19 minute read
REGULATION
LEGALREGULATION By Susan Edmunds
Bank fees under review
New guidelines off er clarity on what’s expected from lenders, after outcome revealed in long-running court case.
Banks are likely to have to change some of the fees they charge their home loan customers as a result of the outcome of a long-running court case.
Fees relating to low-equity deals have become less common because of Reserve
Bank rules that limit low-deposit lending.
But banks still charge a range of other loan fees, including application fees that can run to 1 per cent of the total loan borrowed. These are expected to come under the spotlight over the coming months.
The Commerce Commission last month issued updated draft guidelines designed to help lenders set fees.
It had been waiting for the final outcome of its case against Motor Trade Finance (MTF) and motorcycle retailer Sportzone.
The Supreme Court finally rejected their appeal after a long-running battle over fees in their contracts that the Commerce
Commission said were unreasonable.
Sportzone, which went out of business after the Canterbury earthquakes, charged an establishment fee of $200, to which
MTF added its establishment fee of $190.
Sportzone charged an account maintenance fee of $5 in addition to MTF’s $3 a month, an administration fee of $50 was charged to borrowers who paid their loans back early and there was a fee charged for “PPSR Financing
Statement Registration”.
There were also fees charged when loans went into arrears.
They were found to be in breach of the
Credit Contracts and Consumer Finance Act.
The CCCFA, which was amended in 2015 to include lender responsibility principles, sets rules restricting the fees lenders can charge over the life of a consumer credit contract including the type of fees, costs, and losses that can be recovered via fees and how the fees are disclosed and described.
The central provision prohibits lenders from imposing “unreasonable” fees and the guidelines cover establishment fees, other credit fees, prepay fees, default fees, and thirdparty fees.
The two companies had been under investigation since 2006.
They had argued that the Act could be interpreted as permitting a lender to recover all of its costs from the fees it charged its customers, as long as the costs it was covering related to the lending business.
❝ Now the fi nal judgment in the MTF/Sportzone case has been issued the commission is able to consult with the credit community on fees guidelines❞ - Anna Rawlings
But the Supreme Court backed the Commission in its view that fees should be designed to cover specific transactions, not the whole array of a business’ costs.
The Commerce Commission said the ruling cleared the way for updated guidelines to be issued.
“Now the final judgment in the MTF/ Sportzone case has been issued the commission is able to consult with the credit community on fees guidelines,” commissioner Anna Rawlings said.
“These guidelines aim to clarify how lenders should approach the task of setting credit fees. They also provide guidance on the limitations that apply to the fees lenders may charge. We recognise it has been some time since our 2010 draft guidelines and that lenders are keen to understand their obligations and our approach to enforcement, so we are pleased to be able to issue the draft guidelines for consultation today. We look forward to hearing feedback on the draft.”
A key part of the guidelines is that the lender’s costs and losses are the key factors in deciding whether a fee is reasonable.
In some cases, a fee should could not reasonably charged at all, even if it was
covering a cost, the commission said.
It cited the example of a lender who charged a “welcome letter fee” of $15. “This fee was likely to be unreasonable, even if the cost of sending the letter was $15, because welcoming the borrower was not a step for which it was reasonable to charge.”
The guidelines also say fees that are aimed discouraging borrowers from certain conduct are likely to be unreasonable if they exceed the lender's costs.
That will mean changes for the banks.
They charge a range of fees – Kiwibank has a $250 application fee, charges $75 for discharge of security and $60 per hour to “investigate something about your home loan”.
ANZ has an application fee of up to $500 for owner-occupied lending, or up to 1 per cent of the loan amount for other lending and a $250 fee for loan top-ups, among other fees. Peer-to-peer lender Harmoney has already changed its fee structure after the Commerce Commission questioned its initial percentagebased loan fees.
ASB charges a $400 loan processing fee, a $150 top-up fee and $50 when customers switch to or from a fixed rate. Westpac charges $400 per loan, $150 for re-documented loans and $50 for a temporary loan limit increase.
When applicable, the banks also charge
low-equity fees and premiums on lending to people with deposits under 20 per cent.
Massey University banking expert Claire Matthews said it was likely that some of the fees would have to change.
