TMM The cost of compliance 02/2023

The cost of compliance

How much does compliance actually cost? For one adviser, the answer is almost $100,000 a year.

14

Home values are still on average 24.5% higher nationally than they were when the pandemic first began three years ago Columns

28

New conduct rules: what do they mean for advisers?

New guidelines on how to implement the CoFI law point to it being less burdensome than initially feared.

Mortgage adviser Mike Whittaker likes the ‘tough jobs’ best – mortgages which are hard to get across the line. His love of research into economic trends gives his clients the edge.

30

You don’t know what you don’t know: in his closing column, Steve Wright reminds advisers that we all have gaps in knowledge and skills.

No playbook, but exciting times

When I opened the TMM Better Business Conference recently, I reflected on my 20-plus years covering the mortgage advice sector.

It’s something of an understatement to say a lot has happened in that time.

Like the housing market, mortgage advice goes in cycles. The trouble at the moment, as economist Tony Alexander pointed out, is that the “normal” cycles don’t exist.

We are in a new period where there is no playbook. Making economic predictions is - and these are not his words - a bit of a mug’s game.

For mortgage advisers, the most recent period of time has arguably been one of the toughest for a while, especially if the net is cast back to the Covid-19 pandemic and subsequent lockdown. But it’s not all doom and gloom.

Amongst the many take-outs from conference was a view that the first part of this year will probably continue to be difficult, but later in 2023 the clouds may lift a little.

Some of the pain from interest-rate rises may diminish.

By then the full licensing regime for advisers will be operational, and we will have a better sense of how it works.

There may well be some further relief from the unpopular CCCFA regime. Imagine that.

A feeling is emerging that we are nearer to the peak of the interest-rate cycle than what organisations like the Reserve Bank are predicting.

While there is not likely to be a rapid clawback from the steep ascent of recent years, there could well be a ceiling. With half of all borrowers due to refinance this year, that is welcome news to them.

Robust mood

Coming back to the conference, the mood amongst advisers was remarkably robust.

Deal volumes are down and it is taking more time to get them across the line. But there are deals to do, especially as mortgage advisers grab a bigger bite of the bank lending pie.

One of the things which sets the TMM Better Business Conference apart, compared to other events, is that it is 100% mortgage focused. None of this insurance or investment stuff.

Plus, it is an industry conference for all advisers - rather than the normal dealer-group conference.

We plan to run the next one in February next year. If you want to be kept in the loop with updates, please drop an email to events@tmmonline.nz

Talking about change, it feels as though the mortgage market is seeing new leaders emerging. One area in which this seems most obvious is the dealer-group space. I’ve alluded to it before: it looks like the status quo, which has existed for some time now, may well be facing some challenges.

Having choice is good for advisers, and new groups bring new ideas and technology. Exciting times.

Head office and Advertising

1448A Hinemoa Street, Rotorua

PO Box 2011, Rotorua

P: 07 349 1920

F: 07 349 1926

E: philip@tmmonline.nz

Publisher Philip Macalister

Staff writers

Eric Frykberg, Sally Lindsay

Philip Macalister Publisher

Contributors

Steve Wright, Paul Watkins

Design

Michelle Veysey

Subscriptions

Jing Tao P: 07 349 1920

E: subscriptions@tarawera.co.nz

ISSN

Sourcing non-bank finance for your prime clients? If the rates are double digits, there may be a better fit.

Keen to know more? Contact the property lending specialists at Resimac.

Kiwibank on more advisers’ shopping lists

Kiwibank is continuing its push into the mortgage advice sector signing up another 133 relationships in the first half of its financial year.

Besides those sign ups it had another 40 advisers going through training programmes and another 100 in the pipeline.

Kiwibank chief executive Steve Jurkovich says this means the bank is now “on the shopping list of more customers.”

He says volumes continue to grow and 65% of applications now come through advisers and NZ Home Loans.

“The pull through rate is pretty steady

compared to when we when we don’t have an active home loans campaign in market,” he told TMM.

The drawdown rate between the two channels is “remarkably similar”, he says.

Late last year Kiwi Group Holdings, which owns NZ Home Loans, took a majority stake in Link Financial Group which includes Mortgage Link.

NZHL is a major source of home loan business for Kiwibank.

Jurkovich was asked whether he expects Mortgage Link to start sending more business Kiwibank’s way.

He says Kiwibank wants “all businesses we partner with” to do well.

“I hope we earn more from the Link relationship, but we have to earn it,” he says.

“Every single day we have to earn our right.”

Jurkovich says the future of mortgage

advice looks a little bit like the future of banks.

He sees it as being a mix of technology with a human touch.

Likewise, both groups “all face more regulation and scrutiny.”

He is not a fan of moves by other banks to have special deals available to customers only through mortgage advisers, as BNZ did recently.

Such arrangements are “pretty tricky to explain” to customers.

“My preferences is to be really consistent across the board.”

“We want to be competitive and are not keen on picking and choosing deals by channel.”

In the first half of the financial year Kiwibank grew its home loan book at one and a half times system growth.

“Our winning aspiration is to stick to the one and a half times system growth,” he says. ✚

DTIs have merit: Bolton

DTIs are currently being worked on by the Reserve Bank, which wants them ready by next year in case they are needed to rein in any future upward rush of house prices.

They would join LVRs in the bank's toolkit of anti-inflation mechanisms.

The recent fall in house prices has taken some of the urgency out of the DTI programme, but Bolton still sees merit in them after earlier opposing them.

Bolton told Good Returns TV DTIs are a constant measure which ignores fluctuating interest rates and is therefore more suited to the fact that real estate purchases are a long-term thing.

Bolton's view is that a DTI regime would smooth over the rise and fall of interest rates, and the consequent rise and fall of stress testing levels. They would also reflect more accurately people's ability to pay for a long term project like buying a house.

They could also avert the pain of dealing with a stress testing rate, which has reached 8.5% to 9% in response to actual mortgages reaching a 6.95% median for two-year fixed loans.

However, another highly experienced adviser, iLender found Jeff Royle disagrees with Bolton.

“Having worked with DTIs for years in the UK they do not work.”

“They are too prescriptive and don't allow for individual living costs or lifestyles. They also take away a lender's ability to make a commercial decision.

“We've never had reckless lending in New Zealand and DTIs are solving a problem that does not exist. “

Bolton also thinks loan to valuation (LVR) limits should be phased down and are moving past their use-by date.

“They were appropriate when house prices were too high,” he said.

“But they have done their job and they did a good job, because otherwise we would have had a lot more buyers with negative equity positions.

“But because the banks have got a 10% speed limit, they are only approving main bank customers and they are not pre-approving, you have to have a house under contract, so the rules are limiting the ability of people to buy a home.”

Bolton said it would be appropriate to

pull the LVR restrictions back from first home buyers, but they should perhaps be kept on for property investors.

Royle agrees they should be relaxed to allow Kiwi first home buyers a chance and investors the ability to provide cost effective housing for a growing rental community. ✚

Squirrel mortgages founder John Bolton thinks debt to income (DTI) ratios for lending control are not such a bad thing after all.

WHY CHOOSE ASTUTE?

 A cloud-based custom CRM for both Finance & Insurance.

 Ongoing compliance and training.

 Referral arrangements available for Fire & General and Risk Insurance.

 Access to Astute’s professional indemnity insurance.

 Access to the Astute FAP and supporting information.

 Use your brand or the Astute brand.

Now’s the time to take your business to the next level!

We offer industry leading support for you and your business to grow.

Big Loan Market writer goes alone

One of Loan Market's top writers has left the franchise to set up his own mortgage advice business.

