ensuring customers are looked after during the life of the loan.

This may mean that there are greater requirements put on advisers to ensure they are looking after their customers, but this can’t be a bad thing.

More paperwork for advisers is something which is already happening, and looking through our stories in the past month, is a theme for the future.

It’s clear advisers aren’t keen on this, but it’s something everyone will just have to get used to.

On a more controversial note, I do wonder if mortgage advisers need their own membership association to lobby and represent their interests with lenders and officials. Mortgages are quite different to, say managed funds and life insurance, with consistent changes from lenders.

Also, there seems to be a need to have a collective voice to push for changes like electronic lodgement and standardisation of forms.

There is a good example in Australia, where the MFAA has been extremely active, vocal and effective at looking after the interests of mortgage advisers.

Instead of “Bring Back Buck” it could be “Bring Back the NZMBA”. It’s an idea which we would love your feedback on.

PUBLISHER: Philip Macalister SUBEDITOR: Dawn Adams SENIOR WRITERS: Miriam Bell, Susan Edmunds, Daniel Dunkley CONTRIBUTORS: Paul Watkins, Steve Wright, Jonathan Flaws, Michael Lang, Calvin Davidson GRAPHIC DESIGN: Amy Bennie ADVERTISING SALES: Amanda Ellery 027 420 2083 amanda@tarawera.co.nz

MOVED OFFICES? Make sure you don't miss an issue by changing your address.

Go to www.goodreturns.co.nz/coa SUBSCRIPTIONS: Jill Lewis jill.lewis@tarawera.co.nz HEAD OFFICE: 1448A Hinemoa St, Rotorua PO Box 2011, Rotorua Phone: 07-349 1920 Fax: 07-349 1926 editor@tmmonline.nz

TMM is published by Tarawera Publishing Ltd (TPL). TPL also publishes online money management magazine Good Returns www. goodreturns.co.nz and ASSET magazine. All contents of TMM are copyright Tarawera Publishing Ltd. Any reproduction without prior written permission is strictly prohibited.

Philip Macalister Publisher Email your thoughts to: philip@tmmonline.nz

TMM welcomes opinions from all readers on its editorial. If you would like to comment on articles, columns, or regularly appearing pieces in TMM, or on other issues, please send your comments to: editor@tmmonline.nz

TMMONLINE.NZ/NEWS

Reforms put advisers on alert Advisers are on red alert after the government revealed sweeping new proposals for financial services reform.

Mortgage advisers could face a bigger regulatory burden after Commerce and Consumer Affairs Minister Kris Faafoi published an options paper on reforms for the financial services sector.

Industry figures have warned against “unintended consequences” that could arise from the consultation.

The consultation paper, published at the end of last month, targets banks and insurers, but features possible reforms that could affect the intermediary market.

The government wants to ensure banks and insurers pay intermediaries with the customer’s interests in mind. Politicians want to ban soft commission and want remuneration to be designed with the customer’s interests at heart.

The government also wants to ban sales target-based commission. It will use enhanced “enforcement tools” to police “good customer outcomes”.

The paper also proposes “imposing parameters around the structure of commissions”, and “limits on the percentage of upfront and trail commission”.

Advisers expect the proposals to add to an ever-increasing regulatory burden.

“All this legislation does is create more work for us which ironically makes it harder for us to operate efficiently on lower margins,” said Craig Pope of Wellingtonbased Pope & Co Mortgages.

Andrew Scott, general manager of Newpark Home Loans, warned harsh treatment of commission could have “unintended consequences” for banking competition, and customer choice. “I’m all in favour of good customer outcomes, but I PrintBanner_v2.pdf 1 11/04/19 don’t believe you can regulate that through controlling commissions.”

C

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Hisco backs ANZ no trail stance ANZ New Zealand chief executive David Hisco has ruled out support for trail commission as long as he remains in charge of the lender.

Hisco told TMM that Australia’s Royal Commission had reaffirmed the lender’s view that upfront commission was a better model, and said the bank’s longstanding position would not change.

“When you see me getting carried out in a box, then you can ask the next CEO what they think of trail commissions,” he said, as the bank unveiled its results for the six months ending in March.

Hisco added: “The Hayne Commission report said that it wasn’t clear what brokers did following the conclusion of the sale of the mortgage, and that was why he didn’t actually support it [trail]. I think you’d have to understand what’s different in New Zealand.”

Australia could prohibit trail commission following the Hayne report. The ruling coalition has delayed a possible trail ban for three years, but the opposition Labor Party could enforce an immediate ban if it wins the Federal Election later this month.

New Zealand politicians have taken a more sympathetic view of trail. In a recent interview, Commerce and Consumer Affairs Minister Kris Faafoi indicated trail was a good way of ensuring customers continue to receive a service from their mortgage 12:53 PM advisers.

The government is reviewing lender remuneration as part of its financial

David Hisco conduct options paper.

Advisers continue to account for a large portion of ANZ’s home loan business. In the six months to March 31, mortgage advisers accounted for 41% of home loans at ANZ, up from 38% in the corresponding period last year. Hisco acknowledged advisers were playing a bigger role for the bank.

ANZ CEO Shayne Elliott expects the adviser channel to grow on both sides of the Tasman. He said: “More and more Australians are choosing to use the broker channel. They see value in terms of ease but also in terms of price transparency. I can’t see that slowing anytime soon.”

"I think that trend will continue, and there are many markets around the world that have much higher penetration of brokers.

Interestingly, we’ve seen the same trend – although much lower numbers – happening in New Zealand as well.”

ANZ's New Zealand home loan market share has stayed steady at 31%, however it has grown from 31,000 home loan accounts at the end of March last year to 37,000 accounts this year.

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Tech the key for new entrant Astute Astute Financial Management CEO Sarah Johnston believes the group’s CRM technology and back office support for advisers will give it the edge in the New Zealand market.

can interact with advisers online. It can also maintain relationships with key business partners.” Johnston said.

While Astute's technology underpins strong regulatory compliance and processes, Johnston says advisers can “personalise” the system. “It does everything the regulators and lenders want, but we are not saying, ‘you can’t change things’,” she said.

Johnston says Astute’s CRM platform will The Australian-headquartered group give its members an advantage recently signed up The Mortgage ahead of the new Financial Supply Company, following Advisers’ regime, and help its initial deal with Mortgage advisers handle increased Express in September last scrutiny from lenders. year. Johnston believes the “There are three major things Mortgage Supply Company we do really well. Firstly, the will bolster Astute’s local CRM system we have brought know-how and sales ability, over from Australia, the home particularly with the hire loans part is already out there, of industry figurehead and we are developing our Jenny Campbell. insurance and commercial Johnston said Campbell and equipment parts of would bring valuable our platform. sales expertise to “Our system will Astute members. run every part of our “Jenny’s strengths are business. It is userhelping you grow your friendly and has a business and revenue Sarah Johnston client portal so clients streams. We also have

Leigh Hodgetts from Mortgage Express on training, regulation and compliance,” she said.

Johnston has declared Astute “fit for the new financial advisers regime”. “We have proven systems in place, and we are ready,” she added.

Astute will encourage members to diversify beyond their main product areas.

Johnston wants adviser revenues to be more robust and immune from market cycles. “We want to provide them with a base level of income. We know they go through peaks and troughs when they are in a hunting phase. We want them specialised, but with the ability to refer within the group.”

The group is working on white label products which will help its members sell non-home loan products. “We’re looking at products that will give our members an advantage. We plan on having an exclusive white label range for our members. That is Astute’s philosophy in Australia, and we will be embracing that in New Zealand.”

To keep up with the latest industry news, views and opinions visit

tmmonline.nz

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TMMONLINE.NZ/NEWS

Australian non-bank Pepper eyes NZ Aussie non-bank giant Pepper is plotting a move into the New Zealand market, joining a growing list of alternative lenders.

TMM can reveal that Pepper, one of Australia's biggest non-bank lenders, is quietly ramping up preparations to launch in New Zealand, according to industry sources. The Aussie company has a book of 200,000 customers across the Tasman and is making plans to build on that number in the NZ market.

Industry sources say Pepper executives have travelled to New Zealand in recent weeks, and the lender

is expected to begin hiring for a New Zealand launch soon. Pepper would not comment on the details, but said in a statement: "New Zealand is a market that Pepper is actively considering."

Pepper, led by CEO Mike Culhane, is expected to launch in New Zealand this year. It is understood the company is working on documentation and regulatory approvals. Pepper has been registered as a Financial Services Provider in New Zealand since 2011 and has a presence in the country, having acquired a A$5 billion book of loans from GE. Like most of its non-bank rivals, Pepper's customer

base includes the self-employed, customers with changing personal circumstances, those with an impaired credit history and investors. Aside from home loans, Pepper offers personal finance and car loans in the Australian market.

The firm is expected to support the broker channel as it does in Australia.

Pepper has no shortage of firepower for expansion into New Zealand. Since 2017 the finance company has been owned by private equity giant KKR, one of America's most powerful investors.

Resimac slashes mortgage rates Resimac has waded into the mortgage price war with a series of aggressive rate cuts.

Resimac reduced rates across its entire mortgage portfolio, and introduced a new two-year fixed rate it claims is the lowest in the market from a

non-bank lender.

The lender has cut its prime two-year fixed rate to 4.46% (up to 80% LVR), and 4.89% for customers with an LVR of more than 80%. Its old two year rate was 4.94%.

The bold strategic move positions Resimac close to the major banks, and is cheaper than ANZ, ASB, and Sovereign's standard two year offers.

Resimac’s new three year rates begin at 4.69% for loans below 80%. The new rates were brought in on April 12.

The move comes as lenders across the board make deep cuts, in anticipation of a Reserve Bank Official Cash Rate cut next month.

Resimac New Zealand head of sales Huia Manuel said the lender was keen to

compete with the big banks for prime borrowers.

Manuel said the lender was keen to win new customers turned away from traditional banking sources: “Resimac is aggressively growing its presence in the New Zealand mortgage market with market leading rates and great service.”

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Aussie advisers welcome trail-ban delay Australian advisers welcomed the coalition government’s decision to delay a ban on trail commission — but things could change if the Labor Party wins the Federal Election later this month.

Mike Felton, CEO of the MFAA, hailed the Australian government’s U-turn, and decision to review trail in three years. Trail was due to be banned from next July, following a recommendation in the Hayne Report.

Felton said the decision “reflects the fact that the case for the removal of mortgage broker trail commission has not been made, nor has it been demonstrated that existing trail arrangements lead to poor customer outcomes”.

Felton believes the Australian coalition government is taking stock of evidence rather than following Hayne’s recommendations to scrap commission. “This announcement is consistent with the Treasury’s submissions to the Royal Commission and ASIC’s exhaustive, data-driven Review

of Mortgage Broker Remuneration in 2017, which found no systemic evidence of poor outcomes for consumers linked to the broker commission structure.”

Advisers’ relief could be shortlived, however, as Australians head to the polls on May 18 to pick a new government. The opposition Australian Labor Party (ALP) has taken a tougher stance on adviser commission than its rivals. The party wants to reinforce a ban on trail from next July.

The ALP also wants to cap upfront commissions at 1.1%, and limit clawbacks for two years, and introduce a “best interests duty” for mortgage advisers. The party has reaffirmed its stance in recent election campaigning.

