Australian Broker 13.07

NEWS Sydney’s empty neighbourhoods UNSW research reveals up to 90,000 Sydney properties unoccupied P2

ANALYSIS Protecting the broker channel AFG’s response to ASIC’s review into remuneration structures in mortgage broking P10

BEST PRACTICE Happy employees, higher engagement The effects of wellbeing programs in the workplace P18

APRIL 2016 ISSUE 13.7

SPECIAL REPORT Fintech: A revolutionary tale The mortgage industry’s next big disruption P20

MARKET TALK Real estate industry needs expert oversight

NSW’s peak real estate body calls for greater industry regulation P26

JANELLE PEARCE & GREG PELL Westpac’s general manager and national head of Commercial Introducers on the rise of the commercial broking channel P14

01_Cover_subbed.indd 1

FINANCIAL SERVICES Surge in loans approved outside serviceability

$2.8bn in home loans slipped through the big banks’ approval stages last quarter P27

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BORROWER SNAPSHOT 2

NEWS

ASSOCIATIONS

REGULATION

LENDERS

The perfect storm for interest rate rises P4

ASIC’s high enforcement priorities in 2016 P6

AMP fears apartment oversupply P8

BROKERNEWS.COM.AU

SYDNEY’S EMPTY NEIGHBOURHOODS

EDITORIAL

Percentage of unoccupied dwellings in Sydney’s eastern suburbs

Editor Madelin Tomelty

Sydney - Haymarket - The Rocks

News Editor Julia Corderoy

14.1

Manly - Fairlight

13.8

Potts Point - Woolloomooloo

13.7

Darlinghurst

13.6

Neutral Bay - Kirribilli

Journalist Maya Breen Production Editors Roslyn Meredith Moira Daniels

13.0

Double Bay - Bellevue Hill

12.3

North Sydney - Lavender Bay

11.8

Cronulla - Kurnell - Bundeena

Sales Manager Simon Kerslake Account Manager Rajan Khatak Marketing and Communications Manager Lisa Narroway

CORPORATE

ART & PRODUCTION

Chief Executive Officer Mike Shipley

Design Manager Daniel Williams

Chief Operating Officer George Walmsley

Designer Loiza Caguiat

10.8

SALES & MARKETING

Traffic Coordinator Lou Gonzales

Managing Director Justin Kennedy Publisher Simon Kerslake

Paddington - Moore Park

10.7

Rose Bay - Vaucluse - Watsons Bay

10.6

Chief Information Officer Colin Chan

Bondi Beach - North Bondi

10.6

Human Resources Manager Julia Bookallil

Woollahra

EDITORIAL ENQUIRIES

10.3

0

3

UNOCCUPIED DWELLINGS

6

9

12

15 Source: UNSW, Census 2011

PROPERTY INVESTORS INDIFFERENT TO TENANCY, RELY ON NEGATIVE GEARING Sydney’s housing affordability crisis is being artificially exacerbated by “lunacy” tax incentives, a new report has claimed.

According to the analysis by the UNSW’s City Futures Research Centre, up to 90,000 properties are sitting empty in some of Sydney’s most sought-after suburbs as investors chase capital gains over rental returns.

Researchers Bill Randolph and Laurence Troy said this was thanks to the “perverse outcomes” of tax incentives such as negative gearing, Fairfax has reported.

“Leaving housing empty is both profitable and subsidised by government,” Randolph and Troy told Fairfax.

“This is taxation lunacy and a national scandal.”

According to Fairfax, the 2011 census revealed that in Sydney’s “emptiest” neighbourhood of the CBD, Haymarket and The Rocks, one in seven dwellings was vacant.

Close behind were Manly–Fairlight, Potts Point– Woolloomooloo, Darlinghurst and Neutral Bay– Kirribilli, which all had vacancy levels above 13%.

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These neighbourhoods, together with central Sydney, account for nearly 7,200 empty homes.

The UNSW analysis of the 90,000 unoccupied dwellings across metropolitan Sydney compared the number of empty homes in a suburb against the rate of return investors made by renting out a property.

It found that properties in neighbourhoods with lower rental yields and higher expected capital gains were more likely to be unoccupied.

These results suggest property investors in some of Sydney’s most desirable areas have become indifferent to whether their investment property is rented or not.

Instead, investors are chasing capital gains, with rental losses offset by negative gearing and capital gains concessions.

According to Troy and Randolph, this calls into question Sydney’s housing supply and affordability problem.

“If you choose to accept that there is a housing shortage in Sydney, then the sheer scale and location of these figures strongly suggest that this is an artificially produced scarcity,” they said, according to Fairfax.

Madelin Tomelty +61 2 8437 4792 madelin.tomelty@keymedia.com.au

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tel: +61 2 8O11 4992 fax: +61 2 9439 4599 subscriptions@keymedia.com.au

ADVERTISING ENQUIRIES

Simon Kerslake +61 2 8437 4786 simon.kerslake@keymedia.com.au Rajan Khatak +61 2 8437 4772 rajan.khatak@keymedia.com.au Key Media Pty Ltd Regional head office, Level 1O, 1–9 Chandos St, St Leonards, NSW 2065, Australia tel: +61 2 8437 4700 fax: +61 2 9439 4599 www.keymedia.com Offices in Sydney, Auckland, Denver, London, Manila, Toronto This magazine is printed on paper produced from 1OO% sustainable forestry, grown and managed specifically for the paper pulp industry Copyright is reserved throughout. No part of this publication can be reproduced in whole or part without the express permission of the editor. Contributions are invited, but copies of work should be kept, as Australian Broker magazine can accept no responsibility for loss. Australian Broker is the most-often read industry publication, according to independent research carried out by the Ehrenberg-Bass Institute for Marketing Science at the University of South Australia in December 2008. The research also found that brokers rate Australian Broker as the best for both news content and feature articles, followed by sister publication MPA. Overall, on all categories, Australian Broker ranks top followed by MPA. The results were based on a sample of 405 respondents who were the subject of telephone interviews.

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ASSOCIATION HAPPENINGS 4

DATES TO WATCH

FBAA WARNS INTEREST RATES WILL RISE CEO of the FBAA Peter White has warned that banks may be forced to increase home loan interest rates over the next 12 months as a result of the pressure on wholesale funding costs and profit margins, coupled with looming regulatory changes.

“This is really the perfect storm for interest rate rises as banks look at softening the jump in the wholesale cost of funds that they lend out, like mortgage-backed securities and bonds,” he said.

“Those with money deposited in banks should be happy their interest rates have risen slightly, but the flipside is the borrower will possibly have to carry the cost with an increase in home loan mortgage rates.”

A rundown of the next fortnight’s events

The rising Australian dollar and increased compliance costs, he says, are other factors which may force banks to increase home loan rates, and it is up to brokers to educate their customers about this likelihood and discuss the possibility of refinancing under a fixed interest rate.

“Brokers should be aware of what may happen and assess the most suitable outcome for customers if banks do increase the variable rate.

“There also is an argument for splitting the loan, and we know some lenders offer discounts with this type of package,” Peter White White said.

APRIL

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WHAT THEY SAID...

Greg Medcraft “ASIC is committed to encouraging innovation that has the potential to benefit financial consumers and investors” P26

APRIL

Harley Dale “A strong focus on housing supply and policy reform is crucial to Australia’s future economic and social prosperity as we look to successfully house a growing and ageing population” P27

Brett McKeon “A viable mortgage broking sector is crucial for retaining an element of competitive pressure in the mortgage market” P12

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APRIL

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4/04/2016 1:04:01 PM

REGULATORY ROUNDUP 6

WORLD NEWS

CAN’T ESCAPE THE ARM OF THE LAW

Key enforcement results by misconduct type, July–December 2015

105 investigations commenced

6 persons charged in criminal proceedings

86 investigations completed

42 criminal charges laid

27 individuals removed from financial services

20 infringement notices issued

$149m compensation/remediation

$969,200 infringement notices paid

CANADA

Other market misconduct

FICOM PROCEEDS WITH NEW DISCLOSURE RULES The Financial Institutions Commission (FICOM) of British Columbia has announced it is tweaking disclosure rules for mortgages originated by brokers, despite heavy criticism from the industry. “My office is proceeding with plans to implement improved disclosure measures for mortgage brokers in British Columbia,� said Carolyn Rogers, registrar of mortgage brokers at FICOM. “We have reviewed feedback received from industry in response to the open letter sent in January and appreciate all the comments.�

FICOM put forth a new interpretation of regulation Form 10, which would require mortgage documents to explicitly state how much brokers are compensated. It welcomed feedback from the industry, and many, including broker associations and network heads, argued the change would result in a competitive disadvantage for brokers.

