Day 506: 'Raises serious questions'
Counting the days since the banking royal commission was established.
Good afternoon, and welcome to day 506.
Today in summary: The first few days of the ASIC-Westpac lending test case in the Federal Court revealed the bank broke responsible lending laws more than 260,000 times in three years; the Law Council of Australia has released its pre-election policy recommendations addressing banking misconduct; the Superannuation Consumers’ Centre has called for a rethink of life insurance; the RBA locked in a record low interest rate at 1.5% two weeks out from the Federal election; and Macquarie Group has been caught up in an overseas “dividend-stripping scheme”.
-- Alex
@AlexESampson
Current banker panic level: 😲🧐🤑😱
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Yesterday was the first day of a potential eight-day trial that will be a test case for responsible lending requirements. Corporate regulator ASIC alleges Westpac broke responsible lending laws more than 260,000 times in three years when it approved loans using the controversial Household Expenditure Measure (HEM).
The HEM was called into question during the banking royal commission for using unreliable estimates of basic living expenses, rather than customers' actual declared living costs, to work out whether people can afford the loans they’re applying for. Westpac used the HEM in its automated loan approval system.
A previous case and a A$35 million fine were thrown out last year after a judge told ASIC it had failed to demonstrate how responsible lending laws were broken or how many times they were broken.
The Australian | ABC | AFR
The Law Council of Australia this week put out its 2019 federal election “Call to Parties” policy suggestions report, which made recommendations for ways to best implement banking royal commission changes. These included the Australian Law Reform Commission making suggestions for simpler laws. It also said there was a “clear need” for the disadvantaged to access financial and legal assistance to deal with disputes on equal footing with large banks, arguing “wrongdoers were going undetected” because customers could not afford to fight injustices. This could be achieved through “predictable and stable"“ funding.
The council also wants changes to the Corporations Act to better protect consumers, reduce misconduct and assist enforcement, and measures to address the power imbalance experienced by consumers when dealing with big financial institutions. In its advice on royal commissions, the Law Council called for high priority to be given to implementing the recommendations of the banking royal commission.
The Superannuation Consumers’ Centre (SCC) at Choice has called for an independent inquiry to work out how to protect people who can no longer work. In a joint submission to the Treasury, the SCC and the Financial Rights Legal Centre said there had been a “clear drift away from community expectations”.
The consumer advocates’ submission calls for a ban on delivering Total Permanent Disability (TPD) benefits as instalments rather than as a lump sum and universal terms for life insurance policies, including a single standardised definition of TPD. The group also recommended an independent inquiry to determine the extent to which funds met community needs and independent research into the rates at which people returned to the workforce after receiving TPD benefits.
The Reserve Bank has chosen not to change interest rates, locking in a record low 1.5% for a 33rd consecutive month ahead of the May 18 election. Analysts were divided on whether cutting already low rates in the lead-up to an election was a good or bad idea. In its monthly meeting today the RBA said lower unemployment was needed to lift inflation toward its 2-3% target. The news pushed up the Australian dollar.
The Australian | ABC | AFR | SMH
Macquarie Group has been caught up in a “dividend-stripping scheme” which is under criminal investigation by German authorities. Danish life insurer and pension fund operator PFA is freezing new investments with Macquarie until its role in the so-called “cum-ex” scandal is resolved.
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Today’s burn prize: Superannuation Consumers’ Centre director Xavier O’Halloran
“When designing appropriate life insurance, understanding when people have children is one of the most important things a superannuation fund can know. The overwhelming majority of funds are oblivious to this basic information. This raises serious questions about how seriously they are taking their best interest duty when designing insurance.”
O’Halloran was talking about SCC’s Treasury submission outlining how the life insurance system is complex to navigate, with terms, definitions and exclusions buried in the fine print, arguing people are being signed up to policies without fully understanding what is and is not covered.
“In most cases people are paying the exact same premiums but having the quality of cover stripped away from them because of an arbitrary term hidden deep within a policy,” O’Halloran said.
The Commentariat
AFR companies, markets and the economy commentator Elizabeth Knight writes that as Westpac wraps up one of the most disappointing bank profit seasons in decades, there is no time for banks to catch their breaths. She reminds us that none of the bank chief executives have predicted any bounce back in the near future. Rebuilding trust, shoring up capital, keeping a tight focus on risk and paring back operations were the key themes at each of the big four.
“The big four’s established brands, huge customer bases and ability to invest will afford them some protection. Just how much will become clearer when the dust settles.”
Customers are king in the post-Hayne world, writes The Australian’s business correspondent Richard Gluyas. He says the race is on to create an operating environment where “responsible lending reigns supreme” and customers are valued.
“Before the Hayne royal commission, customers were the final cog in a production line geared for long-term, stable growth and maximum returns. Post-Hayne, the realisation has dawned that an industrial-scale approach to lending might have been highly efficient, but far too often it was delivering poor outcomes to the people it was meant to serve.”
In dodging a pre-Election interest rate cut the RBA has “lowered the bar” for a monetary policy easing in coming months, AFR senior reporter John Kehoe writes.
“The central bank has now put financial markets on notice that employment will need to strengthen and the 5% jobless rate gradually fall to lift inflation to avert a future interest rate cut.”
In failing to change inflation rates the RBA has effectively abandoned its inflation-targeting regime that has been in place since the early 1990s, writes UNSW Business School economics professor Richard Holden in the AFR.
“Mark it in your calendars, May 7, 2019 was the last best chance the RBA had to save confidence and belief in inflation targeting. It’s worth reminding ourselves of the rationale behind inflation targeting by central banks. It is about setting stable expectations for consumers, businesses and markets and trading off the costs and benefits of inflation.”
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