The Australian election is set to be a close call, with Labor currently edging ahead in polling. According to Newspoll, Labor leads the Liberal-National Coalition 51% to 49%, as of April 29. The coalition has narrowed the gap on Labor in recent weeks.

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Church talks about Prospa role Former Resimac New Zealand general manager Adrienne Church says she is excited to be bringing a small business loan offering to mortgage advisers in New Zealand.

Church is spearheading Prospa's push from Australia into the New Zealand market and says it provides a new opportunity for advisers.

Adrienne Church Prospa has been running for seven years in Australia and has lent more than A$1 billion to SMEs on the other side of the Tasman.

It has been piloting its products in New Zealand for the past six months and has already lent $10 million.

The initial New Zealand lending has been direct to business (Prospa doesn’t do consumer lending). It is now starting to roll out its offer to mortgage advisers.

Church says it's a great opportunity for advisers to expand their offering and to help ring-fence their clients.

Advisers can manage the loan themselves or refer leads to Prospa. It pays a 3% commission for every settled loan and 1.5% for repeat or refinanced, business.

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PEOPLE

THE LATEST NEW APPOINTMENTS TMM keeps you up to date with all the new appointments in the mortgage advice profession.

BLUESTONE POACHES ANZ BDM

Non-bank lender Bluestone has hired Wellington business development manager Mark Beams from ANZ, as it looks to build its New Zealand loan book.

The experienced Beams joins ANZ after nearly a decade at ANZ. For the past two years Beams was BDM for mortgage adviser distribution in Wellington and Wairarapa.

While at ANZ, Beams was responsible for 170 adviser relationships, managing accreditations and adviser issues.

The experience will stand Beams in good stead at Bluestone, a year after the non-bank lender's acquisition by private equity firm Cerberus. Bluestone is one of several nonbanks to start-up or revisit New Zealand as the big four lenders tighten lending, forcing customers to look at alternatives.

Bluestone confirmed Beams' appointment today in a note to customers and advisers.

The company said Beams has "worked with advisers for the best part of his 22-year banking career and has certainly made a name for himself in the industry".

The lender said Beams'

Mark Beams 010 WWW.TMMONLINE.NZ

key skills are lending and relationship skills in business banking, branch and credit management.

Beams also worked as a branch manager at ASB Bank, between 2005 and 2007, according to his LinkedIn profile.

SOUTHERN CROSS CEO JACKSON DEPARTS

Luke Jackson has left his role as CEO of peer-to-peer lender Southern Cross Financial after three and a half years in the role.

Southern Cross confirmed Jackson's departure today. Jackson could not be reached for comment.

Jackson joined in September 2015, overseeing a period in which Southern Cross received its peer-to-peer licence.

Jackson has left to pursue another role and will be replaced in the interim by Terry Butler, a Southern Cross director who becomes Acting CEO. During Jackson's leadership, Southern Cross made the move to become a peerto-peer lender to take business from the big banks. According to its recent figures, Southern Cross loans under arrangement grew by 24.8% in the year to September, with investor funds up 19.9%.

It is unclear whether Jackson is staying in the finance sector. Prior to joining Southern Cross, Jackson worked as a commercial manager for BNZ, ASB, Look Finance and the National Bank of New Zealand.

AVANTI TARGETS ADVISER CHANNEL WITH BDM HIRE

Non-bank lender Avanti has promised more support for the adviser channel following the appointment of a new BDM, as it expands its range of products.

The lender has hired Graham Clarke, former National Sales Manager at Mortgage Link, as its new Business Development Manager for the north island, as it aims to build a greater number of partnerships with advisers.

It comes as Avanti uses new funding to support a series of acquisitions.

Stephen Massey, head of sales at Avanti, told TMM Online the developments were part of an effort to raise awareness.

"It is about having a stronger presence, supporting the adviser channel and helping them learn more about Avanti."

Massey said Avanti is keen to grow its near-prime mortgage business through lower long-term rates. Avanti is also targeting near-prime vehicle finance lending, following its acquisition of Branded Financial Services at the end of last year.

Avanti also entered the insurance premium funding market with the acquisition of Bexhill Funding Group in January. Bexhill allows advisers to work out flexible premium funding arrangements with their clients.

MORTGAGE LINK APPOINTS NEW BDM

Mortgage Link has appointed a new Canterbury-based BDM, promoting a south island-based adviser to the senior role.

Kelly Brough becomes Mortgage Link's new business development management, effective immediately. Brough has worked in a number of roles across the business, starting as a PA and moving into a mortgage adviser role on the West Coast and Nelson, before moving to Canterbury.

Kelly Brough Brough has spent the past two years getting to grips with the development, training, and on-boarding of Mortgage Link's CRM, Advice Link.

Brough will continue to be based in Canterbury and takes on a raft of new responsibilities as BDM. She will be responsible for supporting advisers, bringing new advisers onboard, and working on licensing for advisers under the new financial advice regime, which passed its third reading last week.

Brough will retain her accreditation with lenders for existing clients, and she will be available as a locum broker if needed.

Brough's hire comes as a former Mortgage Link sales director moves on. Graham Clarke, National Sales Director since December 2017, has just joined non-bank lender Avanti.

Ben Jamieson will be based in Christchurch, the lender said.

He has plenty of experience in the lending space and has worked for financial services firms including Marsh, and ASB in his career to date.

At Heartland, Jamieson held the role of relationship manager and business development manager, according to his Linkedin page.

Jamieson has a wealth of experience in reverse mortgages. In a statement, Resimac said his strong broker relationships would be a valuable asset to the business.

Jamieson said: “I’m excited to be joining the Resimac team at a time when clients more than ever need the skills of quality mortgage advisers to find the best solution for them.”

ONLINE LENDER SPOTCAP HIRES NZ MANAGING DIRECTOR

customers seek non-bank alternatives in the face of credit tightening.

Keast was previously head of small business designs and Solutions at Macquarie Group, customer operations and improvement senior manager at IAG, and most recently ran an independent consultancy for major financial services companies.

He joins in April and will be tasked with leading the business through a regional expansion. The company, based in Berlin, has operated in New Zealand since 2017, and started lending in Australia two years before. It also has a presence in the Netherlands and UK. Keast said: I’ve worked with small businesses throughout my career and know how driven they are. They see possibilities and work to make them happen. They have a vision, they’re just missing the finance and often don’t have assets to secure a loan. I’m excited to join a growing company which is empowering them with simple, swift unsecured finance.”

Jens Woloszczak, Founder and CEO of Spotcap: "I'm delighted to welcome Simon to Spotcap at this stage of our development.

Simon has an in-depth understanding of the local lending market and a clear passion for supporting businesses. We are confident he can continue to establish Spotcap as a trusted, leading player in business lending in Australia and New Zealand.”

Online SME lender Spotcap has hired Simon Keast as managing director for Australia and New Zealand, as the Berlinbased finance company aims for regional expansion.

Keast joins the online platform to head up operations on both sides of the Tasman, as

Simon Keast

RESIMAC HIRES NEW BDM

Non-bank lender Resimac has hired former Heartland Bank relationship manager Ben Jamieson as its new BDM. Jamieson joined Resimac on May 6 and

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REGULATION

By Susan Edmunds

Support for new code of conduct Submissions from the mortgage industry reveal limited concerns expressed about new rules.

Mortgage advice groups broadly support the new code of conduct for financial advisers, submissions show – but they would like to see the same qualification standards required of everyone.

demonstrate the same outcomes whether that was in-house learning outcomes or formal qualifications.

A product solution such as a mortgage required the same type of knowledge whether the adviser could offer from one provider or multiple. Nominated representatives should not be given an easier path to competency.

“Having more than one provider simply means that an adviser should also have an appropriate product selection process, in addition to having appropriate knowledge, competence and skill in their area of advice. By allowing entities with nominated representatives to set their own learning outcomes, while requiring individuals and other entities providing advice through individuals, to meet the qualification standard, there remains an uneven playing field in the financial advice sector.”

Mortgage Link said the code should set a minimum number of CPD hours.

The draft code said that CPD should be required but gave no firm guidelines as to how much.

“Codes need to be helpful and provide clear direction and obligation rather than requiring

The code is in the process of being finalised.

As part of that, submissions received by the code working group have been released.

Mortgage advisers and dedicated mortgage groups made up only a small proportion of the submissions received.

But those who voiced their opinions of the code were in favour of most of the changes considered.

The draft code they commented on imposed a level five baseline competence standard for all advisers, a requirement to treat clients fairly, to act with integrity, manage conflicts of interest, take reasonable steps to ensure the client understood the advice, give advice that is suitable for a client and protect client information – among other requirements.

Mortgage and Insurance Link said it supported the principle that all financial advisers had minimum levels of knowledge and competence.

But it was one of the submissions that expressed concern the proposals were letting nominated representatives off too lightly – allowing them to backfill their qualifications with the systems and processes of their employer, while financial advisers had to be able to demonstrate the standard independently.

The group said all entities, including individual advisers or big providers engaging nominated Angus Dale-Jones. representatives, should have to

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interpretation. Imagine having a road code that said ‘do whatever speed you feel is right’. Without some clear guidelines and expectations, principles are open to wide and varied interpretation.”

NZFSG also called for the level five certificate to be required by everyone giving financial advice.

Could an individual who operates as a financial adviser through their limited liability company consider themselves an entity to avoid gaining the level five qualification?

“This would eliminate any confusion and subjectivity. Demonstrating that an alternative qualification satisfies the standard is going to be difficult and may place an unnecessary burden on head groups or mean a cost in obtaining independent qualified verification or gap analysis.

“It is not clear whether a person who has obtained the unit standards under the National Certificate (Standard Set A and Standard Set C), but not completed and received the certificate would meet this standard. We understand the intent is that the certificate must be completed.

If this is correct then wording could be: ‘Have fully completed’ the New Zealand Certificate in Financial Services ... or the National Certificate.

“Could an individual who operates as a financial adviser through their limited liability

company consider themselves an entity to avoid gaining the level five qualification?

Maybe there is a need to define an individual and an entity at the start as you have done with client and financial advice to make it clear.”

NZFSG was concerned about the proposals to require advisers to prove the suitability of advice, particularly the commentary that said: “If the nature and scope of the financial advice includes an actual or implied comparison between two or more financial advice products, the financial advice should be based on an assessment and comparison of each product. This includes, for example, where an existing product held by the client is being replaced by a new product which provides similar features or benefits.”

“Every mortgage or insurance offered by our members would be selected from the suite of available products in the market,” NZSFG said.

“In the case of mortgages, we have access to bank and non-bank lenders. It would be impractical to do a comparison between all mortgage products available and we don’t believe this is the intention of the code. The first sentence could include '... of each product that suits the client’s circumstances'."

Mortgage Express’s compliance and training manager, who asked in the submission not to be named, agreed there should be minimum standards set for CPD as a benchmark for advisers. “A professional development plan is very useful to guide advisers on where their educational gaps are and how to address these each year, therefore evidencing what they are doing and showing competence, knowledge and skill is up-to-date.”

Mortgage and Insurance Link said the proposed requirement to “where practicable, avoid conflicts of interest” was subjective.

“Given that many advisers are remunerated by commission, it could be perceived that this is a conflict of interest and this cannot be avoided unless the adviser charges a fee or works for free. We recommend that there is more emphasis on having clear processes and procedures for product selection and for managing and communicating conflicts of interest to clients.”

More guidance was needed for the standard that requires advisers to ensure a client understands advice, the group said.

