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THE YEAR OF THE PRESSURE COOKER
BY ERIC FRYKBERG
‘Every time I think it is going to slow down, and get back to some level of normality, it doesn't. The next thing just stacks up behind it.’ John Bolton
What’s in store for advisers this year? A mass of challenges, that's what: from the large to the small.
The large problems include how to deal with the inflationary snowball and how to cope with the over-the-top requirements of the Credit Contracts and Consumer Finance Act (CCCFA).
The small problems include finding a system to separate out the important emails - those which so easily get lost amid a mountain of messages which don’t matter.
Then there’s re-establishing normal procedures after months of working from home in Auckland, not to mention getting ready for full licensing, dealing with a shortage of staff, and managing to somehow shrug off the burden of unpaid regulatory compliance work with a laugh and a beer at the end of the day.
New complexities
Most brokers spent last year bracing themselves for state regulation, anticipating adding hours of work to every transaction for little real gain. They will spend this year actually having to deal with all this complexity.
Bruce Patten is one of them. A mortgage broker with Loan Market in Auckland, he is already getting pushback from the banks over loan applications which don't fit the detailed requirements of the CCCFA. This means he spends long hours sifting through bank statements, to try to help his client satisfy the bank.
He is working on a technological solution to make this task easier.
“In the New Year, we are working with a couple of companies to start running some pilot programmes. If we can do this work up front, the banks can run their analysis over the loan applications and hopefully everything will marry up.”
Patten says the software required to smooth out mortgage applications under the rigours of the CCCFA is pretty technical, but he is confident of making progress in the long run.
“It's not a perfect science, but it'll get better. Soon we'll be running statements straight through a system that will automatically determine a person's debtservicing capability.”
What Patten is referring to is the few-beers-at-the-pub which might now have to be factored in to a person's debt-servicing ability. Sorting through this detail requires hours of hard work, but Patten is optimistic about an eventual solution.
“I am not talking about the next few months, but in the next few years our job will be more about advising and structuring. Everything else will be automated in terms of deciding what a person can borrow based on their spending habits.”
The rate of change
Patten's observations are not unique. Many similar points were made at a webinar organised by the umbrella body for advisers, Financial Advice New Zealand.
Speakers there included John Bolton, from Auckland firm Squirrel. For him, coping with the rate of change will be one of his big challenges for 2022.
“It's just getting faster and faster. Every time I think it is going to slow down, and get back to some level of normality, it doesn't. The next thing just stacks up behind it.”
Bolton cites rapidly increasing interest rates, the removal of tax deductibility on property investments, the CCCFA changes, and other stringent regulations. Unexpectedly, he is also finding himself deluged with paper - voluminous sheets of it - despite the promises and expectations of the digital economy.
“We are bombarded with more and more paperwork, different types of forms left right and centre, a myriad of processes across lenders, new calculators, plus the CCCFA legislation – I won't talk about this, but it’s clearly a mess.”
Like Patten, however, Bolton endorses - rather than despairing over - digital solutions. He just thinks there needs to be more of them, and they need to work better.
One such solution has already been adopted: an app which gives his clients access to his own diary, to streamline the process of booking meetings or zoom calls. It forestalls procrastination and reduces the number of unnecessary emails in his inbox. Bolton describes the system as “epic”. “It is honestly the best tool I have ever used. I’ve sold it to my whole team… it has changed our lives and it helps with email control, which is a major issue for us.”
Another technological solution was to digitise all staff handover forms. And even though this process had to be redone for CCCFA compliance – a “pain in the ass” in Bolton's words – it still made a huge difference.
The impact of LVR restrictions
Along with the technical and compliance issues around getting loans approved, another problem faces the industry in the coming months: many loans will just not be available. Bruce Patten explains further: “With LVR [Loan to Value Ratio] restrictions, it is very hard to get preapproval for a 90% borrower at the moment - because the banks have all run out of money.
“They are restricted to doing a maximum of 10% of their lending to anyone with a low deposit. Pretty much all the banks are getting close to their caps, because they already had a lot of pre-approvals in place that are now coming to fruition, so a lot of them have shut their doors to new business.”
‘The amount of work we will have to do for every mortgage application has probably gone up by 30 to 40%’ Bruce Patten
The problem Patten is referring to is this: if banks get a lot of good, safe borrowers coming through the door, they can rapidly use up their entitlement of high-LVR loans, which means good, safe borrowers who arrive later are forced to miss out.
The impact of this is already being felt at the low end of the property market. A report by Quotable Value New Zealand (QV) found the cheaper segment of the industry was faltering:
“Real estate agents are reporting a significant upswing in listings, while open home attendance rates are falling. Some properties are being passed in at auctions, which was unheard of a few months ago,” the report found.
This was happening even as property prices soared ever higher, pulled skyward by upper-end buyers with lots of ready money.
Patten has witnessed the problem for cheaper houses first-hand.
“I was watching Barfoot's auctions: out of 20 auctions, they got only about eight away, a really low number. So we will see more properties on the market, we will see the market slow, which is what the Reserve Bank wants.”
This, however, is one process which might be self-correcting.
“[The Reserve Bank] will say, ‘OK, we can move that indicator from 10% of all our lending to 15%,’ and I see that happening towards the end of the year, which will free things up for first home buyers.”