She said they would struggle to charge something such as a low-equity fee under the draft guidelines. “Fees have to be transaction specific and I think it would be difficult to justify,” she said.
“I think it's helpful to think about where these fees came from. Initially banks took out Lenders Mortgage Insurance for high-LVR loans, for which they were charged a premium that they passed on to borrowers - which is reasonable, and transaction specific. Partly due to the ongoing increase in house prices, the banks moved to self-insure but continued to charge a 'premium'. Use of the term 'premium' was really no longer appropriate, so it became a fee. Charging a margin on the interest rate is more appropriate, because it reduces as the loan reduces and is only charged while the LVR is over specified limits, so it is risk-related,” she said.
“I believe the banks will already have reviewed their fees to ensure they meet the new guidelines, but they will need to keep them under regular review as their costs change to ensure they remain appropriate.”
A spokesman for the Bankers’ Association
agreed there would be a flow-on effect to banks.
“The Commerce Commission’s draft consumer credit fees guidelines are, however, still being consulted on. Therefore the extent to which the guidelines will impact banks will not be fully known until they are finalised.”
ASB spokesman Christian May said it was too soon to say what the impact on its policies would be. “The Commerce Commission guidelines are draft only at this point and subject to industry consultation.”
He said fees were a commercial mechanism that varied from bank to bank.
Under the draft new rules, establishment fees can only cover costs incurred in the credit application and processing, documentations of a loan contract and advancing credit to the borrower.
They cannot include a profit margin, a share of marketing costs, bad or doubtful debt provisions or things such as entertainment. Other credit and prepayment fees must also reflect only the specific costs, be they actual or estimated.
Default fees must also meet a reasonableness test and default interest must not be oppressive.
Submissions on the proposal close October 24. ✚
Be Prepared
Mortgage advisers have largely been missing in action during the current review of the Financial Advisers Act (FAA). Your last chance to get involved is looming. The chairman of the Code Committee, David Ireland, warns if you sit there and ignore what’s happening, you can’t complain if you don’t like the outcome.
The Government’s legislated review of the Financial Advisers Act (FAA) is getting into its final throes. The group who will be most affected by the changes are registered financial advisers (RFAs), including mortgage brokers.
But mortgage advisers have, largely, been missing in action during the review. None of the groups made submissions on what they would like to see changed.
Kensington Swan partner David Ireland, who chairs the Code Committee which sets the rules for authorised financial advisers (AFAs), has two simple messages for mortgage advisers:
You are one of the groups who will have to change your business practices.
You only have two chances to have your say: When the exposure draft of the legislation is released (due before Christmas) and when the Code Committee revises the code of conduct all advisers will have to operate under. Ireland is quite certain the current FAA doesn’t work. Since it came into force “band aid” changes have been made, he says, and it is now a “bugger’s muddle”. He said the changes had corrupted the policy objectives of the Act. In its first iteration, the FAA affected AFAs the most. RFAs, a group which includes most mortgage advisers and insurance brokers, were left largely untouched.
There are some requirements around registration but nothing much changed with how they run their businesses.
Ireland says when the act is revised, RFAs “will have a big step up”.
“There’s a tsunami coming. You can stand on the beach and think it is going to have no impact or you can move to higher ground.
“Standing there and not moving increases your risk of drowning.”
Are you an FA, a FAF or an agent? Under the current proposals, MBIE is recommending that the classifications of AFAs, RFAs, qualifying financial entities (QFEs) and QFE advisers should be removed. Instead three new types of adviser should be introduced:
❝There’s a tsunami coming. You can stand on the beach and think it is going to have no impact or you can move to higher ground. Standing there and not moving increases your risk of drowning.❞ - David Ireland
1. financial advisers (FA); 2. financial advice firms (FAF) 3. agents (being persons giving advice on behalf of a FAF).
Both financial advisers and agents will be able to provide the same financial advice. But in the case of agents there will be an additional requirement that the financial advice firm the agent works for is permitted to give the advice.
Financial advisers would be individually accountable for complying with the new regime, but financial advice firms would be accountable for their agents’ compliance.
The question all mortgage advisers will need to address is how they structure their business for this new environment.
Will dealer groups become FAFs and all their members agents? Or will a firm which belongs to a dealer group become a FAF?