“Communicating the advice would need to be done in verbal or written form but how then is the client’s understanding tested?

While this could be done by recording the conversation, the client’s best interests would be better served by having written advice or information about the risks and benefits of the advice.

“While we endorse the code being principles-based if the priority is good client outcomes then the code needs to contain enough detail or be specific enough to facilitate that happening.” ✚

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PROPERTY NEWS

By Miriam Bell

CGT reprieve for investors

A capital gains tax is now firmly off the table but the property environment has changed and investors are being told they need to remember that ... We explain why and how.

Investors nationwide are breathing a sigh of relief after the Government’s recent announcement that it won’t be introducing a capital gains tax after all.

Following the release of the Tax Working Group’s sweeping recommendations earlier this year, many investors feared a capital gains tax in some form was a given.

But when the Government finally released its response to the TWG’s report it shocked everyone by ditching the controversial capital gains tax proposal entirely.

According to Prime Minister Jacinda Ardern, after significant discussion the parties in the Coalition Government were unable to reach a consensus.

She still believes there are inequities in our tax system that a capital gains tax in some

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form could have helped to resolve. “But while I have believed in a capital gains tax, it’s clear many New Zealanders do not. That is why I am also ruling out a capital gains tax under my leadership in the future.”

A capital gains tax might be out, but the Government has confirmed that options for targeting land speculation and land banking will be explored further. Still, investors greeted the Government’s decision with pleased surprise.

NZ Property Investors Federation executive officer Andrew King says the Government’s decision was the right decision to make.

“Good on them for realising that a capital gains tax was not wanted by most people, was unlikely to do what they wanted it to do and for making the announcement they have today.”

But he does note the Government plans to target speculation and land banking and says he is concerned that there will continue

to be a confusion of rental property owners with speculators.

“We hope the Government realises that they need private landlords, who provide about 85% of rental properties, and that hurting landlords will also hurt tenants at a time we have a rental crisis.”

Veteran landlord Peter Lewis, who is vice-president of the Auckland Property Investors' Association, agrees, but says there’s now likely to be a further tightening of tax rules for rental property owners.

“I suspect that alongside new rules around the ringfencing of rental losses, we will see an extension of the bright-line test from five years to 10 years.

“That will mollify the hardcore group which wants to punish residential landlords.

But rather than impacting on established investors, it will actually penalise newer or less established investors.”

Such tax rules are also likely to have a detrimental effect on the rental

market, he says.

For the property industry overall, the ditching of a capital gains tax brings a greater level of certainty to the market going forward. The wait is now on for the Government’s release of a refreshed tax policy work programme mid-year.

FLIPPING MYTH OVERTURNED

In the public mind, one of the main reasons for the introduction of a capital gains tax was to bring to heel investors who supposedly spend their time flipping properties on a regular basis.

However, new analysis shows that investors actually tend to hold on to properties for longer than other buyers.

Prompted by recent drops in sales activity, CoreLogic analysed property “hold periods”, the years between the purchase and resale of a property, to see if property owners are staying put these days.

They found that after a long rise, median hold periods peaked nationwide in 2016 and have actually started to edge down again since then.

CoreLogic senior property economist Kelvin Davidson says the length of time that properties are being held onto before they’re sold has fallen. “But even at its current median of about 7.4 years it’s quite a bit higher than in 2007 when it was a short 3.8 years.”

The analysis implies that shorter hold periods in the past few years suggest more sales activity than otherwise would have occurred, he says.

It also overturns the widely held belief that investors spend their time buying and selling properties at a high rate to speculate on the capital gains.

CoreLogic’s analysis shows that both first-home buyers and movers (owneroccupiers who are relocating) have shorter hold periods than multiple property owners (or investors).

Up until 2015, hold periods were similar for the buyer groups but, since then, first-home buyers and movers who have resold have tended to have stayed in their properties for shorter periods.

In contrast, multiple property owners have not seen the same dip, so a gap has opened up in hold periods.

Davidson says this suggests that landlords haven’t been as willing or able to trade property as they might otherwise have preferred to.

“This reflects the general cooling of price growth and capital gains, the LVR rules, and extra government measures to target speculation, like the bright-line test.

In other words, landlords have had to stick with a property for longer to make the desired profit.”

LANDLORDING IS A BUSINESS

Longer hold periods are worth noting as they illustrate the changing nature of the

property investment landscape – which includes an increased focus on yields as opposed to capital gains.

And that means landlords need to be professional and treat their rental properties as a business. This need is highlighted by three new Tenancy Tribunal rulings.

Landlords from Auckland, Whanganui and Wellington have been ordered to pay a total of nearly $17,000 due to Tenancy Compliance and Investigations Team (TCIT) investigations.

Auckland landlord Peter Wheeler, who owns five boarding houses, was ordered to pay $12,344.64 for failing to lodge tenants’ bond money as required by the Residential Tenancies Act. The Tenancy Tribunal adjudicator described the actions of Wheeler as being “intended to avoid the need to forward bond money to the Bond Centre” and “to avoid future scrutiny by the Tenancy Tribunal”.

Wanganui Home Maintenance Limited was ordered to pay $3,563.52 across eight applications for failing to lodge bonds, failing to maintain the premises, and providing misleading insulation statements.

Wellington landlord Perry Rama agreed to pay $1,000 after he allowed tenants to return to their rented property while it was still the subject of a "Dangerous Building Notice" issued by the Wellington City Council.

He also agreed to pass the management of the properties on to a property management company.

TCIT acting national manager Peter Hackshaw says they proactively assess and investigate landlords to ensure they are treating their rental properties as a business and complying with their responsibilities.

“Landlords who are not meeting their obligations under the Residential Tenancies Act can expect to be held to account, as is the case with these three landlords.”

He says that tenants need to trust that their landlords are doing what they need to do under New Zealand’s tenancy law from the start of the relationship.

“Failing to lodge bond money is a breach of this trust, as is providing inaccurate information on insulation.

“If landlords don’t have the time and knowledge to manage their rental properties as a business, they should pass them on to someone who does.”

A few weeks earlier, Auckland Council also issued a warning to rental property owners: in this case it was that property owners shouldn’t undertake major work on properties without consents in place.

Their warning came after the Council successfully prosecuted two property owners for having illegal additional rental dwellings on their property.

Given Auckland’s ongoing rental crisis, the Council is concerned some property owners are converting existing buildings to rental dwellings. But it emphasises that statutory consents are required for conversions or additional dwellings. ✚

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WHAT’S DRIVING HOUSE PRICES?

UPFRONT – YOUR HOUSE

A tale of

By Miriam Bell

REINZ HOUSE SALES: DOWN

Sales volumes both nationwide and in Auckland were down year-on-year in March.

In Auckland they were the lowest in a March since 2008. But both national and Auckland sales were up on February.

INTEREST RATES: DOWN

The Reserve Bank’s latest OCR comments mean the mortgage rate war is now running hot, with many banks offering sub-4% rates.

Commentators are anticipating a long-term low rate environment.

OCR: DOWN

The Reserve Bank left the OCR on hold at the record low of 1.75% in March. But the bank’s governor, Adrian Orr, surprised everyone by saying the OCR’s next move is likely to be down.

IMMIGRATION: UP

Migration estimates are still volatile after the introduction of a new measuring system. But the latest data suggests that net immigration inflows are on a strengthening trajectory, rather than plateauing.

BUILDING CONSENTS: UP

Building consents nationwide in February were at their highest since the mid-1970s.

Strong growth in consent issuance, particularly for apartments, in Auckland and Wellington is a key driver of this.

MORTGAGE APPROVALS: DOWN

Reserve Bank data shows mortgage lending overall was up in February, both annually and as compared to January. But the share of new lending going to investors remains much reduced.

RENTS: UP

The average national rent remained unchanged at a record high in February.

Auckland’s average rent hit a new record high in February, while Wellington rents WWW.TMMONLINE.NZ 016 dipped slightly but remain at historic highs.

two halves Intense focus on Auckland’s flatlining property market ignores the reality for drama but it does highlight that the country’s property story is now in two distinct parts, reports Miriam Bell.

Anticipation over potential policy changes aside, it has been Auckland that has been hogging the property market spotlight of late.

But these days it’s due to flat, if not slipping, price growth and muted sales activity, rather than market exuberance. And that’s fanning the flames for those predicting a crash.

This speculation is a persistent and ongoing discourse, which just won’t let up. Yet it doesn’t reflect the more complex reality of Auckland’s market. Nor does it reflect the state of the rest of the country’s markets to any extent. The very different state of the Auckland market versus other markets is a tale of two halves, so we’re taking a look at each side of the great divide.

SUPER CITY FOCUS

The halcyon days of the Auckland market’s recent past were never going to last. Price growth of the type seen is not sustainable. When the cycle turned, growth and sales were always going to drop off.

It took a while to become evident, but that slowdown is exactly what is happening in the market now.

QV’s latest House Price Index shows that values in the Auckland region decreased by 1.5% year-on-year and by 0.8% over the past quarter. This left the region’s average value at $1,039,917, as compared to $1,055,992

at the same time last year.

This month’s REINZ data has Auckland’s median house prices dropping by 2.7% yearon-year to $856,000 in March. Likewise the most recent data from Realestate. co.nz records the region’s average asking price dropping to $942,232 in March. Trade Me Property’s shows the region’s average asking price has fallen by $25,000, to $925,550, from its peak in October last year.

Barfoot & Thompson’s price data was slightly more upbeat. It had Auckland’s average sales price at $931,673, which was up on both February and March last year. It also had the median price up on February at $836,000 but it’s considerably down on March last year.

At the same time as prices are flatlining, sales activity across the region can best be described as subdued. According to REINZ, sales plummeted by 18.2% to the lowest number (2,006) for the month of March since 2008. It’s worth noting though that sales volumes were up on February by 45.3% respectively.

Barfoot & Thompson’s data suggests some pick-up in sales volumes, as compared to February. The agency saw 963 sales in March and that’s nearly double the 474 sales seen in February. Yet sales were still not over the 1,000 mark, which is what the agency would expect for sales in March.

Given the data across the board shows new listings, and the amount of housing stock on the market, are both up, there’s a growing consensus that the Auckland market has shifted to favour buyers.

LOOKING NATIONWIDE

Around the rest of the country, the picture painted by the data is far rosier. While growth has slowed overall, many markets continue to perform very strongly. And that is giving support to the national market which still looks very healthy.

According to the QV House Price Index, national property values grew by 2.6% over the past year and by 0.5% over the past quarter. That left the national median value at $686,523 in March 2019. But the strongest value growth is being seen in areas like Rotorua and the Hawke's Bay. Of the main centres, Dunedin and Wellington are leading the way.

Dunedin saw value growth of 13.3% yearon-year and by 3.7% in the three months to March, which left the city’s average value at $451,199. In the Wellington region values rose by 8.4% year-on-year and by 2.2% over the past quarter, leaving the region’s average value at $702,896.

Realestate.co.nz and Trade Me Property’s data both also recorded increases in national prices and strong regional price growth in many markets. However, it was the REINZ data which was most interesting.

First up, it has sales activity nationwide taking a fall. The number of properties sold in March was down by 12.9% to 6,938, as compared to 7,964 in March last year.

Breaking the data down further, 15 out of 16 regions across the country saw an annual

fall in sales volumes. This follows on from a drop in listings in both February and March.