Nathan Miglani joined Loan Market franchise in 2017, and was named its number one mortgage adviser in Australasia in the group's awards last year.

He has set up NZ Mortgages as a standalone group and has a staff numbering 20.

He says he was happy to start the new company after reflecting on what his professional life would be like for the next five to 10 years.

“Well, the result of all this, I’m happy to say, is we are now operating independent of any franchise structure and under a brand-new name, NZ Mortgages,” Miglani said.

“This will be our ‘new baby’ to nurture over the next few years as we strive for our goal of becoming a household name.”

Miglani said his business would differ from many others, as it would not sit inside a real estate company as some firms are.

The move away from a franchise model which provides full support to its advisers, comes weeks before the new financial adviser licensing regime kicks in.

Miglani says because the market has quietened down there is more time to take a long term view.

“For the last couple of years, the market has been pretty mental, it was quite crazy what happened in New Zealand after Covid.

“But now, the market is more balanced, it is not crazy busy, so we have had time to work on the business, rather than working at the business. So we are taking this opportunity to make sure the whole team stays happy, the whole team stays motivated, and the whole team is inspired for the next ten years rather than being frustrated on a daily basis.”

Miglani said this was a big

move to make, but it was essential for his growth as a business owner.

“I had come to a bit of a block and needed to ask myself whether I could fully enjoy what I was doing for another few years. What I’ve discovered is that ‘creating’ something is more important that ‘achieving’ something - it energises rather than depletes.” ✚

People on the move

Got a new appointment you would like to tell advisers about? Email details and a pic to editor@tarawera.co.nz

Canon shoots through

Liz Canon, the former head of Westpac third party distribution, has announced her retirement.

She has been replaced by Chris Poledniok, whose role will be national manager third party and retention channel.

Chris Poledniok was appointed the new National Manager of Third Party and Retention at Westpac NZ in January this year. He has been with Westpac for over 12 years and moved into the Third Party space after 5 years of heading up the Mobile Mortgage Manager Channel.

Prior to that he held various roles as

Liberty makes two new appointments

Liberty Finance has appointed a chief operating officer, Igor Stychinsky, along with a new business development manager, Andrew Mackay

Stychinsky, whose role is newly created, previously worked with Liberty chief executive Aaron Skilton at NZ Home Loans, where he was general manager strategy and transformation.

Mackay has previously worked as a mortgage adviser at Astute, and as a business performance and sales coach at NZHL. Most recently he was the owner of a local Harrisons Solar store.

Skilton says he is thrilled to welcome the new appointments - a sign of growth for the non-bank lender.

“Igor has immense expertise and knowledge in growth and transformation strategies, and Andrew’s proven capability shows our commitment to building a market-leading business-development team.”

Out of the woods

Peter Wood, the long-standing face of Australian non-bank lender Bluestone throughout both its forays into the New Zealand market, has left the business.

Most recently managing director strategic partnerships, he leaves the company after two decades.

Bluestone first entered the New Zealand market before the global financial crisis, then left afterwards.

According to a Bluestone statement,

Area Manager, Business Development Manager and frontline lending roles. He brings to the role a strong background in lending, leadership and strategy planning which fits well in driving growth and understanding the mortgage industry.

He is passionate about building relationships and has been getting around the country meeting Mortgage Advisors, listening to insights and understanding their business.

“I am focused of making things simple and delivering an exceptional customer experience. Our goal here at Westpac is to work together with the industry to have the customer at the heart of everything we do”.

Wood played a “pivotal role” in the company’s re-entry here, launching the Select Home Loan programme in 2019 with the New Zealand Financial Services Group.

“Peter’s legacy will be the strong relationships he built across financial services in New Zealand and Australia.”

Bluestone chief customer officer James Angus, who, according to the statement, “has an outstanding track record of leading highly successful sales teams and developing strategic distribution relationships”, will add the strategic partnerships portfolio to his existing responsibilities.

FMT pushes into the South Island

New Zealand’s largest non-bank first mortgage lender, First Mortgage Trust, has appointed a new business development manager as it continues to grow in the South Island.

Sam Oughton, who brings more than 10 years’ experience in the finance, property and real estate sector, as well as experience as a registered property valuer, will be based in Christchurch.

FMT head of lending Sam Burgess says the company is delighted to have Oughton join the garden city office, which opened in late 2022.

“It’s great to have Sam come onboard during this exciting time.”

Oughton is passionate about delivering exceptional customer service and helping people on their property finance journey.

Familiar face at FMA leaves the regulator

John Botica, who fronted many of the regulatory changes for the financialadviser community, is heading to retirement.

Botica first joined the FMA in 2013 and has held several leadership roles during his tenure, in particular leading the focus on market engagement.

Currently director of regulation and operations, as well as director of market engagement, he will leave the FMA in June.

Chief executive Samantha Barrass says Botica has made a significant contribution to the regulatory authority.

“His experience and knowledge was instrumental in our successful implementation of the new financial advice regime. He is well-known and highly regarded in the industry."

Meanwhile, the FMA has appointed Sharon Thompson to its newly formed enterprise leadership team, as executive director transformation and operational delivery.

Thompson has extensive seniorleadership experience in the New Zealand public sector and financial services industry.

She joins the FMA from Inland Revenue, where she was deputy commissioner for the customer and compliance services (individuals) group.

She led the IRD’s large, customer-facing teams through the organisation’s multi-year business transformation, including digital technology, business process, capability uplift, structural and culture change. ✚

Chris Poledniok

Ban on interest deductibility hits market

In our wrap of property investment news, Sally Lindsay reports on calls to remove interest deductibility - and research showing property managers set rent higher than private landlords.

The loss of tax deductibility on interest costs is having a negative impact on the rental market.

Co-owner of Century 21 New Zealand, Tim Kearins, says future governments “of any stripe must bring it back as soon as possible”.

His comments follow a survey, commissioned by the Ministry of Housing and Urban Development, which found a quarter of landlords put up rents in the six months before May last year.

One of the big reasons for this was increased costs lumped on by the Government.

Rents higher under property managers

Meanwhile, a Consumer NZ investigation has found renting through a property manager costs tenants $7 a week more than if they rent directly from a private landlord.

The investigation arrived at the sum by asking the Housing and Urban Development (HUD) Ministry to compare the value of bonds lodged by property managers with those lodged by private landlords.

It found more than 40% of tenancies are overseen by property managers on behalf of landlords. In the past year alone, property managers lodged more than $162 million in bonds.

Consumer NZ says while the approach they took to the investigation wasn’t perfect, there’s no single source of truth for who owns what property and how much they charge for it.

To add to the confusion, bonds

“A key factor is landlords now not being able to claim their full interest costs as an expense,” says Kearins.

“Alarmingly, that’s only going to get worse, as interest rates increase and the policy rolls out to completion.”

The amount able to be claimed reduces to 50% as of April 1.

“Banning interest deductibility really seems to be both hurting and deterring ‘mum and dad’ landlords,” he says.

“Many of these people once viewed a rental property as a good investment.

“Now many are now either getting out of the residential rental market, or not

considering it in the first place.”

Kearins says the ongoing costs for landlords is seeing them re-direct their money and focus towards commercial property syndications, the share market, or even bank term deposits given the rising returns.

“Not only do extra costs see Kiwi landlords fleeing the residential rental market, but it’s flowing through to rents, with overall rents reportedly up $150 in the past five years, only adding to the country’s cost-of-living crisis.”

aren’t lodged for all tenancies. And because they’re lodged only at the start of a tenancy, they don’t capture rent increases for existing tenancies. Furthermore, bond lodgement forms are not designed to definitively capture whether there’s a property manager involved.