The change will only impact on brokers in British Columbia; however, many have argued that similar rule changes could sweep across the nation.

FICOM does not yet have a confirmed implementation date. “After those directions are made public, I would expect a transition period for implementation of at least several months,� Rogers said. “My office continues to welcome feedback from industry on implementation, and I have received a number of offers in this regard that we will be following up on.�

AN IMPORTANT IMPORTANT AN

Market integrity rules 24%

Insider trading

29%

MARKET INTEGRITY RESULTS BY MISCONDUCT TYPE 10%

Market manipulation 19%

Continuous disclosure

Source: ASIC

ASIC TARGETS INTEGRITY OF FINANCIAL MARKET BENCHMARKS ASIC has released its latest enforcement report for the period period 1 July 2015 to 31 December 2015, outlining its key outcomes and areas of focus for the future, including poor organisational culture in the financial services industry, retail margin foreign exchange trading, illegal phoenix activity, and increasing volumes of electronic evidence and the associated technology.

The report indicates that the integrity of the financial market benchmarks remains a high enforcement priority, as do disclosure obligations and market abuse, and ASIC will continue to address these issues through strong

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02-09_News_SUBBED.indd 6

19%

enforcement action. ASIC’s Wealth Management Project, which seeks to lift the standards of major financial advice providers, and ASIC’s court proceedings aimed at winding up land banking schemes are also high priorities for the foreseeable future. “ASIC does everything in its power to detect and take action against those who break the law, to ensure consumers can have trust and confidence in our financial markets and financial services industry. This report highlights our strong recent enforcement record and ongoing areas of focus,� said ASIC commissioner Greg Tanzer.

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LENDER UPDATE 8

ww FACT FAST

LENDER ROUNDUP

A rundown of the fortnight’s policy and price changes

$8,012m

PRODUCT

Westpac’s statutory net profit for the 12 months to 30 September 2015

AMP ‘BLACKLISTS’ MORE THAN 140 SUBURBS FOR APARTMENT LENDING Non-major lender AMP has ‘blacklisted’ more than 140 suburbs for apartment loans amid fears of oversupply, off-the-plan sales and falling prices.

Leaked documents obtained by the Australian Financial Review indicate AMP has explained its blacklist as a “prudent” response to managing risks of oversupply, which could push down prices and rents and lead to defaults.

The blacklist is primarily concerned with apartment developments consisting of more than 10 dwellings built near capital cities and innersuburban areas, where there is a high volume of new or soon-to-be-completed developments.

According to AFR, AMP borrowers will face tougher terms on the amounts borrowed, the number of apartments purchased in a single development, and a ban on using some incentives offered by developers, such as rental guarantees.

An AMP spokesperson has confirmed the blacklist is about maintaining prudent lending standards, and will be assessed on an ongoing basis.

“AMP Bank takes a prudent approach to managing risk. We take into account a range of factors with our lending policies, including using data provided by industry participants to assess trends and information on postcodes,” the spokesperson told Your Investment Property.

“We have identified certain high-density living areas where we have put provisions in place to manage risk around oversupply. These provisions are regularly monitored and assessed on an ongoing basis.”

The AFR has reported that AMP is one of many big lenders circulating blacklists of suburbs where apartment buyers will face tougher application and serviceability requirements.

02-09_News_SUBBED.indd 8

Source: Westpac

La Trobe Launches a new loan product targeting Australia’s ageing population. La Trobe’s Aged Care Loan is designed to help elderly Australians moving into aged care facilities cover the deposit required by the facility to move in, known as the Refundable Accommodation Deposit (RAD), which can commonly exceed $500,000. According to La Trobe, approximately $3bn per annum is already required to fund individuals moving into aged care facilities.

The new product will lend up to 50% LVR against the borrower’s primary residence, lend above the RAD for property improvements, and allow interest accrual for part of the loan life.

PAYDAY LENDER NIMBLE FORCED TO REFUND $1.5M Following a significant ASIC investigation, payday lender Nimble Australia Pty Ltd will refund over 7,000 customers more than $1.5m after ASIC had concerns that Nimble was failing to meet its responsible lending obligations.

ASIC identified significant deficiencies in Nimble’s compliance with the responsible lending laws when providing loans of short duration to consumers. The probe revealed that Nimble had not properly assessed the financial circumstances of many consumers before providing them with loans, and relied on algorithms which did not properly take consumers’ financial information into account.

In addition, the lender failed to consistently recognise where consumers had obtained repeat loans from payday lenders within a short period of time, and where repeat loans were properly identified Nimble did not take sufficient or appropriate steps as required by law before providing a loan to the consumer.

Nimble will now be forced to refund over $1.5m to over 7,000 customers through a consumer remediation program overseen by Deloitte Touche Tohmatsu; make a $50,000 contribution to Financial Counselling Australia; and engage an independent external compliance consultant to review its current business operations and compliance with the consumer credit regime and report back to ASIC. “This is a significant outcome for financially vulnerable consumers,” said ASIC deputy chair Peter Kell. “This outcome is a further example of ASIC’s strong focus on the payday lending sector. This remains a high-priority area for ASIC, and we expect the industry to continue to lift its game.”

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10

ANALYSIS

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PROTECTING THE BROKER CHANNEL

AFG has confronted ASIC’s review of remuneration structures in mortgage broking head-on, saying the consequences of undermining the current structure should not be underestimated IN FEBRUARY, corporate regulator ASIC issued its scoping discussion paper regarding the mortgage broker remuneration review to key industry stakeholders. The discussion paper outlined the proposed focus of the review, including the home lending market, remuneration structures and consumer outcomes.

In its response to ASIC’s discussion paper, the country’s largest aggregator, AFG, fiercely defended mortgage brokers, saying any drastic changes to the sector and the way brokers were remunerated would directly affect consumers in a negative way.

10-13_Analysis_SUBBED.indd 10

Broker loans not riskier Speaking at the Australian Business Economists Lunchtime Briefing in Sydney last August, APRA chairman Wayne Byres warned lenders that third-party-originated loans tended to have a “materially higher” default rate compared to loans originated through proprietary channels.

“This does not mean third-party channels have lower underwriting standards but simply that the new business that flows through these channels appears to be of higher risk, and must be managed with appropriate care,” he claimed.

In November, ASIC also revealed plans to undertake a review of mortgage brokers in regard to interest-only lending, after it was found that more than half of interest-only loans – typically “riskier” loans – came through brokers.

However, in its response to ASIC’s discussion paper, AFG has refuted these assertions that brokeroriginated loans are riskier.

“While there will be variations in loan performance between channels, the existence of such differences does not prove that a particular distribution channel results in riskier loans or leads to poorer performing loans,”

the response stated.

The variations in loan performance, according to AFG, boil down to the types of borrowers who are more inclined to use a broker.

For example, borrowers who have difficulty meeting the lending criteria of the major banks, have complex finances, or require more specialised lending arrangements are more inclined to use the services of a broker who has wider access to and knowledge of different loan products.

“Irrespective of the distribution channel, lending to such borrowers may be of inherently higher risk, even when responsible lending criteria have been satisfied.”

Brokers are also highly regulated by both ASIC, under the NCCP, and through either of the two industry bodies – the MFAA or the FBAA – of which membership is compulsory. In addition to that regulation, brokers

are also subject to lender policies such as clawbacks. “… brokers generally also face a 100 per cent ‘clawback’ of their commission over the first 12 months, and 50 per cent over 18 months, of a settled loan’s life. It is therefore in the broker’s interest to ensure the product selected meets the customer’s needs,” AFG’s response stated.

Further, AFG argued, it is ultimately the lender’s decision to finance the loan.

“If a loan defaults as a result of the borrower failing to meet their payments, the lender’s own credit policy should primarily be examined together with its approach to its own responsible lending obligations.”

Commission drives competition Speaking in December, ahead of starting its remuneration review in January, ASIC labelled

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ANALYSIS BROKERS GROWING MARKET SHARE

Broker market share increased by 1.4% in 2015 Brokers settled 51.8% of all new residential home loans in 2015 Brokers originated $49.9bn of new home loans in the December quarter 2015 Source: MFAA

AFG URGES BANKS TO PUBLICLY SUPPORT BROKERS AFG has called on the banks to be vocal in their support of the mortgage broking sector and make their responses to ASIC’s remuneration review public.