Despite the plunge in sales activity, median house prices around the country increased by 4.5% year-on-year in March, leaving the national median price at a record $585,000. Around the country, 14 out of 16 regions saw an annual increase in the median price and Hawke’s Bay, Otago and Southland all hit record median prices.

NO DRAMA AHEAD

Looking ahead, most commentators are predicting more of the same for the market nationwide, with slowing growth but nothing dramatic. Most also say the Auckland market is plateauing, but has been flat for some time and is settling into a new normal – rather than teetering on the edge of a crash.

BNZ’s chief economist Tony Alexander is outspoken on this. He says extreme view holders are seizing on titbits of information to lay hints that things are ugly in Auckland and about to get worse. As an example, he points to stories about some houses selling for 30% below their RVs and of rapidly falling sales and prices easing in the inner-city apartment market.

He doesn’t set much store for such examples and says they

are entirely consistent with the market being in the flat stage of its cycle. “It will now and then go down a bit, now and then go up a bit. But underneath population growth continues apace, interest rates are falling, and while dwelling consent numbers are high many projects will never come to fruition.”

Alexander says it is not in Auckland that the most interesting housing developments have occurred over the past two years but in the regions, and that will remain the case through this year. “Then we expect to see the regions slowly flatten out as we advance through 2019 into 2020.”

After that the next interesting thing will be Auckland rising again, he adds. “That might happen in 2021, but it feels too soon and people risk placing too much emphasis on the economic stimulus from a really big international meeting and boat races.” ✚

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KIWISAVER

By Michael Lang

KiwiSaver Insight Is regulated financial advice of value?

In 1989, to keep me out of trouble, my parents sent me to school in Berlin. To their horror, shortly after I arrived the Berlin Wall fell. One of my more vivid memories is of visiting my first East German supermarket with only one brand of anything on the shelf. One brand of baked beans, one brand of soap, no shampoo.

One of the great things about a free market, is choice. The choice of organic beans, budget beans, New Zealand beans or imported beans. Of course, no one wants to eat poisoned beans, or expired beans, so rules and regulation are essential. Where the system breaks down is where the choice and preferences of any one group are imposed on many.

Many New Zealanders do not realise that they have a choice between two fundamentally different types of KiwiSaver schemes; those that come with advice and those that do not. In general, those that provide more charge more and those that provide less, well, charge less.

WHO CAN BE AN ADVISER?

Anyone can call themselves an adviser, but when it comes to giving KiwiSaver advice you must be either a Registered Financial Adviser (RFA) or an Authorised Financial Adviser (AFA). Both require training and are subject to regulatory oversight. RFAs may give class advice, akin to general information about a product, while AFAs are able to take a client’s personal circumstances into account and customise their recommendations.

What constitutes advice?

At one end of the spectrum advice helps educate investors about the benefits of KiwiSaver, such as how to access the annual member tax credit of $521 or how to take a contribution holiday. All schemes provide this information, but how it is delivered varies widely from scheme to scheme.

Moving along the advice spectrum at one

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end, is advice from RFAs which can help match clients with an investment which is appropriate to their age and stage. At the other end, AFAs alone are able to help clients tackle more challenging questions such as: What are the options for my retirement? How much of that will be met through home equity and how much through KiwiSaver and what contribution rate is therefore required?

WHAT IS THE VALUE OF ADVICE?

Unfortunately, due to the relatively late adoption of a universal retirement savings scheme, there is a scarcity of research on the benefits of advice in New Zealand.

However, in more mature markets such as the United States there is a wealth of knowledge based on over a generation of experience in saving for retirement.

These studies have found, amongst other things, that unadvised clients are likely to be overinvested in a single asset (undiversified) or not invested in growth assets at all (non-participating) (Calvet; Campbell and Sodini, 2007). Advised clients, on the other hand, earn higher returns after fees principally because their asset allocation is better over the investment lifetime (Foerster, Linnainmaa, Melzer, Previtero, 2014).

As a consequence, research shows financially planned clients accumulate nearly 250% more retirement savings than those without a financial plan (“The

future of Retirement” HSBC 2011). Little wonder then that a survey in 2014 by IRI, which was also written up in Forbes Magazine on August 28, 2014, noted that baby boomers with a financial adviser are twice as likely to be confident about their retirement than those without an adviser.

HOW ARE ADVISERS REMUNERATED?

10 of the 27 KiwiSaver schemes in New Zealand (37%), are structured for advisers to be able to work with scheme members, either through an upfront planning payment, or through an annual payment, or both. In most cases the cost of advice is funded by the manager out of its management revenues. Through facilitating advice to accompany their product, these schemes offer a fundamentally different service.

There is of course no value in clients paying for something they do not want, or worse, want but do not receive.

Unfortunately, there are examples of both in our small market. It would however be helpful for both the Commission for Financial Capability and FMA to distinguish between “advised” and “non-advised” schemes when categorising the options available for New Zealanders in online tools like Sorted and the “KiwiSaver Tracker”. ✚ Michael Lang Chief Executive of New Zealand Funds Management Limited (NZ Funds). Michael's advice is of a general nature, and he is not responsible for any loss that any reader may suffer from following it.

Schemes offering payments for advice vs without advice payments

COMMERCIAL PROPERTY

LENDING

GUIDE Welcome to the first of a series of lending guides TMM is

producing in conjunction with First Mortgage Trust (FMT).

These guides are designed to help advisers successfully submit loan applications for specialist lending.

This first guide runs through what is required when working with a client seeking a commercial property loan.

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COMMERCIAL PROPERTY

LENDING GUIDE GET THE FACTS Before submitting an application, the adviser should undertake an in-depth factfind with the adviser's client. The purpose of this investigation is to understand the application and the client’s objectives.

This can include: • thinking about other options for the building • the possibility of added value • the market conditions in the relevant location.

One of the things to look for with an investment property is the vacancy rates in that locality and what the situation looks like for competing stock.

The client should also consider the number of tenants in the building.

• What would the client do if a tenant relocates?

• What is the client’s “Plan B”?

FMT encourages advisers to meet the client on site and go through the proposed deal. In this way, the adviser will have a better understanding of: • how the deal stacks up • the proposed security property • the tenants • location (see below) • income.

In addition, it is a good way for the adviser to add value to their relationship with the client.

From FMT’s perspective, location is extremely important. FMT prefers to lend on buildings that are in areas where there is: • growing employment • a good population base • s ubstantial council infrastructure • employment opportunities.

Most lenders are not particularly interested in more remote locations and specialist buildings, regardless of what the LVR is.

Factors such as Interest Only or Principal and Interest (P&I) repayments need to be considered, along with information on the source of income that will service the debt.

Remember: The lender will require clear information on the client’s exit strategy.

TENANTED PROPERTY The lender will require specific information if the proposed property is being acquired as an investment, as opposed to being owneroccupied.

Information that will be required includes who the tenant is and how long they have occupied the premises.

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The lease term is vitally important and a lender will prefer to see a long-term lease (or leases) in place, rather than one that is expiring soon (even if there is a renewal). This is often referred to as the weighted average lease term (WALT).

If one of the leases is expiring in the near future, the adviser should ask the client if the client has inquired into the tenant’s plans.

If the tenant intends to relocate, how easily does the client think they will be able to fill the vacant space?

Many leases include renewals, eg the tenant may be on a three-year lease with two consecutive three-year renewals. This is often called a “three-by-three” (meaning after the expiry of the current term there are two more terms of three years each remaining).

At the end of each lease term, the tenant can decide if they wish to take up the next term or move out of the building. The lease will usually determine when the tenant needs to inform the client of their decision.

Other matters that are important to consider include: • Rent reviews – frequency and methodology (CPI or to market).

• Who pays the outgoings – client or tenant (net or gross lease)?

• The provision of personal guarantees from the tenant director/s.

• The provision of a bank bond to secure the tenant’s obligations.

When submitting an application for a multitenanted property, details should include a schedule with the details of each lease.

Also, copies of all leases should be provided. It is preferable that leases are in the Auckland District Law Society (ADLS) format and amended as appropriate. The ADLS form is well understood.

The lender will also want to know the status of the lease, and whether the tenant has ever defaulted. Confirmation of this will usually be a condition of the loan.

Further securities may be required by way of a general security agreement (GSA) and/or assignment of landlord’s interest in leases.

OWNER-OCCUPIED PROPERTY The investigations for an owner-occupied property might be different from an investment property, but the required securities are likely to be quite similar.

Even with an owner-occupier building, there is often a lease in place. The common structure is for the client’s: • family trust to own the building, and • trading company to be the tenant.

The lender is likely to require a GSA and personal guarantees from the tenant’s director/s (and potentially shareholder/s).

The trading entity’s income will form part of the overall assessment. Accordingly, financial accounts of the trading entity will be required to determine that debt servicing can be met. A guarantee from the trading entity will probably be a condition of the loan, to support the obligations of the borrower.

UNIT TITLED PROPERTY If the property is unit-titled, then information about the Body Corporate will need to be supplied with the application. The Body Corporate is the entity that manages the common areas of a unit title development and keeps the improvements insured.

The adviser should obtain a copy of the Body Corporate: • insurance • rules • minutes (of (at least) the most recent annual general meeting) • budget • latest financial accounts • current and Long Term Maintenance Fund account balances.

VALUATIONS The adviser will need to submit a valuation as part of the client’s application. The valuation should:

• be prepared by a registered valuer approved by the lender • be addressed to the lender and be no more than 90 days old • record that it is for mortgage or finance purposes rather than insurance • include a market rent appraisal (this is helpful for the lender to assess the proposed deal) • be prepared based on vacant possession if the security property is owneroccupied.

It is worthwhile to note that the lender will be making its assessment on the “bricks and mortar” value of the building, not the business value of the client’s trading entity. This is particularly relevant when looking at a security property that provides accommodation.

SALE AND PURCHASE AGREEMENT The adviser will need to gather information (including a copy of the sale and purchase agreement) in relation to the security property to determine/verify: • the position with GST • the purchase price • the status of the agreement for sale purchase (conditional or unconditional) • whether the deposit has been paid and where it is held.

COMPLIANCE

The lender will inquire as to whether the security property has a: • code compliance certificate (if constructed after 1993) • certificate of public use • current building warrant of fitness (WoF). A WoF is required where the security property has specified systems such as fire systems, automatic doors, extraction fans) • seismic report to determine the earthquake rating of the security property (see below).

SEISMIC REQUIREMENTS

Information in relation to a security property’s seismic rating has become far more important to lenders post the Canterbury earthquakes.

Lenders may have different requirements and differing loan to value ratios dependent on the rating.

FMT strongly prefers that the security property is at least 67% of the National Building Standard (NBS). Most lenders would be reluctant to take security over buildings that have a rating of less than 34% NBS. Such buildings are deemed earthquake prone.

If the client is not aware of the NBS rating, the adviser should contact the local council to see if the council has an initial evaluation procedure report (IEP). If the building does not already have a seismic report or an IEP report, then the client should approach an engineering firm to provide a detailed seismic assessment (DSA). The lender can usually provide a list of firms capable of carrying out this work.

The information in this guidance is general in nature and is not legal advice. We do not certify as to the accuracy of any information in this guidance and will not accept liability for any loss, damage or inconvenience arising as a consequence of any use of or the inability to use any information on this guidance. We assume no responsibility for the contents of this guidance.