What do you do? One of the questions mortgage advisers need to ask themselves is what is their “scope of service”? Or put another way, what do they offer clients?
Under the most recent revisions to the code of conduct, AFAs have to be clear on what they offer to clients.
Mortgage advisers may need to work out what they do and what services they want to be authorised for. A theme throughout this piece is the rules are still unclear.
As Ireland says it is unknown how “granular” the Financial Markets Authority will be. At one end the rules could be just mortgage advice. At the other end the FMA could break it into categories: advice on simple, straightforward owner-occupied properties with LVRs of less than 80%, help with property investment loans, commercial loans and more complex advice such as asset lends and specialist lending.
Ireland says the FMA will be looking at what the licence is for and who will be delivering the advice.
He doesn’t think it will be as detailed and prescriptive as the licencing regime fund managers are currently going through under the Financial Markets Conduct Act.
“The FMA response will be proportionate to the scale of business risk.”
Low risk; Yeah Right Mortgage advisers often argue that they shouldn’t be as tightly regulated as investment advisers, as their risk level is lower.
This is going to be hard to argue as there are more mortgage fraud cases ending up in court compared to investment-related ones.
Most recently the Serious Fraud Office (SFO) won a mortgage fraud case against Simon Turnbull. He was jailed for three years and two months after pleading guilty to 16 charges of obtaining by deception or causing loss by deception.
According to the SFO, he was involved in a $33 million mortgage fraud where false loan applications were submitted to a fund management company to purchase 16 properties in and around the Auckland region.
SFO director Julie Read said: “SFO prosecutions against those who commit mortgage fraud help to ensure an honest market where New Zealanders can safely invest at a fair rate.”
In February 2014 another defendant, Malcolm Mayer, was sentenced to six years’ imprisonment for his role in the fraud.
Other names worth mentioning are Kerry Buddle, jailed for four years and three months.
Members who are agents to the FAF and can’t get their own FAF licence may face some challenges. ❝That’s where we might see some bleeding. ❞ - Bruce Patten
Then there was the case of Eli Devoy (aka Ellie Stone, aka Eli Ghorbani, aka Elaheh Ghorbani Sar Sangi) who was sentenced to five years' imprisonment with a minimum period of imprisonment of two years, six months.
She was the principle defendant in an extensive mortgage fraud scheme prosecuted by the SFO, where five defendants were guilty of Crimes Act charges.
What are the groups thinking? Loan Market director Bruce Patten says the group will probably become a FAF and advisers can then be agents of that entity.
He says it makes sense as Loan Market is a branded, “business in the box” model.
Having Loan Market as a FAF is likely to appeal to the smaller offices with one or two advisers.
Patten himself, who has a bigger operation where all his staff are already qualified to at least the level five standard, will itself be a FAF and its staff will become agents.
He is going down this route as it makes his business more valuable if he ever chooses to sell it.
The country’s largest network, NZ Financial Services Group, is still working through the proposals. Patten, who is a director, says that it is possible NZFSG will become a FAF and invite some of its members to become agents. It is unlikely this offer will be made to all members.
Some, like Squirrel, are likely to become FAFs in their own right.
However, members who are agents to the FAF and can’t get their own FAF licence may face some challenges.
“That’s where we might see some bleeding,” he says.
There is a likelihood the proposed regime may trigger some consolidation and may also force some advisers out of the industry.
Patten, like other group bosses, points out that the rules are still not clear, and they could change.
Mortgage Link managing director Josh
Bronkhorst says if FAA review goes in the direction it is currently headed, Mortgage Link would most likely become a FAF as opposed to all its advisers becoming licenced.
He describes this as being “almost like” the current QFE structure, however QFEs are generally used for vertically integrated business to sell their own products.
If Mortgage Link goes down this track it would provide additional services to its members, and the company would need to take a role monitoring the quality of advice being given.
Currently the group is working with IDS and developing advice manuals.
If it became a licensed entity then the fee structure for its members would increase.
The group has nearly doubled in size in the past year and now has 31 principals. It currently works on a licensee model and is looking to get to between 50 and 60 principals in the next 24 months.
Q Group founder Geoff Bawden is very clear on what the proposed FAA review changes mean. “We will become a licenced financial entity.”
That means all of the group’s current advisers would become agents.