“I am always concerned about how those who yell the loudest quite often get heard the best. Our industry is small, [brokers] are small business operators,” AFG managing director Brett McKeon told Australian Broker.

“There is a certain amount of fragmentation within the industry – some groups don’t have the dollars to invest in representing their members well and others are owned by banks, which builds conflict at times with these inquiries and how they respond to them.

“We are going to ask the banks to disclose whether they put a submission in or not on the topic – and I am sure they would have all responded. It would be interesting to see if we can get any of them to be transparent.”

According to McKeon, it is in the lenders’ best interests to openly and fiercely support the broker channel.

“A viable mortgage broking sector is crucial for retaining an element of competitive pressure in the mortgage market. Many of Australia’s smaller lenders rely on mortgage brokers to act as a distribution network for their products.

“We certainly hope some of the banks who are dependent on the channel come forward and support us.

“Some of the smaller banks get 80% or 90% of their business from the third-party channel so you would hope they would be vocal in their support rather than just be part of an ABA [Australian Banking Association] submission which will largely, I think, try and muddy the waters.”

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commissions as a form of conflicted remuneration.

“Although we haven’t reviewed mortgage broker commissions in this way previously, commissions are a form of conflicted remuneration, so the question is whether, as a form of conflicted remuneration, they are a cause for concern,” ASIC’s senior executive leader – deposit takers, credit and insurers, Michael Saadat, told Australian Broker.

In its response to ASIC’s scoping paper, AFG agreed.

Commissions can lead to

aggregators owned by lenders would be able to absorb the cost of providing advice as the cost of distributing a product is modest compared to the income that can be gained from the interest margin.”

This would destroy competition and harm both consumers and brokers.

“We believe that undermining the broking model will result in a significant reduction in competition in the mortgage sector, to the detriment of the consumer. Every mortgage customer will pay

that the lender has a vested interest in maximising its market share,” AFG said in its response.

The aggregator also suggested the regulator look at imposing a threshold level of interest that is mandatory to disclose.

“This potential conflict of interest diminishes as the level of common ownership decreases. Our view is that the threshold level of interest that should be disclosed to consumers is 20%, consistent with section 606 of the Corporations Act 2001.”

“While there will be variations in loan performance between channels, the existence of such differences does not prove that a particular distribution channel results in riskier loans or leads to poorer performing loans” AFG conflicts of interests in many situations, but this is rare within the current structure of the mortgage broking industry.

AFG said it analysed the monthly market shares for each of the lenders on its panel and compared them to the average and lenderspecific commission rate at the time – providing “empirical evidence” that brokers were not swayed by commission.

In fact, according to AFG, “the level of commission offered by most lenders is remarkably similar with upfront commission for residential loans generally ranging between 0.6% and 0.7% of the loan amount”.

Not only did AFG argue that commissions don’t lead to a conflict of interest; it also said that banning commissions will flat-out destroy the industry and harm consumers. Banning commission models in favour of fee-for-service models would unfairly advantage big, bank-owned aggregators.

“Lender advisors and

for reduced competition throughout the life of their loan.

“Furthermore, the mortgage broking sector itself would be severely impacted by the changes.

With more than 14,000 brokers across the country, and a further 30,000+ jobs tied to the industry, the consequences should not be underestimated.”

What ASIC should focus on In addition to defending the current structure of mortgage broking, AFG has pointed to other areas it believes ASIC should focus on as a part of its review. Agreeing with the recommendation in the Murray Financial System Inquiry, which called for new disclosure requirements for brokers, AFG has urged ASIC to review vertical integration within the mortgage broking industry.

“There is little doubt that those aggregators that are majority-owned by a lender have the potential to be influenced by that lender and

The same scrutiny should be applied to banks.

AFG also highlighted the problems associated with multiple lender trading names.

“There have been a number of lender mergers in the Australian market.

Often, the consolidated entity continues to trade using both names (under a single banking licence).

“This means that consumers may believe that they are considering competitor’s products when this is not the case.”

AFG cited examples of applicants choosing to refinance a loan from Westpac to Bank of Melbourne without being made aware that the Bank of Melbourne is a wholly-owned subsidiary of Westpac.

The aggregator also shed light on the risks associated with white label products and the “irrelevance” of comparison rates.

“Several aggregators, including AFG, Aussie and Advantedge, have secured independent funding sources

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CONNECT WITH US Got a story, suggestion, or just want to find out some more information?

and now offer their own loan products,” AFG said.

“These products increase consumer choice but are vulnerable to changes in

“The emergence of new incentives, such as cash rebates, and the increasing average value of a loan are making comparison rates

cost of a loan to the average borrower.

“The comparison rate also excludes the impact of any cash rebates that

“We believe that undermining the broking model will result in a significant reduction in competition in the mortgage sector, to the detriment of the consumer” AFG the cost of funding driven by the limited number of warehouse funding providers.”

When it comes to comparison rates, the aggregator argues that increasing competition in mortgages and the changing nature of the market are making comparison rates “increasingly irrelevant”.

10-13_Analysis_SUBBED.indd 13

increasingly irrelevant.

“The average loan originated by AFG brokers is now over $450,000 while NCCP mandates that comparison rates evaluate the cost of a $150,000 loan over 25 years. This lower loan value magnifies the impact of fees on the comparison rate and distorts the true

may be offered as these are typically only offered for larger loans.”

Furthermore, according to AFG, comparison rates assume that, if the interest rate on a loan increases at the end of an introductory period, the borrower will not refinance to a cheaper product.

“The average loan is now

closer to $450,000 and many borrowers now take advantage of ‘honeymoon rates’ before refinancing when the loan reverts to the standard variable rate or are offered ‘life of loan’ discounts to the standard variable rate.

“For example, the Commonwealth Bank’s

three-year Special Economiser is advertised with an interest rate of 4.29% but a comparison rate of 4.92%. This is because the loan reverts to the Base Rate Economiser loan, at 5.14%, after three years and it is assumed that the borrower would not refinance,” AFG said.

BROKERS DRIVING COMPETITION

Variable interest rates dropped from 400bps above the cash rate in 1994 to 175bps above the cash rate in 2010 175bps 400bps

Source: AFG

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COVER STORY GETTING THE CHEMISTRY RIGHT Westpac’s Janelle Pearce and Greg Pell on specialisation and the importance of the broker-banker relationship in the growing commercial market THE ONLY WAY IS UP

$5.9bn

Total value of commercial loans written in Australia between March and September 2015

11%

Proportion of commercial loans written by brokers Source: MFAA

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Riding the wave of channel growth It’s no secret that Australian brokers have been riding the wave of the residential property boom in recent years. But industry figures have been predicting a resurgence in the commercial market as far back as 2012, and for Westpac’s national head of commercial introducers, Janelle Pearce, and Greg Pell, general manager of Westpac equipment finance and commercial introducers, the proof is in the pudding.

“We’re already seeing uplift in volume.

Compared to last year we’re settling 12% more commercial business,” Pearce told Australian Broker.

Broker Going hand in hand with the rise of commercial business comes similar growth in the burgeoning commercial broker channel, and entering the playing field are not only residential mortgage brokers but experienced commercial bankers that have left the major banks to run their own businesses as commercial brokers.

According to Pell, a big part of the channel growth is customer demand, and he suggests the upward trend of customers opting to use commercial brokers could represent a swing in the market itself, indicating that brokers are steadily on their

way to becoming the channel of choice in the commercial market.

“I think that’s getting back to customer choice – customers are electing to go to commercial brokers,” he said.

Quality over quantity Pearce and Pell make no secret of the lender’s vision to be the number one partner for introducers in the country, but according to Pearce this has little to do with the number of Westpac commercial brokers, and far more to do with the standard of its brokers across the board. Pearce admits that, like other major lenders, Westpac’s expectations are high for accreditation into the commercial third-party channel, and while it makes the process for aspiring commercial brokers more difficult, a by-product of this is that lenders are left with only the strongest commercial brokers who will continue to bring in quality applications.

“We’ve implemented our own compliance framework within the business we operate … we have a very strict process we go through to accredit someone as a commercial broker,” Pearce said.

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15

This includes ensuring the candidate has experience in the finance industry, and that they understand how to put a credit submission together.

“If we’re going to qualify someone and give them an accreditation as a commercial broker, we need to know that they know what they’re doing, because it doesn’t help the brand of the aggregator or the brand of the third-party channel if you’ve got someone inexperienced trying to make a deal happen,” Pearce said.