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INTELLIGENCE

By Kelvin Davidson

Lending activity drops back a little in March The latest figures from the Reserve Bank (RBNZ) showed a small fall in the value of mortgage lending in March, reflecting fewer loans (but not a fall in the average size of each loan).

Meanwhile, the banks continue to operate well below the LVR speed limits, with only 12.5% of lending to owner-occupiers done at >80% LVRs in March, versus the speed limit of 20%. The scrapping of capital gains tax proposals and the prospect of a cut in the official cash rate could help to support the market in the coming months.

CoreLogic Senior Property Economist Kelvin Davidson writes: There are three key points from today’s mortgage lending statistics.

First, the value of lending dropped year-on-year – it was a small fall, but still the first since March last year.

Second, the number of loans is soft, but each loan on average is bigger.

And third, banks are still operating well below the LVR speed limits. For those that can pass the deposit, income/expense and serviceability testing hurdles, the competition amongst banks and “rate wars” are still making it a great time to be a borrower.

Looking at the actual numbers, there was $5.77 billion of mortgage lending in March, down slightly (about $80 million) from $5.85 billion a year ago. The figure for owner-occupiers was up by more than $180 million from a year ago, so the overall drop was driven solely by investors (see the first chart).

By borrower type, first home buyers (FHBs) with less than a 20% deposit (or >80% LVR) remain a key group in the market, with lending up by 43% year-on-year in March (see the second chart). Larger average loan sizes have played a key role here – about $461,000 in March, compared to about $430,000 a year ago (see the third chart). On a 25-year

mortgage at a 4% interest rate, that equates to an extra $75 per fortnight in repayments.

Despite the growth in the high LVR segment, the speed limits are not yet within sight. In March, 12.5% of lending to owner occupiers was at >80% LVR, well below the cap of 20%. Past experience suggests that this figure could push up to about 15% – which would help to provide support for lending flows in the coming months – before flattening off and the banks keeping the “extra 5%” as a safe buffer.

In addition to all of that, there’s a couple of related points to note from the past month. First, there’s the surprise indication from the Reserve Bank that the next move in the official cash rate (OCR) could be down in the near term rather than up in the long term. Although that may not directly lower mortgage rates itself, it does raise the chances that they’ll stay at current levels (favourable for borrowers) for longer. After all, independent of OCR speculation, the lending environment is already competitive and “rate wars” have re-emerged

Annual change in lending, $ million (Source: RBNZ)

Annual change in lending, % (Source: RBNZ)

(see the fourth chart).

Second, the prospect of a broadbased capital gains tax (CGT) has been scrapped, which may bring back a few would-be property investors to the market who had previously been on the side-lines as they waited to see the outcome of the CGT debate. Of course, that effect may not be huge, given that on the other hand, the tax ring-fence for rental property losses is passing through Parliament and will apply to the current tax year.

All in all, March was a slightly softer month for lending activity, but it was hardly a disaster, and there are signs that growth could resume again in the next few months. That may not bring about a big rise in sales volumes or property values, but it should at least help to keep them relatively stable. ✚ Kelvin Davidson is the Senior Research Analyst at CoreLogic.

Average loan size (Source: RBNZ)

Average two-year fixed mortgage rates, % (Sources: CoreLogic, interest.co.nz)

023

ROUNDTABLE

By Dan Dunkley

Regulation to

reshape industry

From left: Glen McLeod, Stephen Massey, Bruce Patten, Jenny Campbell, David Cunningham (on screen), Philip Macalister, Daniel Dunkley, Adam Ward, Josh Bronkhorst.

Incoming regulation and the fallout from the Royal Commission look set to reshape the New Zealand adviser industry, according to attendees at this year’s TMM Roundtable.

TMM brought together New Zealand’s top advisers, banks, and non-bank lenders to discuss the biggest issues facing the market in 2019. Regulatory changes, both present and future, dominated the agenda, as the industry’s leading lights discussed the most pressing topics.

The roundtable took place as the Financial Services Legislation Amendment Bill (FSLAB) completed its final reading in parliament.

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Changes to the Financial Advisers Act will redefine the adviser landscape as groups consider their certification under the new regime, and whether they should become a Finance Advice Provider (FAP).

This year’s roundtable featured Stephen Massey of Avanti Finance; Glen McLeod of Edge Mortgages; Adam Ward, head of thirdparty distribution at ANZ; David Cunningham, chief executive of Co-operative Bank; Jenny Campbell, National Sales Manager for Astute; NZFSG’s Bruce Patten; and Josh Bronkhorst, managing director of Mortgage Link.

The group looked at the incoming impact of FSLAB, the future of trail and upfront commission, whether adviser numbers will

fall in the coming years, and the threats and opportunities presented by technology.

Attendees also looked at the extra scrutiny on customer outcomes, as New Zealand regulators look to avoid a Royal Commissionesque financial services scandal.

Participants agreed advisers are set to come under more pressure than ever on outcomes and relationships. They said regulation would pose a challenge but could weed out poor advisers and ultimately strengthen the sector. The panel expects a busy year amid a continued period of low interest rates.

To listen to this year’s TMM Roundtable, please visit www.tmmonline.nz

sponsored by Q: HOW DO YOU VIEW THE STATE OF THE ADVISER MARKET?

Participants expressed fears about the incoming Financial Advisers Act changes. Advisers said the market was waiting for confirmation of the new regime.

Bruce Patten, head of growth at NZFSG, said volumes had “started to dwindle” as banks have tightened lending criteria due to their own regulatory scrutiny. “It is getting harder, applications are taking longer, and bank turnaround times are getting tougher.”

Patten said there was an “added burden, and we haven’t even got to the full regulation yet”. He said tightening from the banks had “begun to bite with a lot of people’s businesses, and that will get more significant over time”.

The roundtable took place as the Financial Services Legislation Amendment Bill (FSLAB) completed its third and final reading in early April.

The regulation passed its penultimate hurdle before it comes into effect, leaving advisers pondering their future.

Patten said advisers were uncertain about whether they should become a Financial Advice Provider (FAP) under the new regime, or operate under a group with a FAP licence. He said advisers and groups were unsure about their status. “I have had a number of conversations today; everyone is asking whether they should be a FAP.” Patten added: “There’s real uncertainty. I’ve had another call from a group head who is unsure about whether they want to be a FAP, or their members should be. If you talk to different people, you get a different answer.”

Mortgage Link’s Bronkhorst said he “echoed” Patten’s concerns, and said his business was working through the uncertainty with its members. “We did what we called a ‘licence-ready’ roadshow in September. Since then we have had advisers do nothing and say nothing, because there’s so much uncertainty.”

Bronkhorst added: “We’re clear where we want to go as a business, but we have had more advisers come up to us and say they might do their own licence.

Although, the bulk want to be told what to do. I would say 80% of our advisers would like us to be a FAP, and work under us.”

McLeod of Edge Mortgages said advisers were waiting for more clarity before they dived into regulatory compliance. “Every time we did something [in the past] it would change halfway through.

So advisers are saying hold on, let’s get this legislation passed.

The advisers under groups are waiting for leadership, but it is hard when groups don’t know the direction either.”

Stephen Massey of Avanti said: “I’ve been to presentations recently and the regulator has been saying, ‘don’t do anything’. So we can’t really blame advisers. I don’t think we can be surprised that advisers are only just starting to take

The world is going to change, but in a positive way for good advisers.

Jenny Campbell a position.”

Regulation has prompted some groups to consolidate.

The Mortgage Supply Company recently moved its aggregation to new Aussie player Astute Financial. Jenny Campbell, now Astute’s National Sales Manager, said Astute, NZMA and Mortgage Supply would be a FAP under Astute.

Campbell said the new financial advice regime gave groups a chance to “get to know their advisers better”. She added: “It’s not going to be the open aggregation model we had seen before, it’s about picking and choosing, and focusing on quality.”

Campbell said she was “worried” too many individual advisers would become FAPs. “We might end up with 50 with million FAPs, and regulators are not ready for that,” she added.

The panel said it would be difficult for groups to work out what liabilities to take on behalf of their members. “It is a huge call for a group, and we have all been guilty of not having enough oversight of our advisers, day to day. The world is going to change, but in a positive way for good advisers,” Campbell said.

Lenders expressed concerns they could have too many

accreditations and FAPs to deal with. Adam Ward of BNZ said: “From a group perspective, we have about 13 heads of agreement at the moment. ANZ might have 20 or more. Are you suggesting all of a sudden, I might have 500 heads of agreement? I can tell you right now, that is not going to work.”

Ward added: “Surely you want a group that provides support for you to meet your legal requirements so you can get on with what you’re good at.”

Massey of Avanti agreed, adding it would be “a lot of work” for lenders to handle hundreds of adviser-level accreditations.

Ward said BNZ has not made a “final call” on how it will treat individual advisers with FAP licences. “If the regulator got 600 applications, how do they audit and manage that?”

David Cunningham of The Co-op Bank said he hoped for an “industry solution”. He said the adviser industry needed to get together and formally set a standard, “rather than making up our own standards”. “I think standards for the industry need to evolve,” Cunningham added.

Q: WILL ADVISER NUMBERS BE IMPACTED

BY INDUSTRY REGULATION?

Advisers believe new regulation will weed out bad operators in the sector, and predict adviser numbers will decrease.

Jenny Campbell believes “there will definitely be a fall, no question”.

“That is a good thing though, as it will bring professionalism levels right up. It’s good for the good operators. Those who aren’t up to speed will have a tough decision to make. Those that won’t be excluded from the market might have to join branded groups,” she said.

BNZ’s Ward expects a shake-out in the industry in the coming years.

“A lot of people have come into the market, thinking it’s easy money.

As the market tightens, it will get tougher, and you will see advisers drop out,” he said.

Bronkhorst said the licensing model under the new financial advisers' regime would directly impact adviser numbers. He said only high-quality advisers should be allowed to operate under a FAP licence. “If you don’t have the ability to become a FAP in your own right, you should not be given

INDUSTRY EXPERTS

Stephen Massey Avanti

Bruce Patten Loan Market

David Cunningham

The Co-Operative Bank

Josh Bronkhorst Mortgage Link

Jenny Campbell

Mortgage Express

Adam Ward bnz

Glen McLeod

Edge Mortgages

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ROUNDTABLE

By Dan Dunkley Jenny Campbell and Glen McLeod.

Bruce Patten. entrance into a FAP.” Patten of NZFSG, New Zealand’s largest group, also predicted adviser numbers would fall. “I think there will be a runoff, but it will take time because of the interim licensing period.”

Patten said New Zealand advisers could learn lessons from Australia. “With Loan Market, which has 650 advisers, many spent tens of thousands of dollars getting their own license, thinking that was the way to go. The market encouraged them to get licensed, saying their business would be worth more. Now, we don’t have a single licence, holder in the whole group in Australia, and every single person is under Loan Market.”

When asked whether regulation had improved the quality of advice in Australia, Patten said it was debatable, as many groups failed to audit and police themselves.

“A lot of the big groups did no auditing, and got smashed by the Royal Commission.

Unless the FMA audits all of the groups, we

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Advisers expect more focus on culture. will have the same issue over here.”

Q: HOW WILL THE FMA AND RBNZ CONDUCT AND CULTURE REVIEWS AFFECT THE MARKET?

Lenders said the Reserve Bank and FMA reviews into banking and insurance conduct would have a knock-on effect on mortgage intermediaries.