In other words, the current LVR logjam might not last too long, if only because it does its job far too well in the short term.
Getting a full licence: a massive undertaking
All this augurs for a busy year, with a serious weakening of the lower end of the property market perhaps starting to correct itself by next summer. While that is happening, advisers will be busy surmounting yet another compliance hurdle: getting a full licence.
Bruce Patten says the interim licences were very basic. Anyone who applied for one could get it. But the full licences will
have to describe not just office procedure in detail, and how brokers will comply with the rules, but also how they will audit all their work.
“We are going through that full process at the moment, and will be applying for our full licence next year.
“It is a massive undertaking. We’ve got to give the Financial Markets Authority (FMA) everything, in order to have them sign off on how we go about things.
“And then, of course, once we start on full licencing, the first thing the FMA will do is come in and start auditing our auditing. So that is why it’s important to get it right.”
There will be a greater quantum of work than previously for the brokerage firm itself to audit, and for the FMA to counter-audit.
“The amount of work we will have to do for every mortgage application has probably gone up by 30 to 40%, so it is going to require more staff to make sure we are processing applications efficiently and correctly.”
That points to another problem: the sector is already short of staff - and noone knows exactly where reinforcements will be coming from.
More lending by non-bank sector
Another likely development this year is an increase in lending by the nonbank sector relative to the main banks, who will lose their dominance in home lending. This dominance has been put at 93%, but is likely to come down.
This was foreshadowed by economist Cameron Bagrie during a recent webinar.
He said banks were increasingly focusing on straight-forward lending, and would leave “anything a bit imaginative” to the non-bank sector.
Lyn McMorran heads the professional body representing non-bank financial institutions - the Financial Services Federation - and she basically agrees.
‘Getting a loan from a bank will become such hard work that the ordinary citizen will need a broker more than ever’
“A lot of the non-bank housing lenders are now receiving applications that are pretty good quality, but for whatever reason just don't fit the banks' criteria.
“But [non-bank lenders] are subject to CCCFA requirements as well, so it doesn't mean, automatically, that if you are turned down by a bank, a non-bank lender will be able to help you, because they might not.
“You have to feel very sorry for people who had pre-approval from a bank and thought they were going to be able to buy their first home, and now, because the rules have changed, are being told, ‘We cannot help you.’
“These are people who would genuinely meet their commitments… because it is important for them to keep a roof over their heads.”
According to McMorran, both the credit squeeze from LVR rules and the new CCCFA regulations will hamper the ability of people to access credit in order to recover from economic damage caused by the Covid lockdowns.
A silver lining
For some advisers, layer upon layer of new impositions will bring a bonus of sorts. Getting a loan from a bank will become such hard work that the ordinary citizen will need a broker more than ever, just to be able to understand what is going on.
John Bolton: “I see from the ANZ that 50% of their business is coming from a broker. It's amazing, because, if you go back seven or eight years, the percentage was probably in the high twenties.
“If Australia is any gauge, we’ll be heading for 60%. Probably higher. Things like the CCCFA are going to push more people to work with advisers.”
The extra business this will bring the industry will be offset by a big increase in the amount of unpaid compliance work per transaction. But, like all business people, brokers welcome greater custom. Many of them speak of personal as well as professional satisfaction from treating clients well.
One such person is Richard Thomas, of the Share network of financial advisers.
He says he gets pleasure from giving advice to clients “who probably need it more than ever.”
“Some of the discussions you have with clients are not always profitable from a monetary sense, but are certainly profitable from an enjoyment sense.
“That might sound a bit woke, which I am not, but that has certainly been the highlight for the last year. This year I’m looking forward to more of the same.”
In other words, guiding an otherwise helpless client through a bureaucratic labyrinth makes Thomas feel he’s doing the right thing.
Doing better
David Whyte of DCW Management puts it another way, saying the response to
the challenges caused by the lockdown could set an example for future behaviour.
“I know that at Lifetime, the advisers and the care sector contacted 8000 clients during the lockdown to ask how they were.
“It was not a sales pitch, it was not do-you-want-fries-with-that, it was just, ‘How are you doing, how are you going, are you feeling good?’
“It was not about the mind, it was all about the heart, and it worked. It put a stake in the ground for the regulators in terms of how advisers conduct themselves.”
Simon Manning of Wealthpoint has a similar perspective: he thinks the industry needs a strategic rethink - but adds that the coming year will provide a turning point for his company.
He sees a bright future for the financial advice industry, despite its difficulties. “We have to think about what this business looks like in the next three to five years, so this is a very exciting time for us.
“We are just seeing complexity, challenge and change. The economy of New Zealand is going through a pretty challenging period, with inflation and lots of other pressures.
“But this means it is a great time for advice. It’s a great time for advisers.
Whenever there is complexity, whenever there is uncertainty, advisers come to the fore.”
In other words, many brokers see a silver lining of sorts, but they all remain aware of the cloud: a bureaucraticallydriven increase in the amount of work they have to do, from which they don't earn income.
“We have lenders who will pay us an upfront commission and no trail, and yet we are managing that customer through his whole life journey,” said one.
“That includes fixed-rate rollovers and regular advice, which is getting higher and higher as regulatory complexity increases.”
This leaves brokers with the greatest professional challenge of all: keeping the regulator happy, and doing right by their clients, while somehow still earning a living. ✚