“We focus first and foremost on the quality of the commercial introducers as opposed to the number of introducers we have. We’ve made a point of dealing with best in market as opposed to dealing with everyone in market, and we’re really protective of that.”

commercial broker and not only a referrer, being involved in every step of the bank/customer transaction is a surefire way to develop their knowledge about commercial lending, as opposed to stepping out of the picture once the introduction has been made.

Westpac also offers bespoke training to facilitate the progression into commercial broking, and for the major lender that involves taking the broker through an example of a deal which, depending on performance, could culminate in accreditation into the commercial market.

“At the end of the day, there’s no point being number one in terms of writing the most business but having the biggest delinquency profi le of any other bank through third party.

“The broker is important to us and we’re thankful when they bring us a customer” The “strict process” for aspiring residential brokers, Pearce elaborates, involves the bank meeting with the broker to determine their eligibility to become either a commercial broker or a referrer. As a referrer, the residential broker receives a single upfront payment in exchange for the client introduction.

“All of our partnership managers have commercial experience so that they can have an informed discussion with their broker. If we don’t feel that they’ve got the skill set at that point in time to get the full commercial accreditation, then we offer the referrer accreditation to get them started.”

Pearce explains this option is ideal for the residential mortgage broker wanting to dip their toes in the waters of commercial business.

As for those individuals set on becoming a full

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For us, it’s about making sure we’re protecting our shareholders by only accrediting the right people.”

These rigid quality assurance measures challenge the idea that, when it comes to regulation and compliance, the commercial market tends to be more fluid than the residential mortgage industry. Rather, Pell argues that there is a much more high-risk framework across commercial business, and that where the mortgage industry tends to be “a little more generic”, the commercial market has multiple risks at different levels that need to be catered for across the banks’ portfolio of managers.

One of the areas that can prove to be particularly challenging for the broker is timeline, with commercial deals often taking

THE STRONG SUIT OF SPECIALISATION

Westpac’s bankers are trained in tailored industry specialisations including:

Commercial property

Healthcare

Working capital and trade

Education

Real estate

Franchising

Professional and business services

Natural resources

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COVER STORY MAJOR BANKS’ BOOST IN BUSINESS

Major banks’ commercial property exposures in Australia 2013–15, growing at a rate of 5% a year $m 200,000

150,000 146,247

100,000

March ’13

156,072

March ’14

163,269

March ’15 Source: APRA

RAISING THE AWARENESS OF THE COMMERCIAL BROKER Results from the MFAA’s Industry Intelligence Service have shown that brokers are only responsible for writing around one in 10 commercial loans in Australia, and director of Macarthur Finance & Capital Ray Slack puts it down to a lack of awareness on the part of clients.

“There are so many lenders offering commercial products, but clients aren’t aware of that,” he said. “They don’t approach brokers about commercial finance because they don’t know what’s out there.” Consequently, Slack says, brokers mistake this for a lack of demand rather than for what it actually is – a lack of awareness – and choose not to pursue diversifying into the commercial market.

But by looking beyond lending only and diversifying into equipment and commercial finance, brokers have the opportunity to tap into the more intangible aspects of commercial broking, such as client engagement, marketing and partnership opportunities – all elements that can make a real difference in building a sustainable, diversified business. They can become a one-stop shop and satisfy multiple financial needs for their clients simply by asking a few questions about their financial situation outside of their residential mortgage enquiry. For this reason brokers should take advantage of training and education offered by associations, lenders and aggregators.

“Once you have the skills to satisfy all those needs, you really have a client for life,” says Slack. “It’s about identifying what the client needs, not necessarily what they initially want.”

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months to seal, as opposed to the quick turnover and high frequency of residential mortgage deals.

Aligning customers with specialised bankers The issue of the commercial timeline alone is often enough to convince residential mortgage brokers that focusing on their core business is better suited to their interests. The business opportunity for them, however, lies in the increased revenue streams that come as a result of outsourcing the commercial part of their business direct to the bank. For thirdparty introducers, partnering with bankers that are experts in their clients’ industries is the key to a successful business strategy, and this niche, claim Pearce and Pell, is where Westpac’s commercial bankers have a foothold.

With industry specialisations across multiple

relationship between the broker and banker.

“We communicate to our bankers the value of working with commercial brokers,” she said.

“We understand the importance of having a multiprong acquisition strategy, which includes having referral sources. We believe that to be a successful banker you need to have active referrers in the current market.”

Pell added that the banker-broker symbiosis was crucial, with the broker looking to the banker as a sort of financial adviser, and the banker expanding its introductory network through the broker.

“It’s a dual relationship we’re trying to broaden – building that relationship has been one of our key strengths,” he said.

“The broker is important to us and we’re thankful when they bring us a customer. If

“We’ve made a point of dealing with best in market as opposed to dealing with everyone in market, and we’re really protective of that” portfolios, from healthcare to education and property, Westpac’s business customers gain instant access to a vast industry knowledge base, thanks to the countless other clients the lender has operating within the same industry.

“Business owners are so much savvier these days, but there’s also so much more we can help them with. Westpac is a big bank … it has a lot of intelligence that sits behind it that we can share with our brokers that’s about making the business stronger,” Pearce stated. “We have information readily available that the introducer may not have.

“Westpac really has positioned itself as a bank focused on expertise across a range of industries,” she said, “and that’s how we differentiate ourselves from some of our competitors. Our bankers are, I think, the best in market when it comes to being specialised. We’ve invested heavily in our banker network to upskill them in a specific area.”

This includes enormous amounts of training, including cash flow workshops and ongoing professional development towards becoming experts in specific fields. This, Pearce says, means the commercial broker always knows which banker to put in front of each client. “[We’re] putting the customer at the centre.

We’re not doing them any favours, and the brokers are not doing them any favours, by matching them up with the wrong person. It’s not one size fits all,” she said.

“As a third-party channel, we often talk about getting the chemistry right between the customer and the banker,” Pell agreed. “The first thing we want to focus on is getting [the customer] into a specialised portfolio so they know they’re going to get the best of the best in that specific industry.”

The importance of the broker Building this connection with the customer, Pearce says, relies heavily on a strong

they can keep a customer in our tent, we’re very happy,” said Pell.

Recognising that, for the bank, the broker is in fact a customer too is also not underestimated.

“It’s about getting it right for our introducer – we become an extension of [the broker’s] relationship with the client, so if they don’t choose the right brand, and we don’t choose the right banker, they potentially lose that client,” said Pearce.

Building the economy According to Pearce and Pell, the overall focus for the Westpac Equipment Finance and Commercial division is on making Australian businesses more successful, and this includes brokerages. They are, after all, small businesses too.

“Our goal is to ensure we stay in tune with our commercial introducers, making sure we are creating value at every interaction that we have,” said Pearce.

“We want to be more than bricks-and-mortar lenders. We want to be lending to businesses to help support the economy and make Australian business stronger.

“We’re working with aggregators to help them to identify the right brokers who have the desire or curiosity to do more … we want to make sure we’ve got a model that supports all types of brokers, whether they’re a full-blown commercial broker or referrer,” she said.

This includes creating awareness around the third-party market, and not underestimating the importance of the broker channel in the Australian economy; it is an area of expertise that is only going to continue to develop over the coming years as more residential brokers diversify, and more experienced commercial bankers jump ship to move into broking.

In the growing and evolving property landscape, there’s no doubt it’s a good time to be an Australian broker.

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BEST PRACTICE BRIDGING THE GAP BETWEEN WHAT’S IMPORTANT AND HOW WE ACTUALLY LIVE You say you want to spend more time with your family, but instead stay late at the office to get ahead in your career. You vow to give back to your community by volunteering, but can’t work it into your schedule.

In short, there’s a disconnect between people’s words and actions when it comes to what matters most, according to Lee Stoerzinger, a financial planner (www.leestoerzinger.com) and author of On The Back Burner, which explores how people can align the values they espouse with the values they live.

“In theory, we should all try to live a life that is as close as possible to what we say we care about most,” Stoerzinger says. “In reality, that doesn’t happen. Too often, how people think about money gets them off track. They strive for the highest-paying job, an expensive car and a luxurious house.”

As a financial planner, Stoerzinger understands the importance of money and how crucial it is to manage it wisely. But as a family man who adopted two Haitian children orphaned by a 2010 earthquake, he also knows a person’s legacy shouldn’t be limited to material goods bequeathed to family members.

“When you think about it, defining your values should be easy,” he says. “It’s what you believe.

It’s how you want to raise your children. It’s what you want to spend your free time doing.”