Those provisos aside, the results are significant, says Consumer NZ: across price ranges, properties rented through a property manager are consistently more expensive than those rented privately.

Consumer NZ says part of the difference may be that property managers tend to rent out higher-value properties, but that’s unlikely to account for the full difference, according to HUD. While correlation doesn’t mean causation, the data signals the property management industry may have an impact on rent prices.

One explanation is that landlords effectively pass some of the cost of using a property manager on to tenants.

In addition to various one-off fees and charges, property managers usually charge landlords a percentage of rent, typically between 6.5% and 10%.

That fee structure may also incentivise property managers to push landlords to raise rents as much as they can.

Residential Property Managers Association (RPMA) chairman David Pearse accepts there may be such an incentive, but says rents are ultimately a function of supply and demand.

A core part of the service property managers provide is ensuring landlords keep up with changes in market rent, and they do so by looking at the prices of other properties in the area.

But the market rent is shaped by the decisions landlords make as to when they will raise rent and by how much.

Anecdotal stories suggest property managers may raise rent in circumstances where landlords would not – even without the landlord’s knowledge.

As the property management industry grows, and more rent decisions are informed by the advice of property managers, market rent may rise faster than it otherwise would.

Landlords raising rent because of Govt legislation

Of 700 landlords answering a recent Kantar survey commissioned by the Housing and Urban Development (HUD) Ministry, 47% had raised rents by more than $20 a week to the end of November.

Of those landlords who had not raised rent in the past six months, 23% were considering increasing rent in the next three months.

Key reasons for 41% of landlords considering a rent increase include a desire to cover increased costs, for 51% it is matching market rates, and for

57% it is raising rents after a year of no increases.

Two out of five, or 39%, are specifically looking to cover costs resulting from regulatory changes.

Just over four in 10 landlords took the opportunity to increase the rent when their tenants changed. About six in 10, or 61%, of these landlords increased rent by more than $20 a week.

However, the desire to maintain good landlord-tenant relationships and encourage tenants to stay means some landlords keep rent levels the same.

Just under two-thirds of landlords personally manage their rental property/ properties and just over two out of five, or 42%, use a property management or real estate company.

Another 5% use an individual property manager. Overall, the survey shows these results have remained fairly consistent over time.

Cost savings drive 65% of landlords to self-manage, along with wanting to be more hands on (54% like to talk directly with tenants, 50% like to be hands on generally).

Mortgage payments

Landlords are increasingly concerned about their ability to pay their mortgage, with 23% saying they are concerned - up seven points from the May 2022 survey. One in five landlords, or 21% have had issues or concerns with their tenants. Thirteen percent of all landlords have had an issue and discussed it with their tenants. ✚

The Healthy Homes Standards and tenancy law changes have been blamed for higher average rents of more than $500 a week.

Long road until house values near pre-pandemic levels

BY SALLY LINDSAY

The latest QV House Price Index (HPI) shows home values are still on average 24.5% higher nationally than they were when the pandemic first began three years ago.

That's despite a 12.6% average drop in the last 12 months, and a 2.7% average decline this quarter.

QV national spokesman Simon Petersen says if residential property values continue to fall at their current rate, it could still take up to two years to hit their pre-pandemic level nationally.

“That’s a pretty big ‘if’, with the market expected to stabilise before then.”

The latest HPI figures show the average home value has fallen across the

Auckland market hobbled by February’s extreme weather

Auckland’s property sales in February slumped to their lowest for at least a quarter of a century.

Barfoot & Thompson, the biggest residential agency in the city, sold just 410 properties, down 45% on the same time last year.

The only month in the past 20 years when the agency sold less was in April 2020, when virtually all commercial activity was suppressed as a result of Covid.

However, new listings at 1,309 for February were 21.5% higher than in February last year. At month’s end the agency had 4,873 properties on its books, the highest number in a February for 10 years.

The median price of the homes sold was $1,023,000, up 2.3% on January’s median price and down 8.9% on that for February 2022.

The average price at $1,101,980 was down 1.2% on that for January and down 7.9% compared to February last year.

A feature of February’s trading was that fewer than 6% of the homes sold were for more than $2 million. At this time of the year that number has regularly been about 10%.

In February, nearly a quarter of the houses sold were in the under-$750,000 price bracket.

Wellington’s affordability exits the doldrums

Housing affordability in Wellington is now the best of the country’s main centres.

CoreLogic’s House Price Index shows prices in Wellington have fallen 20% in the past year - the biggest drop in the country.

The dramatic fall is making the city affordable once again for house buyers, after being out of the reach of many for a couple of years.

Across the country, home values fell 1% in February - the biggest monthly drop since October last year, when they declined 1.3%. Home values are now 8.9% below February last year.

Christchurch’s average property value edged higher in February by 0.4 per cent,

wider Wellington region by 21% since February last year to reach $854,092 at the end of February this year – a figure that is still $109,609 or 14.7% higher than when the pandemic began.

Home values remain more than $100,000 higher in the region than they were three years ago.

In Christchurch and Auckland, the pre-pandemic difference in dollar terms is still upwards of $200,000.

Meanwhile, the largest drops in home value across the main urban centres in the three months to the end of February were in Rotorua (-5.5%), Auckland (-4%), and Palmerston North (-3.9%). ✚

and is only 1.7 per cent lower than the same time last year.

Slow but steady decline in building consents

New dwellings consented in January dropped by 86 to reach 2,777, down by 2% compared to January last year, Stats NZ figures show.

It was the fourth consecutive month the number of homes consented has been below the same month a year earlier.

Although the number of dwellings consented in January was down, the estimated build costs were up 2.%.

The downturn in January’s new consents compared to a year ago was particularly significant in several areas with Auckland down 11.5%, Waikato down 17.8%, Bay of Plenty down 14.8%, Tasman down 7.4% and Nelson down 20%.

The number of stand-alone houses consented in January was down 25.6% compared to a year earlier, while the number of multi-unit homes consented was up 22% over the same period. ✚

Make business happen

The cost of compliance

In this issue of TMM, we look at regulation through the eyes of mortgage advisers - starting with the bottom line. For one adviser, complying with all the new legislation costs almost $100,000 a year.

BY ERIC FRYKBERG

How much does it cost a business to comply with all regulatory changes?

TMM wanted hard information, so we asked an independent financial adviser to open the books - to show us exactly how much he was compelled to pay given successive waves of state regulation.

The answer? Regulatory compliance was adding just under $100,000 a year to his operating costs.

The exact total was $99,687.61, including GST.

This was an actual figure, taken from actual accounts, and so was commercially sensitive. As a result, TMM has undertaken to anonymise the data and to withhold even the geographical location of the company in order to safeguard its privacy.

Broken down, the largest cost was $67,500 a year for a fulltime office manager to deal with compliance.

FAP (Financial Advice Provider) expenses cost $3680 annually, separate from formal FAP application fees.

Engaging a business mentor/board member to handle compliance issues cost a further $8970, and a biannual audit cost $7590 a year.

Extra costs were added for various items such as indemnity insurance.

The proprietor of the firm says regulation has dramatically increased overheads.

New regulations continually impose fresh costs on the lending industry, but do not offer any obvious suggestions in terms of where to look for the money to pay the bills.

“We can't make up for this cost,” he says. “We get paid what we get paid.

“This is a hot topic for us: how do we entwine fees for services with the commission that we are paid already. It’s a hot potato.”

What to do, Minister?

This conundrum faced by small businesses was put to the new Minister of Commerce and Consumer Affairs, Duncan Webb.