Cunningham said the “fixation” on customer outcomes was becoming “allencompassing”. He said this would force banks to focus on intermediaries and how they handle customers. “It’s forcing a hell of a lot of change ... The broking industry is dancing to the tune of regulation, and banks are dancing to the tune of the RBNZ and FMA.” Cunningham described the focus on good consumer outcomes as an “opportunity and a threat” for the adviser industry. He said the lack of a clear definition of “good outcomes” made it difficult for banks.

BNZ’s Ward said there were

Jenny Campbell. “conversations in our business around customer outcomes”. He said the bank was working on how to measure good customer outcomes. He added: “I’ve always said sales and incentives are not the issue. If they are a good broker or banker they will be doing the right thing, no matter how you are paying them.”

Ward said a more consistent approach to sharing information could help advisers and banks achieve better outcomes. “Our biggest problem is the fact that we do not have consistency in the way we capture information. It impacts turnaround times and our ability to automate. As advisers and banks, we need to get together and work on this stuff, which is not competitive.”

Ward said New Zealand could learn from Australia’s Combined Industry Forum, which was formed in 2017 to help the country’s mortgage sector address governance and remuneration practises. “We should be able to do that here in New Zealand,” he added.

“I’ve been talking to ASB, ANZ, Westpac

sponsored by about that, to ask what we want. But I’d like a bankers’ body or association to pick the issue up, as it is hard for a single bank to lead it.”

Lenders said they would focus more on adviser-customer interactions in light of the recent FMA and RBNZ conduct reports.

Ward said more consistent information gathering would help advisers and banks stay on top of the issue. “It has to come down to consistency in applications and what questions you ask. I think we will get

If you don’t have the ability to become a FAP in your own right, you should not be given entrance into a FAP. Josh Bronkhorst there,” he added.

Cunningham added: “The RBNZ and FMA life insurance report was clear, they expect manufacturers to know about the conversations intermediaries are having with their customer ... You have to trust the adviser has the right training mechanisms to ensure there are quality conversations, and that follow-ups are happening. Both [banks and advisers] will have accountability.”

Massey of Avanti added: “We place a huge amount of reliance on the advisers and groups we have relationships with, to ensure the relationships are good. It is not uncommon for us to ask an adviser to go back to their client for more information. We can’t take risks. If an adviser isn't getting things right, we may choose not to do business with that adviser.”

Ward added: “There are initiatives out there, but no one has gotten to a comfortable level. We have had a look at a couple of [technology solutions] but haven’t gotten comfortable with the security aspect yet. But it will eventually reach a tipping point where it becomes the norm.”

Patten said the mortgage sector was yet to adopt the basics. “We don’t even have electronic lodgement,” he said. “We’ve been talking about that for ten years.”

Cunningham expects initiatives like Open Banking (the shift towards opening up bank data to authorised third parties) will improve the way information is shared between customers, banks and advisers. “In two years, we will be surprised at the pace of change, as there is a willingness on behalf of banks to move things forward.”

With technology set to take over traditional adviser roles, such as information gathering and analysis, advisers might be forced to reassess their value proposition, Ward said. “As an adviser, I’d be thinking about my value proposition. If all that information is available online, from valuations to assets and liabilities, what is my role? Banks might be quick at turning information around one day, and that would be quite a shift. The market could change for all of us.”

Campbell said digital advice was likely to become more common over the next few

Q: HOW WILL TECHNOLOGY IMPACT THE ADVISER INDUSTRY.

Roundtable participants were divided on the threat and opportunity posed by new technology.

Adam Ward of BNZ said the true impact of technology “may be five years away”, and said he was frustrated about the slow pace of change in some areas. “It is so easy to share information now.

Data scraping would be fantastic. We should know your spending habits, but as an industry, we are not good at mining information. It could solve problems for us around showing true serviceability.”

years: “Technology is going to play a big role in how we interact with clients. There are so many efficiencies available. For example, there’s nothing to say you can’t be giving advice, as long as it is recorded.

Technology is going to change the way we deliver advice.”

McLeod said he wasn’t worried by the rise of technology. “The more information we have, the better advice we can give. We like to embrace tech. We can go through statements and we can pick up trends.

Having that and being able to present it to lenders with full analysis helps outcomes across the board.”

Patten said technology would help the gathering and analysis of information, making the human advice component more important. “The generation after Millennials do not want a bar of me, and we will have to have technology in place for them. We need to be evolving.”

Q: WHY CAN’T THE INDUSTRY SOLVE TURNAROUND TIMES?

A lack of consistency in applications, different approaches from different banks, and difficulties with technology are to blame for slow turnaround times, according to our roundtable participants.

According to the TMM Annual Adviser Survey, turnaround times remain the biggest problem for advisers, despite efforts to introduce e-lodgement and other solutions to speed up the process.

BNZ’s Ward said 40% of its loan book came through brokers last year, up from about 22% in 2015. He said the level of growth made it difficult for BNZ to process applications and left the bank reliant on hiring more staff. “The only way to address that [growth] is to add people,” Ward said. “We need technological solutions to streamline the process,” he added.

McLeod and Ward said advisers who send out multiple applications to different lenders exacerbated the problem.

Ward said BNZ had started to review individual broker performance and conversions. “You need to see where people are playing the system, and not converting,” he said.

Cunningham said Co-op Bank turned around applications within a day, and said capacity was not a big issue for small lenders.

Q: HOW WILL THE ROYAL COMMISSION AFFECT REMUNERATION HERE?

Stephen Massey.

Most of our panellists expect the Royal Commission and Hayne Report to influence the behaviour of the Aussie-owned "big four" lenders.

Following the Hayne Report, the Australian government is reviewing upfront and trail commission. The opposition Labor Party, which could come into power later this year, wants an immediate trail ban.

Campbell believes New Zealand will

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ROUNDTABLE

By Dan Dunkley Josh Bronkhorst.

Glen McLeod.

“be driven by what happens in Australia”. She added: “Why would the big Aussie banks here have two separate remuneration models in the same region? It makes no sense at all.

There has been a definite softening, but we will have to wait and see.”

Patten agreed. “Whatever happens in Australia will be mirrored here. I do not have a single bit of doubt about that."

Patten said even domestic lenders could make remuneration changes if the big four move first. “Kiwibank has said if all the other banks get out of trail, they can’t justify it to the FMA, and they don’t have to do anything the Australian banks do.”

Ward added: “We have come back from Armageddon in Australia to where we are now. They have kicked the can down the road. Will Australia influence us? Of course.

Does it mean we will do exactly the same thing? Not necessarily.”

Ward said NZ banks “will be wary of anything that could mean a bad customer outcome”. He added: “Trail is not necessarily

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a bad thing, but how can you show it has generated a good customer outcome?”

Patten said advisers would need to do more to demonstrate they had provided an ongoing service.

Some attendees expect little change on the remuneration front. Bronkhorst said New Zealand was a “totally different market”. He added: “In Australia, they have been paying trail for such a long time, and it has become ingrained in the way people have behaved, it has driven negative behaviour. Behaviours here are very different.”

Cunningham said “New Zealand can chart a different course from Australia”. “We can have two different outcomes across the Tasman, and I don’t think what we are seeing from the Hayne report will come to pass.”

Q: SHOULD ADVISERS DIVERSIFY BEYOND HOME LOANS?

Mortgage advisers have an opportunity to diversify and cover all of their clients’ financial

Stephen Massey.

needs, according to our panel.

Patten said advisers had untapped opportunities in their contact books. “I spoke with an Aussie adviser who was writing more than $200 million a year, and he said ‘why would I want to diversify?’ On the other hand, if you’re writing $15 million, why would you not cross-sell everything you can?”

Patten added: “I believe we have to do more for clients, and that’s why I have a full-time insurance adviser in our business. I know that we get three times more referrals from clients we write mortgages and insurance for. It’s a no brainer.”

Campbell said advisers might find it difficult to diversify due to the extra qualification requirements. “It makes sense to have a holistic approach, but advisers will need to be qualified in both streams.

There’s a lot of work for them to do around that.” Campbell said diversification may suit “smaller, regional players”.

Ward said he was a “big fan” of diversification. “In five years’ time, firms that

sponsored by

Adam Ward. have diversified will be more successful.

Tech could change, and a lot of the stuff advisers look after now could be gone. But if you are looking after everything and you are integrated into their life, you have evolved with the customer.”

Q: WILL ADVISERS GROW MARKET SHARE IN THE NEXT YEAR?

BNZ’s Ward expects advisers’ share of the mortgage market to increase over the next year. He said adviser business represents about 50% of its mortgage loan book, up from 22% four years ago.

Ward said developments including the Royal Commission and LVR restrictions have driven customers to specialist advisers. “It has raised the profile of the adviser industry, and that isn’t a bad thing.

It is challenging for banks to keep up, let

Daniel Dunkley.

The broking industry is dancing to the tune of regulation, and banks are dancing to the tune of the RBNZ and FMA. David Cunningham alone customers, so I predict the adviser channel will grow.”

McLeod agreed, and was bullish on the year ahead: “With what we are seeing with compliance, we are gonna get an increase in volumes,” he added.

Stephen Massey.

Cunningham expects levels to be “around the same” next year, representing about onethird of its loan book. “We have seen stronger growth of the broker channel in Australia, and part of the reason for that is New Zealand banks work well with their customers. I don’t think it has changed radically in 20 years.”

Patten said regulation would continue to make it difficult for borrowers, pushing customers out of bank branches and into the arms of advisers: “The Responsible Lending Code was great for advisers. The banks did a terrible job explaining the Code. They said no, and customers didn't know why. We got a huge inflow of business just from that one piece of regulation.”

Campbell, meanwhile, said she was “very positive” about the adviser channel and expected volumes to remain at similar levels.

“I’m feeling optimistic about the adviser market in general.” ✚

Philip Macalister.

029

MY BUSINESS

By Miriam Bell

Taking control of business

Auckland-based John Keenan recently established his own mortgage advice business, JK Mortgage Solutions, which is informed by his commitment to providing excellent client service.

WHAT PROMPTED YOU TO GO INTO MORTGAGE ADVISING? HOW DID YOU LEARN ABOUT THE BUSINESS?

When I bought my first house it wasn’t a great experience. Then I saw an ad for Mike Pero Mortgages. And it all prompted me to become an adviser to help other people have a better experience than I had. That was 16 years ago.

My first job was at Mortgage Link and I loved it. I soon realised that banking experience was necessary. So I went and worked in banking – first at Superbank, then Westpac and ANZ – as a mobile mortgage manager for 12 years. After that, I moved to SuperCity Mortgages and I was there until recently.

YOU RECENTLY WENT OUT ON YOUR OWN: WHAT INSPIRED YOU TO DO THAT? 030 WWW.TMMONLINE.NZ

Eight months ago, I established JK Mortgage Solutions. My motivation was the desire to build a business of my own based around client service and adding value. It was about doing my own thing and being in control.

To date, business has been going well.

This first year is largely a transition year, one of putting the processes in place. But I have quite a big existing client base who are very loyal. And I’m enjoying working to build that further.

WHY ARE YOU PASSIONATE ABOUT THE INDUSTRY?

It all comes down to helping people. When someone rings up and they don’t know what they are doing, but you are able to take their hand and walk them through the whole process to ensure they get a great financial outcome, it’s a great feeling. That’s why I love what I do.

HOW DO YOU APPROACH BUSINESS DIFFERENTLY TO OTHER ADVISERS?