The trick is to create a mindset that helps you give greater weight to what matters most and inspires you to act. Anyone can take steps to get thinking and acting in the right direction, says Stoerzinger; for example: Focus on family activities Create a new family tradition, such as organising a monthly game night, buying tickets to a football game in the summer, or taking an annual road trip. You could have donuts the morning of your kid’s birthday, start a family book club, or visit a shelter once a month to feed the homeless.

Connect with nature Go birding, take hikes with your dog, go shelling at the beach, go kayaking on the lake, paint outdoors, see the bigger picture and look at the sky. “The world is full of wonders to de-stress and bless us,” Stoerzinger says.

Give back Consider how you can be a servant in your community without donating money. Who has needs you can meet? Think about your true passions in life. Who can benefit from your skills?

“We can continue complaining about money, stress and schedules,” Stoerzinger says, “or we can admit that we need to step back, define what’s important to us and live our lives with dedication to those things.”

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HAPPY EMPLOYEES, HIGHER ENGAGEMENT Georgie Drury, CEO and founder of Springday, on the effects of wellbeing programs in the workplace

NEW RESEARCH is telling us that today’s top graduates prioritise work-life balance over money. A study

by Universum of 50,000 Gen Z high-school graduates identified their top two career goals as 1) work-life balance, and 2) job security and stability.

Kelly Services reports that 63% of employees value flexible work arrangements, and 50% of millenials (that is, 18–25-year-olds) value wellness programs.

So, what does this mean in practice? HR strategy needs to consider wellbeing and work-life balance as an essential component of a broader engagement strategy.

Wellbeing is directly linked

to engagement, and does not exist in isolation.

The crucial link is motivation. Workplace wellbeing programs are effective and more meaningful where employees are intrinsically motivated to join them. They work best in companies where management values employees and where everyone, from the CEO down, feels valued by the company and contributes to its clearly shared objectives.

This is the most important point. Unless the wellbeing programs align with your company’s culture and vision, and unless they’re communicated properly, they’ll fail. You need to support wellbeing honestly

and transparently, by doing the following: Get buy-in from management Employees need to understand this isn’t a ‘do as I say, not as I do’ situation. It helps if the CEO and senior management lead by example and the program aligns to the CEO’s HR strategy.

Get buy-in from staff This no-brainer is often overlooked. Ask staff what they want, and then do it or explain clearly why you can’t.

Remember, there must be a high percentage of staff yearning for someone to support their health goals – for example, Australians

WORK-LIFE BALANCE A PRIORITY

Top 9 things Australian professionals look for in a new role 70%

67%

Work-life balance (incl. flexible arrangements)

64%

Higher salary

58%

Cultural fit with organisation and/or team

Career progression/ training opportunities

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19

spend just shy of $10bn on weight loss each year.

Imagine the goodwill if your company helped fight the obesity epidemic by supporting staff to lose weight.

“Wellbeing is directly linked to engagement, and does not exist in isolation”

Make a business case Work out your objectives, articulate them, and – I cannot say this enough – work out how to measure them. For example, find out absentee rates; know the cost of workers’ compensation and your engagement scores.

This’ll help you assess return on investment.

Link programs to strategy: show employees how wellbeing programs are linked to your company’s values and strategic

direction. This is vital if innovation is on your company’s agenda. Try to get your ELT to understand that innovative companies think creatively and are ahead of the curve, and that you want your employees to see this, and think this way, as well.

Get some quick wins: for example, target enthusiastic staff, or take part in global or national awareness initiatives like R U OK? Day or Movember.

46%

36%

Better benefits

A company whose values are closer to mine

30%

Strong manager

Have fun Promoting and supporting wellbeing is not punishment! It’s a positive, proactive way to improve your company and the lives of your employees.

So that’s the foundation you need to lay for workplace wellbeing. The next step is to educate employees about wellbeing, inspire them to put what they learn into practice, and help them track their progress.

14%

13%

Better brand

Better job title Source: The Hiring Report 2015 (Hudson)

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4/04/2016 1:08:35 PM

20

SPECIAL REPORT

FINTECH: A REVOLUTIONARY TALE The mortgage industry is on the precipice of its next big disruption, led by tech-savvy alternative finance providers

A LOOK AT THE STATS

320% Growth in Australian alternative finance market in 2015

US$348 million Total Australian alternative finance market volume in 2015

US$105.05 million Invoice trading market volume in 2015

US$43.15 P2P consumer lending market volume in 2015

US$7.05 P2P business lending market volume in 2015 Source: KPMG

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IT HAS been over two decades since the mortgage industry was revolutionised. The last time it was so profoundly disrupted was back in the 1990s with the emergence of mortgage brokers. Brokers have been active in Australia since the early 1980s, however they became a dominant force within the industry in the late 1990s on the back of a major marketing push by Aussie Home Loans and Wizard Home Loans.

Today, mortgage brokers are responsible for over half (51.8%) of all new residential home loans written, according to statistics released by the MFAA. But the next wave of disruption is coming. It is alternative finance.

Alternative finance providers – or fintech providers – leverage technology and the intelligent use of data to provide a more flexible and personalised service than their traditional banking counterparts. Operating outside the stringent regulation imposed upon Australia’s highly-regulated major banks and without the overhead costs of owning and running a physical presence, fintech providers also claim they can offer Australian consumers more competitive, cheaper financial products.

As the chief executive of the Australian arm of global peer-to-peer (P2P) lender, RateSetter, Daniel Foggo summated, “it’s simple” to see why consumers are ditching traditional lenders in favour of fintech rivals.

“Alternative finance providers like RateSetter are consistently offering consumers and businesses a better deal with lower rates, transparent fees and a simple and fast online application process. Consumers and businesses are hungry for an alternative to traditional

finance,” he told Australian Broker.

RateSetter, which offers secured or unsecured personal loans, is a global P2P group founded in the UK in 2009. It was established in Australia in 2012 where it is managed and majority-owned locally.

An impressive growth trajectory Online alternative finance has grown rapidly in Australia. According to a recent report, Harnessing Potential: Asia Pacific Alternative Finance Benchmarking Report, Australia’s alternative finance lending market is the third largest in the Asia-Pacific region after experiencing growth of 320% in 2015. The average annual growth rate between 2013 and 2015 was 281%.

The Australian alternative finance lending market ballooned to US$348m in 2015, trailing China, which reported US$101.69bn over the same period, and Japan, which reported US$360m.

“While still a relatively new concept for many, online alternative finance has been experiencing rapid growth globally since 2013, and in Asia has already become a multi-billion dollar market,” Ian Pollari, global co-lead for KPMG’s fintech practice said. KPMG collaborated with the Cambridge Centre for Alternative Finance, the Tsinghua University Graduate School at Shenzhen and the University of Sydney Business School to conduct the research.

“Activity in China dwarfs much of the region, but Australia is punching above its weight, creating niche markets and capitalising on the sophistication and financial muscle of its established financial services sector.”

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DISRUPTION BEYOND FINANCE

The largest share of Australia’s alternative finance market volume was balance sheet business lending, which accounted for over US$120m in 2015. This was followed by invoice trading (US$105m) and marketplace/ P2P consumer lending (US$43m) in 2015.

Marketplace or P2P business lending volume reached $7.05m in 2015.

funding up to $15m per month.

Sedgwick explained how the P2P financier filled this gap by challenging the “cookie cutter” approach. “tim’s clients have been attracted by the firm’s ability to customise the best rates for them by assessing an extensive range of variables applicable to each business. This means tim

“It doesn’t require a broker to build a whole new business or client base – it’s just an easy option available to help them engage more with their clients and help deliver them real value”

More than half of Australians trust a “sharing economy service” more than its traditional alternative, according to a new survey, revealing the amount of potential in the growing P2P lending space.

According to The RateSetter Sharing Economy Trust Index (RSETI), commissioned by P2P lender RateSetter, 61% of Australians have used a sharing economy service – such as Uber, Airbnb and eBay – in the previous six months and 85% intend to use one in the next year. In fact, 52% of Australian’s now trust these share economy services more than their traditional counterparts.

“The sharing economy is profoundly and permanently impacting how Australian consumers buy and sell goods, consume services and share surplus resources. It’s important to know how Australians feel about it – and how that affects their behavior,” RateSetter Australia CEO Daniel Foggo said.

“Unsurprisingly, sharing and peer-to-peer services are becoming increasingly popular and that’s because these platforms deliver services more efficiently and affordably, whilst keeping their focus on the customer”.

The RSETI saw P2P online marketplaces like eBay and Gumtree coming out on top as the most commonly used (56%) and trusted (74%) sharing economy service for Australians.