“There is space to look carefully at what the law says,” said Webb.

“There may be, and there certainly was… a tendency to take a belt and braces approach, which goes further than the legislation, regulations and guidance require.”

Webb insisted he wanted to have a diverse lending industry, not one dominated by a few big players.

“I want to see a sector which can be innovative and nimble, and deliver good products at the best and lowest cost to consumers.

“But, at the same time, we have seen situations historically where there haven't been good lending practices, and so it is absolutely the Government's role to make sure that we have improved those practices.”

Beyond suggesting advisers examine the fine print of a state regulation carefully before proceeding, and avoid any overreach, Webb did not offer any significant solutions to the problem of broker costs - and continued to insist the matrix of state rules was positive for New Zealand as a whole.

Flying blind

In response, the adviser with the $100,000 bill says if the industry is taking compliance too far, it is doing so only for safety’s sake: no one knows how much compliance is needed, so it is prudent to do too much, not too little.

In response, Webb offered no real solutions beyond saying that small firms needed to be very careful about the costs and obligations they took on.

For smaller operators, he suggested the problem might stem from taking their compliance obligations further than required.

“Everybody is flying blind until the Financial Markets Authority (FMA) starts putting a line in the sand in terms of taking people to court,” says the adviser.

“The Minister himself doesn't know. He doesn't know the consequences of these new regulations.

“So we are being overprotective, because we don't know what all this is

‘At some stage [the FMA] are going to come knocking at the door’

- Dan Bell

going to lead to.”

Webb will end up getting the opposite of what he wanted, the adviser adds, because the costs of compliance will drive small operators into the arms of aggregator groups, thereby reducing the number of independent players.

“Exactly the thing that he didn't want [will have] happened.

“You’ve got a whole lot of independent advisers operating under an aggregator's FAP.

“They lose a portion of their autonomy because they are having to adhere to the third party, the FAP and the aggregator.”

A burden of many parts

Broken down, the compliance burden has many sub-sections.

One is the steady implementation of the Financial Services Legislation Amendment Act (FSLAA), which set up the FAP regime.

Another is the Financial Markets (Conduct of Institutions) Amendment Act (CoFI), the impact of which is described elsewhere in this issue.

Then there is the old bugbear, the Credit Contracts and Consumer Finance Act (CCCFA), which continues to cause irritation despite Government efforts to lessen its sting.

Flap over FAP

The steady progression toward full FAP licensing has riled some advisers.

Despite years to get ready for the new regime, which started this month, most dealer groups report they had advisers who had not completed their Level Five qualifications as the deadline loomed.

The new licensing regime was designed to put all financial advisers on a level footing, and to ensure advice was available to New Zealanders.

Super City mortgages owner and adviser Marchy Pang says the need for full licensing will cause some advisers to move on.

He cites a colleague with 25 years in the business under his belt, who will choose the final FAP deadline as the right moment to quit.

But Pang says not all cases are like this.

Other advisers will leave the industry because they fall short of the standard required by the new rules, bringing more work opportunities for those who are left.

The FAP regime will also improve standards in the industry, he says, so all up it has some merit.

“The good guys will stay, there will be more quality [among advisers], and eventually there will be benefits for the client.”

Full licensing requires high-level compliance in many areas, such as having dependable cyber security.

But none of this is a surprise.

Many large companies in the mortgage business saw what was coming when the whole process began with legislation in 2019, so they got in early.

Squirrel is one such firm.

Squirrel managers recognised that satisfying the new rules for full licensing was an essential part of doing business, so they just went ahead and did it. The company met the full licensing requirements long ago.

Even so, it’s one thing to grit your teeth

view, there are three lines of defence: you operationalise compliance and risk management... and then you need to have a second layer, which is compliance oversight... and then the third line of defence is assurance and governance.”

Bell says his company mustered strength well ahead of time to deal with this new era.

“We have been well ahead of the curve in terms of requirements; 99% of our team have completed their Level Five qualification,” he says.

“There are a couple of stragglers still finishing some stuff off. But we got our full licence at the beginning of last year, and got an evolved compliance and risk division [up and running].”

Bell says while Squirrel has enough resources to complete all the obligations imposed on them by regulators, some smaller firms will have been battling to keep up - not only to acquire the appropriate certification, but to actually implement the demands put on them.

He says smaller businesses will need to rely more than ever on larger organisations such as aggregator groups.

Dealer group responsibility

New Zealand Financial Services Group (NZFSG) central and southern regional manager Shaun Fafeita says the dealer group has a lot of responsibility in dealing with regulations because of its broad membership.

“We have to make sure that everyone under our licence adheres to our policies, so we promote these and educate people wherever we can.

“Whether by email or webinars, we have to get our message across.

“Because come full licensing, there are no ifs and buts: you’ve got to comply.”

and comply with the rules, but quite another to say it was easy.

Squirrel chief customer officer Dan Bell says the FAP process was no small thing; the new regulations have dramatically increased the amount of work his team had to do in the office.

“Of course it does, 100%. It is certainly increasing the cost of doing business, that’s for sure.

“And those costs need to be absorbed somewhere.”

For Bell, the changes signal a whole new level of oversight of the industry.

“The expectation is that the Financial Markets Authority (FMA) is going to start more actively supervising the sector, so at some stage they’re going to come knocking at the door [to do an inspection].

“From a risk management point of

Fafeita says NZFSG has to look both upwards and downwards: upwards towards the expectations of the FMA, downwards to the authorised bodies for whom it gets a licence, but who still need watching over.

“And we have to look sideways as well, because, as a dealer group, we’ve also got obligations towards our lender and insurance partners; we are responsible to them as well in terms of meeting their obligations.

“Technically, they’ve got their own licence, so they can row their own boat. But we are still responsible as a head group, because the banks have traditionally signed their adviser off under a head group, to give advice on their particular products.”

Unlike some in the industry, Fafeita is not too fired up about the waves of regulatory change, despite the extra responsibility and a significant amount of hard slog.

“Yes, it has been hard work, but we

‘Yes, it has been hard work, but… it’s going to bring a more professional industry’

- Shaun Fafeita

know what the end result will be.

“It’s going to bring a more professional industry.”

Sore heads from the CCCFA

For Maurice Mehlhopt, the new regulations cause endless headaches.

Like many of his colleagues, his particular bugbear is the Credit Contracts and Consumer Finance Act (CCCFA).

“It just drives my customers mad,” he says.

“The amount of detail they have to fill out [when taking a loan] is unbelievable.”

Mehlhopt specialises in reverse mortgages for older people, often well into their 70s.

These are people who have seen their life savings or superannuation lump sum steadily depleted by the need to top up the state pension every fortnight.

They decide to dip into the equity of their home to give them a financial buffer later in life, to make it less necessary to count every penny.

But Mehlhopt says the CCCFA makes it both complicated and highly irritating to use a reverse mortgage as the solution.

He says when applying for a loan, customers are asked to give large amounts of fine detail about their income and expenses - and are then subjected to further demands as to whether they really need the money at all.

Their response is, “That’s my business”, Mehlhopt says.

“They say, 'If I want to get a reverse mortgage and go have a bloody holiday when I’ve got a couple of million dollars’ worth of assets, what's wrong with that'?”

Mehlhopt is emphatic that the banks which offer reverse mortgages are not responsible for this mess.

He says they behave well towards their would-be clients and are forever apologising for asking intrusive questions, saying they are legally required to do so.

He blames the law itself, calling it “just bloody stupid.”

“It’s got to the stage where some of my clients are saying, 'Maurice, it doesn't matter, I am over it, if that’s what it takes, I will do without it for a while.’”