Bawden is working with Mortgage Express
to develop the necessary templates and processes. While they compete with each other it made sense they shared costs, he said
Jenny Campbell from the Mortgage Supply Company is waiting for more information.
She points out that when the FAA was first introduced, there were big changes right at the end of the process and she is wary of that happening again.
She is also annoyed that education providers are trying force advisers into doing training now, when the future requirements remain unclear.
Mortgage Supply, she says, is also in an interesting position as it probably has more AFAs than any other group. These advisers have already invested in training and development; yet under the proposals the AFA status will be removed.
The group is taking a “wait and see” approach, but is “willing to help shoulder some of the burden” of the new reqime.
A big worry is that FAFs, like QFEs before them, will be shouldering “an enormous about of liability on behalf of the advisers.”
Mike Pero Mortgages chief executive Mark Collins says "at this stage we haven't given it a lot of thought."
MPM is a franchise model, which would, arguably, make it relatively easy for it to be a FAF with each adviser then becoming an agent.
However, Collins, isn't so sure it is the model he would use. When he was at Sovereign he was involved in setting up Sovereign's QFE and learnt about how much responsibility the company had to take on for its advisers.
He says the FAF model takes the risk away from the people giving advice and moves it to the company.
That would require significant resources around audit and compliance.
Collins also points out many mortgage advisers left the corporate world to be self-employed and to get away from the burdens of corporate compliance. He suggests MPM becoming a FAF would be taking them back to the sort of environment they left.
A curly bank question While there are still many unknown factors, and there are some lessons that can be drawn from what AFAs when through and what fund managers are currently going through to become licensed under the FMCA, there are also some idiosyncrasies.
One is what changes will lenders make to accreditation rules?
Currently pretty much all mortgage advisers need to belong to a group to write business for the banks. TMM understands some banks, such as ANZ, have been going through their books and removing individual advisers not affiliated to a group.
The banks have been much stricter on accreditation of new brokers in the past couple of years.
Under the what is being proposed there is a question about what banks will require from accredited mortgages advisers in the future. Can they be agents? Will accreditation depend on being a FAF? Will there be restrictions around scope of service?
ASB general manager business banking and retail specialist services Ian Boyce says the question of how banks deal with brokers is a significant issue with the FAA review and also with work being done by the Australian Prudential Regulation Authority (APRA).
The question APRA is asking is how can banks be sure the right conversations are being had with customers when they are using third-party distribution channels like mortgage advisers?
He says the bank is the early stages of working through this process with the FAA review and it is submitting papers to the Australian regulator too
While the New Zealand industry hasn’t had a good track record of working together on issues, he thinks this is one where banks should collaborate.
“I would love to see the industry work together on this,” he said.
ANZ head of specialist distribution, Penny Burgess says, “We’ll need to review our current agreements in light of the legislative changes. "We do not currently accredit individual
Jenny Campbell
advisers who are not associated with a dealer group, this is unlikely to change.”
BNZ head of third party distribution Adam Ward said the bank hasn't done too much work on what the proposed changes will mean, however he expects there will be an adaptation of the current accreditation process.
He doesn't expect that it will be too hard for banks to adapt to the FAA changes, however, it is likely "to be a challenge for brokers."
Ward echoes Boyce's comments that banks will be more interested in what mortgage advisers are telling their clients and the advice given.
Overall, he supports the proposed changes and says it will lead to some consolidation in the industry. "More regulation and higher expectations on brokers is good for the industry," he says.
Save your CPD bucks It appears clear that people who are currently RFAs will have to embrace a continuing professional development plan just like AFAs.
AFAs have to prepare a professional development plan each year and identify areas they have weaknesses or want to upskill themselves in. Once they have identified these areas they need to earn relevant CPD points.
Ireland says RFAs shouldn’t rush out and undertake additional professional development at this stage.
They should wait, he says, until it becomes clear what the new requirements will be. “Preserve your CPD and training dollars,” he says. In the meantime his advice is that when the exposure draft comes out, take it away over the holidays.
Read it. Work out how it will impact on your business and, most importantly, make submissions.
“If you don’t like something and submit on it you get to take the moral high ground.”
“You can’t be pointing your finger at officialdom if you don’t like something but haven’t said anything,” he says. ✚