Almost a quarter (23%) of all Australians spend at least $50 a month on P2P economy services, but the survey showed 25-34 year olds spend the most on share economy services, averaging a monthly spend of $116.

Meanwhile, 64% of Australians say they would consider using a sharing economy service to supplement their income, with online marketplaces (56%), online outsourcing (18%) and accommodation sharing (12%) topping the list of preferred money-makers.

Daniel Foggo, RateSetter According to the chief executive of The Invoice Market (tim), Angus Sedgwick, fintech providers have been able to service a gap in the invoice trading market – which holds the second largest share of the country’s total alternative finance market – due to rigidity of traditional funders.

“The growth [in invoice financing] has been largely driven by the inability of the larger, traditional lenders to provide cash flow finance for SMEs because of their demanding lending criteria. This creates opportunities for next generation financiers such as tim to offer solutions that address the business needs of SMEs for funding,” Sedgwick told Australian Broker. tim is a P2P SME invoice financier established in 2014. The platform has financed over $100m since its establishment and is now

20-23_Alt Finance_subbed.indd 21

offers an end to the ‘cookie cutter’ approach often used in cash flow funding and is able to provide clients with better rates and maximum flexibility.”

While the alternative finance market in Australia may be on an impressive growth trajectory, Foggo says the sector is facing some challenging pushback from traditional lenders this year.

“One of the challenges we’re facing is the slow uptake of Comprehensive Credit Reporting (CCR), but we’re pleased to see the government taking action on this,” Foggo told Australian Broker. “Better credit information helps drive competition and choice for consumers, and we think that CCR will be a game changer for both lenders and brokers.”

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22

SPECIAL REPORT SMEs DRIVING DISRUPTION An index tracking the rate of change within financial services industry has revealed that emerging fintech companies are rapidly changing the face of financial services.

The Disruption Index, a joint initiative from online SME lender Moula and research firm Digital Finance Analytics (DFA), tracks important leading indicators, such as smart device penetration and use, online loan applications and service expectations in the SME sector. Between May and July 2015, the Index stood at 33.02. Between August and October 2015, the Index rose to 33.94. The higher the Index score, the greater the disruption of the industry.

Speaking to Australian Broker, Martin North, principal of DFA, said the SME sector has driven disruption in the financial services space.

“There are three things that have happened relatively recently which have fundamentally changed the game. The first thing is the Treasurer gave a 100% capital write-off to small businesses and they have gone out in their droves and bought smart devices. We have seen a very significant rise in the penetration of smart devices as the main device businesses are using for their interactions with their customers, suppliers and the banks.

“The second thing is this means that [businesses] now have a much higher expectation in terms of immediacy of access to information, products and services than they did before. This has created a big gap between where the banks currently are in terms of servicing small business customers and where small businesses want to be.

“The third thing is there are lots of new players coming in and essentially offering a different proposition… People are responding to the opportunity created by the disruptive environment.”

According to North, 2016 is likely to see more fintech businesses enter the market, however the major trend will be existing fintech businesses starting to gain serious momentum.

“I think we are going to see more momentum. I think the peer-to-peer players are going to be very interesting and I think we will probably see some new players beginning to think about the wealth creation sector because I think that is an area which is ripe for fintech penetration and development.”

Daniel Foggo

This March marked two years since the start of CCR, a voluntary system in which lenders can share an individual’s positive credit history data, such as loan repayment history as well as negative credit events, such as an individual’s history of defaults.

So far, most of the large banks have refused to share this customer credit data as a part of the CCR regime, and critics say this is because they see holding on to the data as a competitive advantage, prompting calls from fintech rivals for the government to make the regime mandatory.

the case for alternative finance providers targeting SMEs. “Brokers are crucial to the continued growth in the invoice financing market as typically it is finance brokers who are the first point of contact with business owners and having the conversations about cash flows. Importantly, they are also helping to educate businesses about this source of funding.

“Increasingly though, we also see the opportunities for mortgage brokers to broaden their revenue base simply by identifying existing

“The growth [in invoice financing] has been largely driven by the inability of the larger, traditional lenders to provide cash flow finance for SMEs because of their demanding lending criteria” Angus Sedgwick, tim According to Sedgwick, the key challenge this year, as the sector gains awareness and tries to keep up with its massive growth trajectory, will be credit control.

“It is simple enough to put up a ‘shingle’ to offer alternative finance, as many operators have done recently, but originating the business, having sound processes to assess the credit worthiness of clients and sourcing the funding is the key to ensuring the financial robustness of an alternative finance lender.

“Take, for example, alternative financiers in Europe. Several of the larger fintech lenders are expected to report significant losses as they have been far too lax in their lending criteria and the credit assessment systems used have taken on bad loans.”

The importance of brokers With no physical presence or established brand power to rely on, mortgage brokers are important advocates and major distribution channels for many fintechs. Sedgwick says this is particularly

20-23_Alt Finance_subbed.indd 22

Angus Sedgwick

homeowner clients who might be business owners or senior executives of firms that need invoice financing.”

Despite the eagerness of fintech providers to partner with brokers, Foggo admits that fintechs still have to battle against misguided reservations about the sector, which is still in its infancy in Australia – the biggest being that brokers often place alternative finance in the ‘too complicated’ pile.

“I think the biggest misconception around P2P lending is how simple it is for brokers to build it into their existing business. Brokers are still learning about P2P, but those who are engaging have found it’s a great way to help them build stronger relationships with their clients and diversify their earnings,” he said.

“It doesn’t require a broker to build a whole new business or client base – it’s just an easy option available to help them engage more with their clients and help deliver them real value.”

So, how does alternative finance fit into a broker’s service offering? Foggo says their goal is

4/04/2016 3:39:30 PM

23

simple – to provide consumers with greater choice while giving the broker an easy option to diversify their service offering and solidify their value proposition.

“With P2P lending, brokers can show their clients they have access to new, flexible tools to help them save money compared with traditional lenders. P2P lenders offer market-leading rates, up to 8% lower than the banks.

“Whether their client is buying a car, renovating their house or paying off credit card bills, a relationship with a P2P lender can allow brokers to quickly and efficiently deliver their clients access to the most competitive rates, whilst generating a new revenue stream.

“At RateSetter we’ve also developed an online portal to make it even easier for brokers to make referrals and monitor their client’s progress. Our portal also allows brokers to very simply see and manage the commissions they earn.”

Brokers don’t even have to look far to find these opportunities. According to Sedgwick, there is an opportunity gold mine for invoice trading once a broker learns how to prospect their existing client database.

“It’s firstly a data capture and analysis exercise for brokers,” Sedgwick explained.

“In gathering information about clients, brokers will always collect occupation details. This data enables business owners, self-employed clients and even senior executives of firms that may need invoice financing to be identified. Then it’s a matter of taking the opportunity to start the conversation about debtor funding and the potential use of it in the business. Given traditional funders typically have very restrictive lending criteria for SMEs, alternative finance is an ideal solution.”

The future of fintech The fintech revolution is coming and will be here to stay, judging by its impact in the more mature global alternative finance markets in the UK and US. “It’s worth looking at the experience in the United Kingdom and the United States to see how quickly P2P lending could grow and the impact it could have,” Foggo told Australian Broker.

“RateSetter started in the UK in 2010 and has now facilitated over $2bn AUD in loans to hundreds of thousands of customers. We expect to see the same growth trajectory here in Australia.

“Morgan Stanley has estimated P2P lending to Australian consumers will pass $10bn and comprise 6% of total consumer lending in the next five years. P2P might be a disrupter now, but in five years will be very much a part of the mainstream financial landscape.”

In the interim, both Foggo and Sedgwick say the short-term focus will be on driving education and awareness.

“We think 2016 is the year when P2P lending will really start to drive competition and change the Australian consumer lending landscape. We’re working hard to reach a broader audience. It’s always a challenge building awareness and trust in finance, but time in the market helps,” Foggo said.

“One of the best opportunities we see for [invoice financing] to continue its strong growth in its funding levels is continuing to educate businesses about this source of alternative finance and actively building and supporting our referrer network to do this,” Sedgwick concluded.

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4/04/2016 1:10:16 PM

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SPOTLIGHT VIDEO SPOTLIGHT

ONE YEAR ON

THE GOOD, THE BAD AND THE UGLY OF FOREIGN INVESTMENT What a difference a year makes – or not. Australian Broker reflects on the punditry, news and trends that made headlines 12 months ago 28 APRIL 2015 The Foreign Investment Review Board’s (FIRB’s) annual report reveals that foreign investment in housing increased by 95% over the 2013/14 financial year 10 AUGUST 2015 The Federal Government’s crackdown on illegal foreign investment continues, with more overseas investors forced to sell residential Australian real estate 1 DECEMBER 2015 The Foreign Acquisitions and Takeovers Legislation Amendment Bill 2015 is implemented, which will see the ATO enforce harsher penalties for rule-breaking investors.