Amendments not enough

Marchy Pang is another mortgage professional with a strong dislike for the CCCFA.

In its early days, the new legislation made life very difficult, by prying into people's smallest daily costs.

“We had the clients asking, 'Can I have the coffee?', or 'Can I have the subscriptions [to a magazine or TV service]?'

“Throughout the year we have had some adjustments [to the law] come into

CCCFA:

effect, but it is still not enough.”

The new CCCFA rules were applied from December 2021, and caused such an outcry that a reform process began within two months.

A lot of the objections came from lenders and advisers having to account for every cup of coffee, without them having the flexibility to assess a person's overall dependability.

Limited reforms were initiated part way through last year. These eliminated the need for minor daily outgoings to

exclude discretionary expenses from lenders' calculations, and ease their need to make conservative assumptions about the ability of would-be borrowers to service their debts.

It would also make debt consolidation or debt refinancing more manageable.

Some groups believe the changes will still not go far enough. They accuse the Government of fiddling around the edges, leaving a substantive problem unaffected.

The National Party has pledged to roll back the CCCFA changes if elected in October.

Pang agrees the CCCFA problem is not yet fixed, though he thinks the changes so far have made the lending business easier to manage.

“Banks are making reasonable adjustments... the need to look at expenses has been slowly relaxed, which is good news.

“We don't have to do a line-by-line examination of how many flat whites the clients have had.”

be counted if robust data on a person's creditworthiness was available from elsewhere.

The same reform also ended the need to add savings and investments to a person's expenses, by recognising that these payments were fundamentally different from consumption.

After this reform was implemented, a second tranche of changes got underway. These have been proposed, consulted on, and will be finalised this month.

The potential changes would further

In summary, Pang says the CCCFA is better - but that there’s room for improvement.

Mehlhopt, however, is less charitable.

“If I’m working with a client on the phone taking information, when I send that information in, even though I was AFA-registered, they say, 'Maurice, you’ve altered the application forms, you have to sign it, and date every change you’ve made on that form'.

“You can understand it. The banks want to cover their own butts... but the amount of detail you have to give is just so frustrating.” ✚

‘Just bloody stupid’

- Maurice Mehlhopt

‘It’s one thing to grit your teeth and comply with the rules, but quite another to say it was easy’

There is some good news out there

Headlining this year’s TMM Better Business conference was popular economist Tony Alexander and Core Logic’s Nick Goodall. Here they give their outlook for the year ahead.

BY SALLY LINDSAY

The biggest boost to the property market most people are unaware of is the number of migrants flowing back into the country.

Economist Tony Alexander and CoreLogic chief researcher Nick Goodall speaking at TMM’s recent Better Business conference say migration has turned around faster than anybody expected.

Combined with 200,000 plus migrants already in the country going on to permanent visas, it will lead to a tighter rental market and more overall property growth, although less of a drop in the future, says Alexander.

NZ Stats figures show in the 12 months ending June/July last year, the country had a net migration loss of 16,000 people.

There were expectations numbers would improve later this year, but 16,000 have already arrived New Zealand and there could be up to 35,000-50,000 set foot here by the end of the year.

That has relevancy for Auckland, says Alexander. “Kiwis from across the country leave, but migrants come in predominantly to Auckland.

Goodall says while migration is a positive for the property market, credit will still be a greater influence.

It is continuing to be a tough environment in which to get credit, says Alexander, although banks are more willing to lend because the worst case scenario of 8% plus interest rates is fading as the Reserve Bank fights to get inflation under control. Banks have already priced in another 50 basis point OCR rise into their interest rates.

Recession ahead? Yeah, nah

Although the Reserve Bank said last year it would engineer a recession and is still forecasting one, Alexander says it would be relatively rare as businesses are saying they cannot get staff.

“It is a 50/50 call. The banks are tending to push out the timing of a recession to late this year, early next year.

“The question is does the Reserve Bank really need a recession to get inflation down? Economists don’t know the track which inflation is going to follow. Frankly, none of us have a model that tells us exactly what is likely to happen.”

He says any recession will be a different dynamic than every previous downturn in New Zealand where

unemployed people were sloshing around.

It is not the case this time, and that is important when it comes to mortgagee sales, servicing higher interest rates and the $170 billion plus of mortgages that will repriced in the next 12 months.

CoreLogic’s data show banks are probably through the largest hump of people having to take the biggest leap in mortgage payments as they come off low 2% interest rates to middle 6% rates. “There is more to come but not as much as we have seen,” Goodall says.

First Home Buyers well placed

Alexander believes this may be the best time in a generation for first home buyers (FBHs) to get into the market without facing intense competition from other buyers.

CoreLogic data show 25% of all sales in January this year went to FBHs. About 28% of those sales went to FBHs in Auckland despite stretched affordability.

“The key is they are willing to adjust their expectations to meet the market and vendors are a bit more open to negotiation. There are also many more buying choices in Auckland than anywhere else in the market,” Alexander says.

Investors disappearing from the market in the last week of March 2021 took out a large percentage of the competition for FHBs. There is no great sign of those buyers coming back as falling prices, higher interest rates and tax changes over mortgage interest deductibility keeps them away.

However, Alexander says the more experienced investors know this is when to buy, just as they knew in early 2021 it was the time to sell their ‘crap’.

Construction sector in trouble

Alexander has warned over the past 18 months that a lot of inexperienced, undercapitalised, over-optimistic people have moved into the residential construction sector.

“There was always going to be a period of reversal, of weeding out and through the surveys I do and industry feedback there are signs a solid decline in the industry has already started.”

He says the feedback from architects, which is always the earliest in a downturn, is business is falling away for them substantially. The proportion of new build sales is also dropping.

Alexander says the worry for people is will there be enough resources and

materials available in the wake of flooding, the cyclone and normal house building.

“The flurry of building will continue, but resources and materials will be available in the second half of this year, particularly as banks have pulled back aggressively on their willingness to finance multi-unit new builds.”

Incomes and house prices

House prices are up 18-20% from where they were pre-pandemic. That is about 7% a year, which Alexander says is nothing surprising. “It still sounds a lot, but people don’t often give a thought to what incomes are doing underneath.

The quarterly employment survey shows wages are about 18% higher than pre-pandemic. Alexander says the ratio of house prices to wages at the end of 2021 was 30%, now it is almost right back to where it was three years ago.

Many people believe when interest rates come down house prices will take off again, but Goodall says there has to be caution around that because of stretched affordability.

Affordability has improved slightly because prices have fallen away. It now takes about eight times income, compared to 11 times a few years ago, to buy the average house, but this is offset by rising interest rates meaning more than 50% of an average income earner’s pay goes to servicing the mortgage on an average priced property, assuming an 80% deposit, he says.

“The reason this is important is we think this will help dictate how things will go over the next couple of years.”

At the margin

Alexander and Goodall are in step with this assessment and say the residential housing market is at the margin.

Price fall expectations are 23% from peak to trough from 2021 to 2024 but most of that fall will be throughout the rest of this year, Goodall says.

“Things are changing – nothing major, but FHBs are slowly coming back into market motivated by talk about rental shortages and poor quality rental accommodation, increasing migration and the impact of the recent floods on the rental market,” Alexander says.

“Recognition of some of those rental pressures in the context of wages rising 30% in the past three years and house prices coming down have people broadly working those numbers in their heads and some are coming into the market. Also, with interest rates at 6.5% people are thinking ‘this is going to be as bad as it gets if I sign up at that rate’.”

Makes no sense

Goodall and Alexander agree that the housing market is a massive study in consumer behaviour.