I pride myself on not just effectively demystifying the mortgage process for new clients, but on providing a comprehensive ongoing service to my existing clients.

IS THERE ANY PARTICULAR AREA THAT YOU SPECIALISE IN?

After being round the traps a fair bit over the years, I’ve built up experience in most areas. I enjoy the refinance market as there is so much potential to help people to save money or even get a windfall.

But I do like working with first-home buyers too. They are like deer in the headlights initially so it always feels satisfying to ensure they don’t get themselves into trouble and instead wind up with a good deal.

DO YOU MAKE USE OF SOCIAL MEDIA AND NEW TECHNOLOGY OR PLATFORMS IN YOUR WORK?

I’ve been a bit resistant to making use of social media in the past. These days, having gone out on my own, I’m making the transition and I’m focused on using it much more effectively. It is marketing really.

But I’m a firm believer that it is good old word of mouth which, ultimately, generates the most business.

WHAT HAS BEEN THE HIGH POINT OF YOUR TIME IN THE BUSINESS? HOW ABOUT THE LOW POINT?

One of my high points involves one of my first clients. When he came to me, 15 years ago, he had six children and was the family’s sole income-earner. His previous adviser had tied him into a second-tier lender and he was struggling. I managed to get him back to a main bank and back on track. And he is still my client today – he has followed me everywhere I have gone.

The low points are always the deals that should be done for someone but no matter what you do you just can’t get the deal over the line anywhere for some reason – be it the property or income or an issue from the past.

believe that ensuring advisers across the board have a particular level of knowledge will be good for the industry. As an adviser, it’s always good to boost your knowledge and experience.

For anybody who baulks at spending the money and time to get up to speed, it might be that it’s not the right profession for them to be in. It’s important for advisers to be professional and trustworthy.

WHAT ARE YOUR BIGGEST LONG-TERM BUSINESS & PERSONAL GOALS?

I would like to grow the business more going forward. I’d like to build a brand that clients know they can trust to provide a high level of service, one which has a great reputation with both clients and banks.

WHAT ARE YOUR TOP TIPS FOR OTHER ADVISERS?

FROM: Born and brought up in Auckland, in Epsom.

FAMILY: My wife and twin sons OUT OF WORK INTERESTS:

Fishing, squash.

FAVOURITE TV SHOW: Game of Thrones.

FAVOURITE FILM: The Shawshank Redemption.

FAVOURITE BOOK: River God

by Wilbur Smith.

FAVOURITE MUSIC: Pearl Jam.

First up, it should always be 100% about your clients 100% of the time. But also always remember that you will get found out if you are not looking after clients. It’s that word of mouth, talk around the BBQ thing: it keeps you honest. ✚

DO YOU HAVE A MENTOR? IF NOT, WHO HAS MOST INSPIRED YOU IN BUSINESS & IN LIFE?

I have been lucky enough to have worked with quite a few inspirational people over the course of my career. But it would be my dad who was the biggest influence on me: he showed me how to get along with everyone and he was a great bloke.

WHAT’S THE BEST ADVICE YOU’VE EVER RECEIVED?

Never let an opportunity pass you by!

IS THERE A TYPICAL WORKING DAY FOR YOU? WHAT DOES IT LOOK LIKE?

I have a home office so I have a pretty short commute every day. During the day, it’s pretty intense on the work front. But working from home means that I have flexibility. So I can help with the boys more. I’m round after school and I haven’t missed one of their sports days in three years.

That’s important to me. Usually I’ll do some more work in the evening. It’s a good balance.

WHAT CHALLENGES – FOR YOURSELF OR FOR THE INDUSTRY DO YOU SEE AHEAD?

The financial advice industry is gearing up for changes. I

031

SALES & MARKETING

By Paul Watkins

Stand out

from the crowd

Gaining trust and the ever-changing face of advertising mediums doesn’t have to be as tricky to negotiate as it may seem.

To win the promotional war out there and stand out from the crowd, you need advertising that captures your target groups’ attention. There is an art to crafting them so that the phone will ring, or the web enquiry form is filled out, or they give you their contact details.

I’ve had questions from brokers about how to word both online and offline adverts, blog posts and websites, as they need regular updates. Traditional media is failing to attract attention, with radio and press not giving the return on investment they used to. Advertising is harder now, and it’s usually due to the message not connecting with the

032 WWW.TMMONLINE.NZ

target audience or being too general. I have written about something similar before, but it’s worth going over some key points of constructing an advertisement again.

“Pick me!” is the sentiment in most. “Best rates”, “I can search all lenders for you” are headlines that don’t have much impact as they are too general and don’t meet the expectation of prospects. This is because they are almost in the hygiene-factor category, meaning expected by prospects.

Why would they go to a broker who didn’t offer the best rates or who couldn’t access multiple lenders? Such ads don’t set you apart one iota, as you could change the brand name on the ad to that of one of your competitors and it will most likely fit.

The key is to address the prospects “problem” head-on, both at a financial and emotional level. You are offering financial solutions but purchases and money decisions are based far more on emotion

than logic. People took out mortgages 30 years ago at over 16%, which on the face of it is ridiculous, but it didn’t stop them taking them out, as they still allowed them to get into the house they wanted.

The first thing to understand when constructing an ad, is that people only buy things when their lives have been disrupted in some way. Something must have happened to prompt them to even look.

Perhaps their circumstances changed, such as getting married, a relationship bust-up, come into money, believe they have finally reached the required deposit, are sick of renting, need to downsize due to family leaving home, need to refinance due to crippling mortgage repayments or another event. No one just wakes up and says. “I might go get a mortgage today.”

This is your starting point. Each of these is a problem, so must be treated as such, by acknowledging the problem and offering

a solution. It’s not about you, as 90% of ads are. I regularly see ads from brokers that start with “We can” or “I am able to” or “We specialise in” or “We find the right mortgage”. These are all about you and nothing to do with the prospect’s problem. As a prospect, I don’t care who or what you do, I care about how you can fix my problem.

It must be emotionally charged and relate to the feelings around obtaining a successful mortgage. I know what you are thinking: how can you speak about mortgages while appealing to their emotions? They are blackand-white products taken out for perfectly logical and financially sound reasons, complete with calculations, processes and form filling. Nope. Wrong.

As a prospect, I don’t care who or what you do, I care about how you can fix my problem.

You don’t sell home loans. You offer ways people can achieve their hopes and dreams. They only take out a mortgage to buy the house they want. No one wants a mortgage. Why would you saddle yourself with enormous debt on purpose? What they want is that desirable home, and to get it, the mortgage becomes the method. It’s an extremely emotional transaction.

Before we go further, if you acknowledge the specific problem, this means you must identify the niche it applies to. Is the ad

aimed at first home buyers, self-employed, those wanting to refinance or another group? Identify your target group and match the problem and solution to it, as each niche is motivated by completely different reasons.

If you get this part right, the ad is not as hard to write. It should never be about the product, but always about the desired outcome and emotions of the prospect.

Here is a 4-step process for creating an ad.

Go through these points in order.

1. Acknowledge their problem or pain, specific to the target niche.

2. Point out some ways or a process to overcome the pain.

3. Illustrate how this works with an example (based on a real client hopefully).

4. Convert the talk into action, by inviting them to act.

Using these guidelines, let’s say you are targeting self-employed prospects. The pain is that their income can be lumpy and unpredictable, so not something many lenders like to see. The solution is that you know successful ways to get the home they want, despite the nature of their income.

You would illustrate this with an example of a self-employed couple who had only been in business for three years and yet you managed to get them into their desired home near the school they wanted for their kids (kids always add a touch of emotion).

The serial entrepreneur US based Gary

Vaynerchuk said, “If you are not communicating what’s of value to THEM … versus what’s valuable to you, then you are irrelevant in the 2019 world.”

The final part is converting the talk into action. This comes from either inviting them to call and find out more or to act on something that evokes trust in you. Examples would be to download something of value (if the ad is running online) or book a call with you (which can be set up electronically) or to text a key word so you can get back to them.

Note that “Call now!” doesn’t work like it used to. We are far too sceptical and untrusting of offers and promises. While you would still include such a call to action, give them something of value as well, such as access to case studies they might be able to relate to. Let them see your knowledge and expertise in action. This gives you their contact details.

Advertising has three core components, the media, the offer and the creative. If you know exactly who you are targeting, being the niche, the media choice becomes easy as you can work out what media your target group uses (Facebook, Google Ads, press, magazines). The offer must follow the 4-step process listed above. The final bit, being the creative, is what it looks like: the colours, the style and the method (video, cartoon, very large headline). This can often be decided by the media you choose.

Advertising and promotion are an art form.

And it is a war out there to win hearts and minds above your competitors. The rules haven’t changed, despite social media’s rampant disruptive impact, but the way you target, construct and execute your ads now requires a lot more thought. ✚ Paul Watkins writes blog content and newsletters for financial advisers.

What used to work is always the thing that is going to put you out of business - Gary Vaynerchuk

IN THIS BOOK YOU WILL LEARN: •

A new book from Paul Watkins.

Uber disrupted the taxi industry, Airbnb disrupted the accommodation industry, and social media is disrupting how financial advisers gain clients.

• • •

How the old ways of prospecting for clients have been seriously disrupted by social media How trust is the new currency Why websites don’t generate leads The 5-steps to growing your perfect client-base using social media

WANT TO BUY? Buy from: intelligentinvestor.co.nz or direct from Paul at: paul@paulwatkins.co.nz

033

LEGAL

By Jonathan Flaws

Moving the goal posts

Jonathan Flaws provides an overview of FSLAB’s recommended changes and how they will impact advisers.

In what seems like a galaxy far, far away in another millennium, credit law was governed by the Moneylenders Act 1908. Lending at a rate of more than 10% pa made you a moneylender.

That Act lasted for 73 years until the Credit Contracts Act 1981 was enacted to replace it. This only lasted 22 years and was replaced by the Credit Contracts and Consumer Finance Act 2003 which lasted with little amendment for 10 years until the 2013 amendment which has lasted for six years until the Credit Contracts and Consumer Finance Amendment Bill 2019.

With the increasing pace of legislative change comes complexity. I have often wondered whether it would not be wiser to legislate at a broad-based level and provide for generic compliance with overriding standards than regulate in detail and leave cracks through which irresponsible creditors

034 WWW.TMMONLINE.NZ

can crawl.

The new amendment Bill was introduced on April 9 and has been passed to a select committee for review. Most of the detail of the changes are yet to be revealed for many changes simply enable regulations to be made to regulate activity. Until the draft regulations are available, we can only speculate on what they may contain.

The following are some of the recommended changes in the Bill:

prescription relating to assessments of affordability and retention of documents – the presumptions that lenders can rely on borrower information without verification are to be removed.

• Debt collectors must disclose key information before commencing action.

These are only some. There are more changes that may be relevant to brokers.

KEY CHANGES

The purpose of the legislation is to protect natural persons who borrow for consumer purposes and natural persons who also guarantee consumer loans.

In the world of mortgages, however, many family trusts are owners of the mortgaged property. A contract is a consumer credit contract if the “debtor” is a natural person.

If the debtor or any one of the debtors is the trustee of a family trust, then the contract is not a consumer credit contract and the lender is not fettered by the rules relating to consumer credit contracts when dealing with the contract.

The explanatory note indicates that the key changes covered by the bill are: • Interest and fees on high cost loans is to be limited to no more than 100% of the amount borrowed. This will only apply to loans with an annual interest rate more than 50% p.a.