Foreign investors will also have to pay an application fee to the FIRB of $5,000 for a home under $1m or $10,000 for homes over $1m 18 MARCH 2016 Federal treasurer Scott Morrison announces that, from the end of the month, the FIRB will need to approve the sale of critical infrastructure belonging to the states and territories, such as airports and ports, to private companies, worth more than $250m

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2 MAY 2015 The Federal Government unveils new measures to penalise foreign investment in existing dwellings in Australia 22 JULY 2015 Foreign buyers still account for more than one in 10 established properties in Victoria and NSW, despite this being illegal under federal legislation 8 OCTOBER 2015 Foreign investment in commercial real estate hits record highs, accounting for 56% of the $8.6bn worth of commercial sales in the September quarter

17 FEBRUARY 2016 From 1 July 2016, where a foreign resident disposes of certain taxable Australian property, the purchaser will be required to withhold 10% of the purchase price and pay that amount to the ATO

Steven Degetto

THE UNTAPPED MARKET OF SMALL BUSINESS Suncorp head of intermediaries Steven Degetto believes mortgage brokers may have failed to see a new business opportunity while the residential property boom has served as the industry’s bread and butter in recent years.

“We know that over half of Australian consumers choose mortgage brokers to help them with home loans and investment loans, but less than 10% use brokers to look at their small business needs,” he said.

To tap into this utterly unsaturated space, Suncorp has launched a new small business team specifically for the purpose of supporting brokers with small business and commercial lending, as well as assisting brokers looking to get into the market.

Degetto stated that small business customers are digitally savvy, wanting to save time and money, and are seeking a trusted financial adviser relationship.

Their number one concern is cash flow, and with over two million small businesses in Australia, there is ample opportunity for mortgage brokers to diversify into this market and substantially boost business.

“Being primarily a small business themselves, mortgage brokers have a great opportunity to have that alignment with small business customers,” Degetto said.

Suncorp began running small business masterclasses on the eastern seaboard in February, with more planned throughout the year to assist and educate brokers on the small business commercial market.

4/04/2016 1:15:26 PM

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4/04/2016 4/04/2016 11:56:13 1:13:38 AM PM

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MARKET WRAP DID YOU KNOW?

MARKET TALK

EXPERT OVERSIGHT NEEDED FOR REAL ESTATE INDUSTRY One of NSW’s peak real estate bodies has called for the State Government to improve how the industry is monitored and regulated CURRENTLY UNDER the purview of NSW Fair Trading, the Real Estate Institute of New South Wales (REINSW) believes the property industry, due to its size and complex nature, deserves to be overseen by those with an intimate understanding of how it operates.

REINSW president John Cunningham has said the current supervision model monitoring the real estate industry doesn’t treat it with the seriousness it deserves, and that the appointment of a Commissioner for Property Services would rectify this problem.

“The whole property sector is the biggest income earner for the state and we just feel that it’s not being treated with the seriousness it should. We’re not getting experts or specialists in their fields who understand what we’re about,” Cunningham said.

“We go into meetings and we find that people don’t understand what’s going on and they then have to go and research,” he said.

The REINSW has been a strong campaigner for the toughening of requirements such as minimum education standards needed to operate in NSW, and Cunningham believes the establishment of a commissioner would help that goal to be achieved.

“It’s about professional activity and professional performance and getting better outcomes for the consumer, and that means you have to elevate the industry to a higher standard.

“We don’t feel that in Fair Trading that we’re given that importance in being able to lift our game. We’re just constantly battling to raise the bar. We’re firmly in the belief that what’s good for consumers is good for the practitioner,” he said.

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While NSW Fair Trading has recently taken steps to improve the industry, such as by clamping down on underquoting, Cunningham said the fact that real estate transactions were likely to deal with large sums of money increases the need for expert oversight.

“It’s become far more complex in terms of both state laws and federal laws crossing over.

The Fair Trading environment tries to be too many things for too many industries, and it’s time that property was separated from it and given a standing it deserves.

“We feel that if there are complaints against somebody in the property sector then they should be treated more seriously. These complaints would usually be in relation to fairly big transactions; you look at median house prices, they’re up around $1m – so that’s a big issue.”

The establishment of a commissioner would also allow the real estate industry to have greater self-regulatory powers, similar to the legal sector.

“We want to move to a co-regulation model where we have stronger teeth than we currently have as an industry.

“The Law Society operates in the umbrella of the Legal Services Commissioner, but they are a co-regulated model where they are able dictate that their practitioners have to meet professional standards, and we want that same ability. We want to raise the bar.”

15.1%

The number of first home buyer commitments as a percentage of total owner-occupier housing finance commitments in January 2016 Source: ABS

ASIC, FCA SIGN ‘WORLD FIRST’ INTERNATIONAL AGREEMENT ASIC has signed what is believed to be a world-first agreement with its UK counterpart, the Financial Conduct Authority (FCA), in a bid to help boost innovation in the financial services industry in both countries.

The agreement will see innovative businesses receive reciprocal support from financial regulators as they look to enter either the UK or Australia market.

It is hoped the move will help boost fintech industries in each nation as they are currently worth around $12.5bn a year in the UK and $1.3bn in Australia.

Greg Medcraft, chairman of ASIC, said the deal highlighted the regulators’ commitment to innovation and fintech.

“ASIC is committed to encouraging innovation that has the potential to benefit financial consumers and investors,” Medcraft said.

“Since ASIC launched its Innovation Hub last year we have seen a surge in requests by fintech start-ups seeking assistance about how to navigate the regulatory requirements. In particular, we have dealt with robo or digital advice, crowdsourced equity funding, payments, marketplace lending and blockchain business models.

“It is very exciting to observe, and clearly some business ideas will want to scale up internationally. We believe this agreement with the FCA will help break down barriers to entry both here and in the UK.” Christopher Woolard, director of strategy and competition at the FCA, said he hoped this deal would be the first of many and show the global benefits fintech can create.

“Innovation in financial services isn’t limited by national borders, and so it’s important that we support overseas businesses that have new ideas that could benefit British consumers,” Woolard said.

“We also know that many British firms wish to use the UK as a springboard to launch their businesses or products internationally, making them potentially more sustainable challengers.

“That is why this agreement – the first of many, we hope – is important. With ASIC, we will reduce the barriers for authorised firms looking to grow to scale overseas and to assist non-UK innovators interested in entering the market we oversee.”

4/04/2016 1:10:59 PM

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AUSTRALIA’S FUTURE ECONOMIC PROSPERITY DEPENDS ON POLICY REFORM

FINANCIAL SERVICES

The supply of affordable housing in Australia requires serious reform at the federal level, a leading housing industry association has warned.

“Looking beyond the current cycle, a strong focus on housing supply and policy reform is crucial to Australia’s future economic and social prosperity as we look to successfully house a growing and ageing population, along the way reducing pressures on the nation’s burgeoning health budget,” Housing Industry Association (HIA) chief economist Harley Dale said.

“Australia will fail to achieve this objective without federal government leadership and involvement in housing policy reform, including strategic planning for the future housing and residential infrastructure requirements of our growing and ageing population.”

According to Dale, “tinkering” with tax provisions such as negative gearing and capital gains tax does not represent real reform – and actually risks damaging confidence in the housing industry.

A key finding in the latest HIA National Outlook is that a peak in new home building activity will be followed by a significant cyclical downturn extending to 2017/18.

New dwelling commencements are forecast to decline from a record peak of 220,000 last year to a trough of around 160,000 in 2017/18, while the growth in residential property prices will continue to slow.

However, Dale says the outlook for renovations investment, which is recovering from a 12-year low, is looking a little brighter.

“Having grown by just 0.9% during the 2014/15 financial year, renovations investment is forecast to grow by 2.8% in 2015/16. Growth is anticipated to increase by a further 1.7% in 2016/17, with activity then projected to see modest yet steady increases out to the end of the decade.

“This outlook for the renovations sector doesn’t look like shooting the lights out, but it is considerably more promising than what we have faced for some years now.”