“It makes no sense,” says Goodall. “When we look at the fundamentals and all the available information common sense dictates this should happen in demand and supply, but it never plays out this way. This is why it is so interesting.”

Alexander says the housing market has elements of crypto and shares with investors try to buy before the market goes up.

“So, there are psychological investment related factors as well economic fundamentals – growth in population, growth in income and new supply coming forward.

“In my surveys I am trying to get a feel for the psychology of the market because it can turn quickly, even if the fundamentals don’t necessarily change at the same pace.

Alexander says his belief is there is probably going to be some overshooting of the market in the next year and beyond. “It will probably go down too far. Auckland prices are down 22% because of a big supply increase and Wellington is down 25% because prices overshot on the upside.

“It’s the regions where things will be subdued over the next few years. There has been population growth in the regions related to the pandemic, but clearly there is now going to be a bit of a reversal.” ✚

Big thanks to our sponsors

Why say no to non-conforming loans? Non-bank lending might be easier than you think.

For some mortgage brokers, non-conforming lending can fall into the too-hard basket. However, it can make good business sense for you, and can be life changing for your customers. For a broker, nonconforming describes a world of opportunity.

For some mortgage brokers, non-conforming lending can fall into the too-hard basket. However, it can make good business sense for you, and can be life changing for your customers. For a broker, nonconforming describes a world of opportunity.

When a bank says “No”, they are saying no to loans that do not conform to their current criteria, which represents their appetite for risk. Yet, they’re often saying no to people who are capable of ser vicing a home loan. That’s where nonbank lenders can help. We price for risk. All bank “No” responses to home loans, are an opportunity to explore what non-bank lenders have

When a bank says “No”, they are saying no to loans that do not conform to their current criteria, which represents their appetite for risk. Yet, they’re often saying no to people who are capable of servicing a home loan. That’s where nonbank lenders can help. We price for risk. All bank “No” responses to home loans, are an opportunity to explore what non-bank lenders have to offer.

a serious struggle to keep her family home for herself and her two kids. With the mortgage in a payment plan and running two casual jobs to try to keep up with payments, she was doing her best but barely treading water Even though she was back in full time work since November 2022, the banks said “No”. When her broker came to us at Pepper Money, loan to refinance her property, to consolidate debts, actually improve her cashflow – and get life back on track.

a serious struggle to keep her family home for herself and her two kids. With the mortgage in a payment plan and running two casual jobs to try to keep up with payments, she was doing her best but barely treading water. Even though she was back in full time work since November 2022, the banks said “No”. When her broker came to us at Pepper Money, we were able to offer a specialist loan to refinance her property, to consolidate debts, actually improve her cashflow – and get life back on track.

The moral of the stor y? Ask if Pepper Money can help. We make non-bank lending easy.

The moral of the story? Ask if Pepper Money can help. We make non-bank lending easy.

We make non-bank lending easy: Here’s how

Do you have a customer the bank said no to? Talk to us today.

Do you have a customer the bank said no to? Talk to us today.

Pepper Money / 800 945 658

Pepper Money / 0800 945 658 scenariocentre@peppermoney.co.nz adviser.peppermoney.co.nz

scenariocentre@peppermoney.co.nz adviser.peppermoney.co.nz

Are non-bank home loans hard work?

Are non-bank home loans hard work?

Non-bank home loans are often known as specialist loans, originally named to highlight the expertise required to write them. However this is no longer the case. We’ve made non-bank lending so easy we can help any mortgage broker take a customer through the non-bank home loan process.

Non-bank home loans are often known as specialist loans, originally named to highlight the expertise required to write them. However this is no longer the case. We’ve made non-bank lending so easy we can help any mortgage broker take a customer through the non-bank home loan process.

Non-bank home loans change lives.

This case study is not a testimonial and is provided for educational purposes only. It is not a substitute for professional advice. Outcomes will vary depending on individual circumstances. You are protected by responsible lending laws. Because of these protections, the recommendations given to you about home loans are not regulated financial advice. This means that duties and requirements imposed on people who give financial advice do not apply to these recommendations. This includes a duty to comply with a code of conduct and a requirement to be licensed. Applications are subject to credit assessment, eligibility criteria and lending limits. Terms, conditions, fees and charges apply. Information provided is factual information only and is not intended to imply any recommendation about any financial product(s) or constitute tax advice. If you require financial or tax advice you should consult a licensed financial or tax adviser. ©

Pepper New Zealand Limited NZBN 9429031065153 | NZ Company Number 3416551

This case study is not a testimonial and is provided for educational purposes only It is not a substitute for professional advice. Outcomes will vary depending on individual circumstances. You are protected by responsible lending laws. Because of these protections, the recommendations given to you about home loans are not regulated financial advice. This means that duties and requirements imposed on people who give financial advice do not apply to these recommendations. This includes a duty to comply with a code of conduct and a requirement to be licensed. Applications are subject to credit assessment, eligibility criteria and lending limits. Terms, conditions, fees and charges apply Information provided is factual information only and is not intended to imply any recommendation about any financial product(s) or constitute tax advice. If you require financial or tax advice you should consult a licensed financial or tax adviser. © Pepper New Zealand Limited NZBN 9429031065153 | NZ Company Number 3416551

As home loans go, the non-bank loans can be a bit special because the people that need them most are often those who are facing some big life changes. The thing that can make all the difference? A non-bank home loan. Just ask if we can help.

Non-bank home loans change lives. As home loans go, the non-bank loans can be a bit special because the people that need them most are often those who are facing some big life changes. The thing that can home loan. Just ask if we can help.

A real life example. Turning things around

A real life example. Turning things around

After losing her job due to COVID, Joan was flung into

After losing her job due to COVID, Joan was flung into

We make non-bank lending easy: Here’s how

Advice Link: your link to being a better advice business

Six years ago, Link Financial Group (LFG) - the holding company of Mortgage & Insurance Link - discovered an opportunity for a New Zealand-based financial services Customer Relationship Management (CRM) platform.

At the time, the Australian-based, mortgage-specific CRM they used was no longer keeping up with their advisers' needs, and their insurance advisers were on a separate CRM.

Hence the decision was made to build Advice Link.

There are many CRMs in the market, but not many have financial industry compliance and new regime built into their DNA.

Throughout development, the new regulatory environment was front of mind.

Advice Link had to deliver on workflow management requirements and provide a platform to seamlessly showcase adviser competency, knowledge, and skillset, while maintaining a positive customer-engagement experience.

Advice Link has an inbuilt, comprehensive, six-step advice process, accurate record-keeping, and an audit trail of disclosure (and other information) ensuring compliance and due diligence are taken care of.

Advisers can rest easy in the knowledge that the feature-rich Advice Link includes:

• workflow management and automation

• loan and insurance pipeline management

• an adviser library with FAP resources and platform to track competency, knowledge, and skill

• advice document creation for accurate record-keeping and audit trail

• customer portal for document completion process and uploading documents with ease

• direct integration with a major bank for efficient processing and shorter turnaround times (direct integration with other lenders is in progress)

Advice Link was proudly developed in New Zealand with a local support team. Our development team works closely with more than 40 lender and insurance providers and key industry stakeholders to ensure our users have the latest resources available.

Through continuous enhancement, Advice Link is a flexible and progressive system which meets the changing needs of the New Zealand Financial Services industry and adapts to new regulations, legislation, and industry requirements.

All developments are made with peer consultation to keep Kiwi advisers and their requirements at the front and centre of design, with a non-negotiable motivation to enhance functionality for its users.

A high emphasis has been placed on ease of use, keeping it intuitive, easy to navigate, and master; as a result, Advice Link has proven itself to be the most valuable tool in the belts of many mortgage and insurance advisers.