• All directors and top executives of the consumer credit lender must meet a fit and proper test.

• Enforcement provisions are to be strengthened.

• Regulations will provide greater

WHO IS PROTECTED BY CONSUMER LEGISLATION?

At present a lender is required to apply the responsible lending principles to any “relevant guarantor” – being a guarantor of a consumer credit contract. So, at present if the debtor is a natural person the contract is a consumer loan. Any guarantor of that contract becomes, by definition, a “relevant guarantor”, even if that guarantor is a trustee of a family trust or another entity such as a company.

The Bill now removes a trustee of a family trust from the definition of “relevant guarantor” so the trustees receive no protection whether borrowers or guarantors.

But if the only borrowers are the natural persons who live in the property and the owners are the trustees who are only expressed as guarantors and not borrowers, then the loan is still a consumer loan and subject to the responsible lending principles and other requirements for consumer loans.

The most relevant of these relates to fees and charges. That is that under a consumer credit contract they must be reasonable whereas under a non-consumer credit contract they need not be.

The relevance of this change is not so much on how you structure the loan but on the advice you give to a trustee guarantor.

They should be under no illusion that they have no benefit just because the loan is a consumer loan.

REASONABLE INQUIRIES AND VERIFICATION

One thing that is clear from the Bill is that you can no longer take borrowers at their word. Section 9C(7) is repealed. This section allows lenders to rely on information given by the borrower unless the lender has reasonable grounds to believe the information is not reliable.

Just what verification of information is to be required will be determined by the regulations when they come out. It seems that the special committee process will be used to determine what verification is appropriate so if you wish to have an input into this decision, you should ensure that your views are put forward in submissions that will no doubt be called for on the bill.

A new clause 9C is included requiring the lender to keep records about the inquiries made under section 9C, namely the inquiries made to help the lender determine that the credit will meet the borrowers’ requirements and objectives and that they will be able to make repayments without suffering substantial hardship.

The records must not only show what has been done but also demonstrate how the lender has satisfied from the records and verification obtained that the requirements and objectives have been met and the loan can be repaid without substantial hardship.

It is not enough to collect the information, but the lender now must show how this was analysed and why the requirement has been met.

The records need to be kept by the lender

for seven years.

WHAT ABOUT THE INTERMEDIARY?

It is at this point that I am forced to get on my hobby horse.

The CCCFA and the amendment Bill have still to come to grips with the fact that a fair proportion of lenders never see the borrower and rely upon information and applications received from intermediaries. Which means that as an intermediary, you may have to comply with multiple requirements from different lenders.

Given that the penalties under the Act against lenders and their directors and top executives are to be tightened, it is likely that they will become more concerned with how you undertake your business and how you interact with your client borrowers.

The reason why I am concerned about this aspect is that it would be a lot easier for intermediaries and arguably safer for lenders and the legislators if they acknowledged that you existed and made the regulations apply first to intermediaries. Most lenders will rely upon what you provide them and accept that as their own.

The Australian Royal Commission identified that one of the main concerns with intermediaries was that it was not clear who they acted for. They clearly acted for the client, but lenders tended to treat them as their distribution channel and although their agreement made it clear they were not agents of the lender, they tended to treat them as such.

One thing that is clear from the Bill is that you can no longer take borrowers at their word.

The position here is, I suspect, much the same.

In my view the legislation (either the Act or the regulations) should acknowledge the role that intermediaries play and require them to be responsible for undertaking the same inquiries, making the same analysis and keeping the same records as the lender.

The lender should not have to second guess and go over the information again and make its own independent verification. I doubt that it does.

Therefore, the lender should be entitled to rely upon information obtained by intermediaries unless it has reasonable grounds to question the work done by the intermediary. If the analysis is wrong, either deliberately or because it was negligently

undertaken, then the lender should not suffer penalties unless it was obvious or should have been obvious that this was the case.

Intermediaries are required to be registered and under the new regime, to be trained and qualified to do this job. You need to understand and apply the lender responsibilities when dealing with clients – this should be written into the legislation to give you legitimacy and to give the lender some comfort that you can be relied upon to do your job.

ADVERTISING – OTHER LANGUAGES

The emphasis on other languages has been shifted from persons who have English as a second language to persons who the lender reasonably believes do not fully understand what is being explained in English. The bill doesn’t refer to English per se but to languages one and two so it is possible for a loan to be primarily written in, say Te reo and then have the key information translated into English.

A new provision is to be included so that if a lender advertises in a language other than English then it must provide borrowers with the key information about their loan in the same language if the lender reasonably suspects that the borrower does not have enough understanding of the lender’s main language.

WHERE IS THE INCLUSION OF SHARIA LAW FUNDING?

Over the last few years I have been asked to look at Sharia loans and advise on how they might comply with our credit legislation. By and large they can fit into the purpose and concepts behind the CCCFA but there are several significant differences.

Perhaps the most obvious one is the requirement for disclosure of the annual interest rate. Under Sharia law interest cannot be charged. That is not to say the party lending the funds is not entitled to a return. The return is expressed as a profit rather than interest so requiring it to fit into an interest rate regime and disclosed as such is not consistent with the type of funding.

Given the recent events in Christchurch, the national acknowledgment that our community is composed of a variety of cultures and our expression of ourselves to the world as a country of inclusion rather than exclusion, would it not be a significant indication of this if the next change to our credit legislation made provision for funding applying the laws of a significant part of the world who we have welcomed into our community? ✚ Jonathan Flaws is a partner at legal firm Sanderson Weir.

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INSURANCE

By Steve Wright

Genetic testing – what must advisers be aware of?

Our understanding of human genes, their impact on health and their value in increasing our understanding of health risks allows for more effective and efficient primary health care.

It is conceivable that this increased understanding of genetic risks will deliver big health benefits and become more commonplace once genetic testing becomes an inexpensive and more reliable predictor of future health. It may also create some challenges and opportunities for life insurance.

Prudent insurance companies manage their risk carefully so that they remain financially sound and can deliver on their promises to policyholders. Underwriting is

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an important tool for managing an insurer’s risk. Medical underwriting is the process by which the claims risk due to an applicant’s medical condition and history at the date of application, is assessed for life, disability or health insurance benefits. Claims risk is the probability (not the certainty) of a claim being made during the life of the policy, which, for life insurance contracts can be 50 years or more. If that risk is statistically higher than the average for a specific individual applicant, the insurer can apply a premium loading, an exclusion, or, in more extreme cases, defer cover completely for this individual, so that this increased risk can be prudently managed.

Insurance is about protecting against uncertain events occurring, it is not about funding for certain or almost certain events.

Selective insuring (adverse selection) by people whose future health risk is relatively

People with an increased genetic risk might insure themselves for more while people with a lower genetic risk may insure less. certain, can destabilise the delicate balance between benefits and premiums. People with an increased genetic risk might insure themselves for more while people with a lower genetic risk may insure less.

This is why increased genetic testing and associated predictability of future health

IF A CLIENT HAS HAD A GENETIC TEST, MUST THEY DISCLOSE THIS TO THE INSURER?

Our law recognises insurance contracts as special contracts “of the utmost good faith”.

This means applicants for insurance are bound to make full disclosure of anything material they know about and that may affect the risk to the insurer. Genetic test results are essentially the same as other medical tests and results which identify an increased risk to health, must be disclosed.

Failure to disclose such a genetic test could result in claims being declined or even the client’s policy being voided completely.

Genetic tests that simply determine your ancestry but nothing more can probably be safely ignored as they are not material to the assessment of health risk. Naturally these tests and details must be disclosed if an application form asks for them.

IF THE CLIENT TELLS YOU THAT THEY HAD A GENETIC TEST BUT REFUSE TO DISCLOSE IT ON THE APPLICATION FORM, MUST YOU TELL THE INSURER?

issues for the life assured, is something insurers will need to keep an eye on if the element of “uncertainty” is reduced or even eliminated by genetic testing.

Genetic testing is not an issue only for insurance companies however, there are some things advisers need to be aware of so that they can appropriately advise their clients:

CAN INSURANCE COMPANIES INSIST ON GENETIC TESTING? While there is no law prohibiting this, NZ

insurers that are members of the Financial Services Council have agreed to a set of rules regarding genetics tests. While this is voluntary, one would expect insurers to comply with it in the normal course of events. In short, FSC members agree that they: • will not require genetic testing from insurance applicants • may request existing test results be disclosed • will not use genetic tests to allow preferred underwriting.

The answer to this is a resounding “yes”: unless of course you want to pick up liability for any claim yourself. From the insurer’s point of view, the client will have non-disclosed material information on the application form, which will trigger the remedies that the insurer is contractually allowed under the terms of the policy.

Should you, as the adviser, have been complicit in knowingly allowing the client to non-disclose in this way, all of the remedies available to the client, the insurer and/or the regulators may be brought against you, potentially costing you both financially, reputationally and potentially even affecting your ability to continue in your career. It is simply not ever something any adviser should entertain.

If a client instructs you not to reveal their non-disclosure, you should explain the position to them, namely that they have already made disclosure and you are duty bound to pass it on. You should also remind the client again of the dangers of non-disclosure and also explain (it is best to do this in writing) that unless they fully and accurately disclose these issues, you as their adviser are unable to perform the services they have contracted you to perform. ✚ Steve Wright is the general manager of professional development at Partner's Life.

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The TOP

10 stories

on www.tmmonline.nz There was a wide variety of stories on TMM Online since the last issue of the magazine. Here’s what mortgage advisers have been reading.

As usual it has been a busy month on Good Returns.

Here is a list of the top 10 most read stories over recent weeks.

1OCR preview: caution expected

6Major shake-up for groups

2

7Four credit unions vote through merger

3Bluestone poaches ANZ BDM

8OCR announcement: Here's what Orr said

4

adds to senior team with Loan 9Newpark Market hire

change their mind on next 5Economists OCR movement

Bank stuns economists with 10Reserve OCR cut prediction

Leading economists do not expect a change to the OCR next week, and predict the central bank will maintain a cautious outlook on the domestic and global economy.

Resimac takes on banks with big cuts

Non-bank lender Resimac has waded into the mortgage price war with a series of aggressive rate cuts.

Non-bank lender Bluestone has hired Wellington business development manager Mark Beams from ANZ, as it looks to build its New Zealand loan book.

Capital gains battle heats up

There are now two declared armies in the battle over taxing capital gains, with the launch of a new pro-capital gains tax campaign on Monday.

Economists believe the Official Cash Rate could be cut as soon as May or August, following the Reserve Bank's comments last week.

Consolidation of mortgage advisers’ groups has started with Mortgage Supply agreeing to move its aggregation to new player Astute Financial.

Four of New Zealand's major credit unions have voted “'yes” to a nationwide merger — but one party has dropped out of the deal.

The Reserve Bank has kept the OCR unchanged and says the next move is likely to be down. Find out why in the Governor's statement here.

Newly-formed adviser group Newpark Home Loans has hired senior adviser Gopal Sreenivasan from Loan Market to fill a leadership role.

The Reserve Bank has surprised economists by stating the next OCR move is "likely to be down" due to slowing domestic and global growth.

TMMONLINE ALSO HAS ALL THE LATEST MORTGAGE RATES AND CHANGES.

To keep up with all the news make sure you check www.tmmonline.nz regularly.

Or you can get the news and rates update sent to you each day by signing up to the TMM email newsletter.

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