BY THE NUMBERS

232,078 The number of new homes approved in Australia in 2015 – the strongest year on record Source: ABS

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SURGE IN LOANS APPROVED OUTSIDE SERVICEABILITY New figures released by APRA show $2.8bn in home loans slipped through the big banks’ approval stages last quarter IN THE past year there has been a jump of more than 37% in the number of home loans getting the tick of approval despite customers failing to meet their serviceability requirements. The figures released by APRA for the December quarter show almost $2.8bn was lent to borrowers in this category – more than 9,000 loans were approved, based on the average loan of $300,000.

According to News.com.au, Financial Counselling Australia’s executive director, Fiona Guthrie, believes the situation is a “potential time bomb” waiting to happen, and comes despite APRA’s massive crackdown on lending practices by the major banks in late 2014.

Australian Bankers Association CEO Steven Munchenberg confirmed the banks were working with APRA on loan serviceability issues.

“APRA is working with all authorised deposittaking institutions to create more consistency in monitoring of loans approved outside serviceability,’’ he said. “Banks have comprehensive and rigorous processes to assess a person’s capacity to repay. How banks assess serviceability may vary a little across banks, but what doesn’t change is that banks will only approve loans they think can be paid back.”

The APRA figures indicate that there has been a similar surge for smaller lenders, with the value of loans approved outside serviceability up 78% to $680m compared to the $382m approved in the December quarter of 2014.

APRA’s newly implemented stricter lending practices have led to lenders introducing independent rate hikes outside of the Reserve Bank making any adjustments to the cash rate.

News reported that the regulator was aiming to have all banks implement one set criteria for loan serviceability to avoid confusion moving forward.

However, Guthrie expressed enormous concern over the “rubber-stamping” of these loans.

“It’s a worry people are getting loans approved on wonky criteria,’’ she said. “You have either got criteria or you haven’t got criteria.”

The News report comes following a recent 60 Minutes investigation that suggested banks were irresponsibly loaning large amounts of money to borrowers who were unable to pay them back due to a collapse in the property market. The exposé revealed how one couple were $2.3m in debt after investing in multiple apartments in a remote Queensland mining town, which they have been unable to fill with tenants.

According to reporter Ross Coulthart, the couple believe there was a mistake made in lending the money to them in the first place.

“They are not blaming the bank entirely, but there needs to be a debate that banks, despite what they are saying, are not in fact following due diligence or normal lending practices.”

In a similar case, a 24-year-old ordinary income earner was loaned $6.5m and bought 10 properties that she can’t service, again due to a lack of tenant interest. Documents from the lender show the bank knew her investments were risky when they approved her loan.

“It doesn’t make a great deal of sense why the bank loaned this money,” Coulthart said. “They should have a duty of care to make sure people have the capacity to repay.”

4/04/2016 1:10:59 PM

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PEOPLE CARBON CONSCIOUS LTD

first commercial planting in 2008 WA over 21 million eucalyptus trees have been planted on 18,000ha across 30 properties in central and northern agricultural regions of WA NZ

APPEALING TO THE ECO-CONSCIOUS CLIENT Mortgage provider Homeloans recently planted its 15,000th eucalypt, a milestone in its support for the Carbon Conscious progam, for which it plants a tree for every Homeloans loan settled MORTGAGE PROVIDER Homeloans recently reached a major eco milestone, planting its 15,000th tree as part of the Carbon Conscious program.

“For every new Homeloans loan settled, we plant a mallee eucalypt tree,” said Homeloans executive head of marketing Will Keall, who planted a few of the trees himself and explained how each tree was capable of offsetting around 175kg of carbon from the atmosphere.

“With 15,000 trees planted, that equates to over 2.6 million kilograms of carbon from the atmosphere that we will have offset,” he said.

In 2010, Homeloans decided to take their eco-conscious way of doing business to the next level. They teamed up with Carbon Conscious, an Australian-owned company that develops and manages carbon reforestation projects for businesses and individuals that want an offset to their greenhouse emissions. This was just what Homeloans was looking for.

“As an organisation, it’s important to us that we behave in a responsible fashion,” said Keall. “A lot of paper goes into each home loan

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application, and the finance industry is responsible for a lot more carbon emissions than people would think, with its heavy reliance on IT. “When it comes to consumables, many people choose products or services based on environmental grounds. If borrowers knew the volume of carbon emissions that the financial services sector was responsible for, they might choose their financial products similarly.

“So we came up with the idea to offset that with the planting of a tree for every loan that we settle. It doesn’t cost our customers anything.

It’s just our way of giving something back to the planet.”

The environmental conscience that is embedded in the Homeloans company culture is also shared by its customers; it attracts the ecoconscious borrower and influences their decision to go with Homeloans.

“We know there is a portion of the market that would prefer to deal with organisations that are environmentally responsible. We didn’t expect to acquire customers purely as a result of this initiative, but it does seem that we have done so on

a number of occasions,” Keall said.

“Since we launched the program six years ago, I’ve received calls from brokers saying that borrowers have learnt about our involvement with the Carbon Conscious program and that has been influential in the clients’ willingness to go with Homeloans.”

1 million pines have been planted on 800ha on three properties in New Zealand

registered as Greenhouse-Friendly in 2008

became Registered Offsets Entity under the Australian Federal Government Carbon Farming initiative in 2010 of them as they get bigger,” he said.

Homeloans’ contribution to the Carbon Conscious program isn’t the only initiative the company has in place to support a more sustainable environment.

Employees are mindful of the usage of paper; there are recycling facilities in all offices; competitions

“The finance industry is responsible for a lot more carbon emissions than people would think” As for the plant specifics, the mallee eucalypt was chosen for the program as it is a native species that adapted to the growing conditions of the Australian wheat belt region where the eucalypts are planted.

According to Keall, this particular species grows quickly, is easy to plant, is more cost-effective than others, and will live a long time.

“I went out there a year after we launched the program. [The seedlings] were all pretty small at that point, but it’s great to see photos

are run in-house with prizes for the office with the highest reduction in printing; and environmental tips are included in the monthly e-newsletter to its customer base.

“Being part of this program is just one way Homeloans is contributing to a more sustainable environment,” Keall said. “One of our focuses is on conducting our business in an environmentally responsible fashion, and initiatives such as the Carbon Conscious program help us achieve this.”

4/04/2016 1:12:09 PM

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CAUGHT ON CAMERA Mortgage Professional Australia editor Sam Richardson recently held the 2016 non-major bank roundtable in Sydney.

The panel included Arun Balakrishnan from Citibank (on behalf of Janine Copelin), Glenn Gibson from AMP, Fons Caminiti from Adelaide Bank, Steven Degetto from Suncorp, Mark Woolnough from ING Direct and Lino Pelaccia from ME Bank. For the first time, the discussion was live-streamed on MPAMagazine.com.au across Australia and was opened up to the public who could text in questions for the panel.

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4/04/2016 1:12:28 PM

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PEOPLE HOT SEAT

GEORGE FARMER Aussie Bundaberg franchisee George Farmer on the moment that brought his client to tears, and how brokers can win big in 2016

What is your most memorable client experience?

About six months after the 2013 floods [in A Bundaberg] I met with a couple who had just signed a contract to buy a home – their previous home had been destroyed in the flood and they had been in temporary accommodation since. The client had been through a lot and made it quite clear they wanted to be in their new home as soon as they possibly could so they could restart their life.

After leaning on their insurance company, their solicitor, their lender and their agent, I managed to get the deal to settle two weeks early. As soon as I had everything confirmed, I met with the client and said to them: “I know you want to settle and move in early. How about tomorrow?” They both burst into tears.

Q

Who or what inspired you to become a mortgage broker?

I had been working in the banking industry A for a number of years and had reached a point where it was time for a change. Becoming a mortgage broker seemed a natural progression as it allowed me to utilise the knowledge I’d gained over many years and in an environment where I could truly put the customer first.

Q

What will be the biggest opportunities for brokers in 2016?

Although the regulatory environment over the A past six to 12 months has thrown up some challenges, I also see huge opportunity in it. You can no longer take for granted that policies are reasonably similar from bank to bank, particularly in relation to compliance and investment lending.

The brokers that take the time to really understand their client and help them navigate this minefield can win big.

Q

Q A

Who would you choose to play you in a movie about your life?

I have always liked Matt Damon, but it would be a pretty boring movie!

If you were the prime minister of Australia, what would be your first priority?

Where do I start? Personally, I think a A complete overhaul of the tax system is long overdue. Hand in hand with that there should be a review of all government spending.

The problem with the current political environment is neither party wants to make the hard decisions.

Q

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4/04/2016 7:27:09 PM

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