When approaching development, we

focus on:

• feedback from our financial advisers actively using the system

• compliance and regulatory requirements

• best practice and industryspecific functionality

• theory vs. practical application

In November 2022, New Zealand Home Loans (NZHL) announced they were acquiring a majority share in Link Financial Group and associated companies, including Advice Link.

This is the beginning of a new and exciting chapter for the Mortgage and Insurance CRM - now an independent company dedicated to further developing a fully-fledged financial services tech platform.

While LFG advisers remain the largest group of users, we expect users will diversify: Advice Link is now open to the broader New Zealand adviser market, providing more advisers with access to this world-class system.

Advisers using the CRM are settling more than $2 billion of loans annually and completing more than $4 million of annual insurance premium income.

Josh Bronkhorst, director and shareholder of Advice Link, said he is particularly excited about the prospect of offering adviser groups a white-label version of Advice Link, enabling groups of all sizes to provide their advisers with a CRM solution which better represents their brand, look, and feel, and features unique to their group. ✚

Link Financial Group introduces a New Zealandbased mortgage and insurance CRM platform for Kiwi advisers.

New conduct rules: what do they mean for advisers?

New guidelines on how to implement the CoFI law point to it being less burdensome than initially feared.

BY ERIC FRYKBERG | PHOTO KATRINA SHANKS

Details are emerging about what the CoFI law will mean for advisers - and it seems less onerous than had been widely feared.

This appears to be the message from the Financial Markets Authority (FMA), which issued guidance in February on how to implement the new law.

In fact, according to the draft guidance document, CoFI – real name the Financial Markets (Conduct of Institutions) Amendment Act 2022 – has flexibility built into it, and allows financial institutions to make a judgement call on their own intermediaries.

“The FMA intends to take an outcomes-focused approach to supervising financial institutions,” the guidelines state.

“We believe that financial institutions know their businesses best, and are best placed to determine the most effective actions to achieve CoFI obligations and objectives.”

Financial Advice NZ chief executive Katrina Shanks says CoFI, as proposed in the FMA guidelines, will work in tandem with the Financial Services Legislation Amendment Act 2019 (FSLAA).

She says she is “pleased overall” with it.

No one-size-fits-all

Following recommendations from the FMA and the Reserve Bank, CoFI grew out of the Government's desire to impose

a code of conduct on banks, insurers and non-bank deposit-takers.

The recent guidelines are particularly important to mortgage advisers, as more than half of the loans written by the big banks are originated through third-party

‘Financial institutions will be allowed to recognise the work on ethics that advisers have already done for themselves’

channels, with the percentage even higher for the smaller banks.

Non-banks rely almost solely on adviser distribution.

But in a move welcomed by Financial Advice NZ, assessing compliance would not be done on a one-size-fits-all basis.

Instead, the guidance says financial institutions will be allowed to recognise the work on ethics that advisers have already done for themselves –requirements they will have already fulfilled by meeting the Code of Professional Conduct required by the FAP (Financial Advice Provider) regime.

“An intermediary that holds a FAP licence will pose a reduced level of risk that the institution’s distribution method will not meet the fair conduct principle,” the FMA guidance says.

Under the risk-based approach at the heart of the FMA guidance, this means that full-licence holders – effectively all advisers – could reasonably be assumed to have met high standards of conduct already.

Since it was required under FAP rules, oversight from a financial institution will have to take this into account or be “proportionate to the level of risk,” to quote the FMA document.

FCP to be a living document

Under CoFI, financial institutions are required to have a Fair Conduct Programme (FCP), which looks at not just policies of fair conduct but ways to make them work.

And an FCP should not be a one-time thing, but a living document which constantly reappraises ethical rules.

However, the FMA guidance document holds back from saying how often it should be reviewed, since the need to do so will vary from case to case.

And while an FCP must be communicated to intermediaries, the responsibility for working out systems to implement it would be shared between the institutions and intermediaries.

Once again, the administration of this system would be flexible.

“We consider that the requirement to take into account the types of intermediaries they use, and the legal obligations those intermediaries have, should help institutions have the confidence to comply with the CoFI distribution requirements in a manner that is proportionate to the level of risk associated with the type of intermediary,” the FMA states.

“Our view is that fair treatment is a shared responsibility of financial institutions and intermediaries.”

Formal agreement not essential

Another issue was how formalised the relationship between institutions and intermediaries should be.

“While we consider that contractual agreements are good practice, we acknowledge that there could be scenarios where it is not practical or proportionate to have one in place,” the FMA writes.

“In those cases, we expect financial institutions to be able to explain what processes and controls they have in place, in the absence of contractual provisions, to provide confidence that distribution involving those intermediaries will operate consistently with the fair conduct principle.

“If deficiencies in the arrangements with an intermediary are identified, the institution should consider what steps are needed to address these, which may include formalising the relationship.”

The guidelines go on to talk about the need for financial institutions to hold training courses for intermediaries.

But the principle of flexibility applies here too, since the extent of that training will be affected by an adviser's prior knowledge, such as having met and understood the standards of competence required under FAP protocols.

And the guidance further empowers advisers by saying that responsibility

for the Code of Professional Conduct will apply to them, not to the financial institution which makes use of their talents.

Managing compliance costs

The guidance offered by the FMA acknowledges that there could be compliance measures which are onerous and costly for institutions and intermediaries.

But it thinks these can be managed.

“Our intention …. is to avoid unnecessary compliance costs. We want to reiterate that institutions can comply in a proportionate way, and this is consistent with our expectations.”

The FMA adds that it has heard of financial institutions responding to CoFI by imposing compliance measures in advance which go too far, and urges them to review these measures.

And it further spares advisers from the constant glare of financial institutions by listing things it does not want the institutions to do. These include:

• constant surveillance of intermediaries

• monitoring individual instances of advice or individual sales

• supervising intermediaries’ legal compliance on matters such as FAP

No audits required

The FMA’s new guidance also spares advisers another big cost: annual external audits or independent assurance reports.

It says the FMA was aware of institutions imposing this level of oversight on intermediaries, remarking that it could be costly - especially for intermediaries which distribute products and services of multiple financial institutions.

The guidance on this is emphatic: “CoFI does not impose any legislative requirement on institutions to require intermediaries to obtain annual external audits or independent assurance reports.”

Shanks says Financial Advice NZ was “very strong” in its submissions about the unintended consequences of CoFI.

One of her concerns was the widely forecast overlap between CoFI and the FSLAA.

“But I think this guidance has recognised that the two different legislative regimes, CoFI and FSLAA, will be able to work side by side instead of overlapping.

“We also like the emphasis on the risk-based approach towards distribution networks which carry a known risk [compared with those that don't].” ✚

“The guidance also spares advisers another big cost: annual external audits or independent assurance reports”

Love of research gives the expert edge

BY ERIC FRYKBERG

‘The reason I do the job is for the tough ones, which is most mortgage applications now’

Aformer international rower, Mike Whittaker attacks business with the same diligence as he did sport, powering through the reading and research in order to provide customers with the best possible information on economic trends.

He divides his time between Parnell and Waipu, serving clients in Auckland and up north.

How did you get into this job?

I started in the business selling life insurance. I had just moved on from a job when my mate rang me one day and said, 'Can you do cold calls?'

I said I had done cold calls all my life - and he replied that he had a mate who would be calling me.

I got a call from Apex (Advice) and was offered a job. I started selling life insurance there as well as mortgages - we did both - and then I switched to mortgages about a year later.

Presumably you liked dealing with mortgages more - what was better about that field?

There’s more customer contact and more positive responses. Selling life insurance is about when you are going to die, and how you are going to get ill, whereas mortgages are more about getting people further in their life, helping them move forward, and hopefully making them wealthier.

It is more positive; there are more phone calls; there is more customer connection.

What do you like most about the job?

The reason I do the job is for the tough ones, which is most mortgage applications now.

The easy ones are dead easy; it's the marginal customers, the ones you have to fight for to get across the line, that I enjoy - along with challenging the rules of the banks.

I did a mortgage for a guy in Auckland recently: the house had a code of compliance, but a retaining wall behind it did not.

It was a massive retaining wall, and no bank would take it because it did not have a code of compliance, so the house was sitting there empty.

I worked with the Earthquake Commission, I worked with insurers, I pushed it through the banks and they

took it on, and the guy made about $400,000.

We had to wait for the wall to be signed off, and once that happened the house was worth double what he had paid for it.

What do you like least about the job?

Banks and their rules and regulations.

The world has too many rules, there are too many regulations, and that’s why some people don't work anymore, because they’ve had enough of rules. Especially silly rules.

I had one the other day from a bank about a document from the council; the whole thing was absolutely silly. Fewer rules and more common sense would be good.

What turned you against sports coaching?

Money. The pay was poor.

At the time, you would be pretty much doing it for nothing; sometimes you might make a bit, you might make $10,000, sometimes $40,000.

But now international sports coaches around the world are paid about $300,000 a year or more.

So, if I was not an adviser, I would be a professional sports coach because they get paid reasonably well now.

I was a rower – a coxswain. I rowed for New Zealand: World Championships, the Olympic Games. I got second in the world once, in Finland.

I ended competitions in about 2000, and then I went coaching at Sacred Heart. I got into business in 2005.

What does home life look like?

Married, no kids, most weekends in Waipu and we hang out in the city during the week.

I do lots of work up here, like mowing lawns and gardening. Weeding is quite satisfying, and it’s good physical activity. I also play golf.

What

is a typical working day like?

I normally start work very early: I try to get in at about 7am and work all day until I’ve done all the things I need to do.

It is not as busy now as it has been previously, but I normally finish at about 5pm or 6pm. I don't really stop for lunch; I just keep going.

And I don't go to the gym at lunchtime, like a lot of brokers do.

I don't generally work in the weekends, though occasionally I do some mortgages on Saturday morning.

Because of living in Waipu, I do a lot of mortgages from the North, as well as Auckland, so I will meet people up there and talk about their loans from there.

If you had your life over, would you do this job again?

Moneywise, yes, it definitely really pays. You get rewarded for the stress you get put under.

But ideally, probably no.

My first goal was to be an international sports coach. When I decided not to take that path, I went into business and put the same philosophy into business as I had put into high-level sport.

What’s your favourite book, favourite type of music or pastime, such as watching sport on TV?

I don't watch TV, at all; I virtually don't even watch rugby.

I do research and I read. I’m a numbers person, so I will follow the statistics of the country – for example, inflation statistics - and I try to follow trends, so I can pick things better than the economists do.

I get asked that a lot in my job: what do you think the future holds? How is the economy going to do? That’s the number one question people ask.

I don't really have a favourite movie or anything like that, no.

But the unusual thing about me is that I have ducks. Pet ducks.

At our place in Waipu, we have 15 Indian Runner ducks. They do their own foraging, but we feed them whenever they feel like getting fed.

They swim in the pond, they live here, they’re like our pets.

What is your favourite type of food?

I would say a meat pie. ✚

‘I try to follow trends, so I can pick things better than the economists do’

Excuse the dramatic headline, but some are touting ChatGPT that way.

It appeared from out of nowhere, and now almost everything you read about it says it will have an impact as great as the internet itself. Maybe.

In its latest iteration, ChatGPT-4, it now has the ability to create humanspeaklike texts, generate images from text, generate coding, and a lot more.

One instance of its immense power was a hand-drawn layout of a website, which GPT-4 then used to produce the computer code needed to build that website.

This was done as a demonstration of the ability to handle images as inputs to the AI (Artificial Intelligence).

Another use is that it can write an entire book for you.

I watched a YouTube video on how to do this and tried it. It gave me 10 chapter headings for a 100-page non-fiction book on a specific subject.

Then, putting each chapter heading into ChatGPT, with a relevant supporting question, it gave me the bulk of the text for each chapter.

While it still took a while to tidy up the text with edits and put my ‘voice’ into the book, best guess it saved me 80% of the time it would otherwise have taken to write the book.

Is ChatGPT the death of mortgage brokers?

For people in jobs which do the hard slog for a time-poor public, ChatGPT may help not hinder – especially in one particular area of business. Paul Watkins explains.

Immense power in its infancy

The power of this technology is only just being understood.

Even with recent enhancements, ChatGPT is still in its infancy, but to quote one hyped-up commentator, “This may be as big as the industrial revolution”.

A bit exaggerated I feel, but the question is this: what should you do? Ignore it? Just treat is as a better way to search than Google? Or can you use it to benefit the marketing of your brokerage?

Having read widely on the topic, it’s clear to me that its immediate value is in the areas of enhancing marketing activity and messages.

I will focus mainly on the upside of ChatGPT to your firm, but also touch on some potential negatives.

The first point to note is that your clients will use this new service to search for information about mortgages.

ChatGPT is a tool which can create personalised mortgage choices and suggestions based on client input, such as location, salary, house price and other factors affecting their credit rating.

Of course, you can also use AI for this yourself as an internal tool.

The downside here is that the value of using an adviser may become lost to some prospects, particularly Gen Z who are very tech savvy. Time will tell.

On a positive note, chatbots backed by AI have the potential to provide wellinformed answers to prospect and client questions, and would be available on your website 24/7.

This will enhance your perceived levels of service, as the answers can often appear to be written by a human.

Use AI to create content

Content for blog and newsletter articles are an obvious use of the new technology. To generate these, give ChatGPT such requests as, “Give me a list of 15 things people should know about mortgages before taking one out.”

The results can now become your article headlines.

Then ask ChatGPT about each of these headlines individually. The result is the basis of an article; you just need to do some quick editing or add your own style. Let me give you a single, edited-down example.

I asked ChatGPT: “Some actions I can take if concerned about the impact of higher mortgage-interest rates on my finances.” Here are the results:

1. Change the terms of your mortgage. You might be able to get some relief by renegotiating your loan, especially if you've had it for a while.

2. Assess the impact of the rate

increases. It's important to understand how much your payments will go up with each rate increase.

Generally, every percentage point increase in interest rates adds $1,000 per year per $100,000 borrowed. Knowing this can help you plan and budget.

The results also showed up two more answers, one about considering longerterm fixed rates and the fourth about how you should consult a financial adviser or mortgage broker before doing anything.

This last one is obviously in your favour.

Create a pipeline of leads

Mortgage advisers require a good pipeline of leads, progressively moving prospects from awareness to interest to desire to action, given no finalised sale is achieved in a single day.

To get these leads, social media is a good option to make your presence known, usually promoting a ‘lead magnet.’

ChatGPT can help you brainstorm, create and even populate the lead magnet, usually in the form of a short e-book or downloadable PDF document.

You can ask ChatGPT such things as suggesting an engaging title, how to create the sale funnel, and ideas for the content of the follow-up emails.

All sound simple? Sadly, not at all.

The first step is to familiarise yourself with ChatGPT.

Go into it and take on the role of a prospect wanting a mortgage to buy a new home.

doing for them.

But it’s still early days. For now, don’t panic or rush into changing your search strategy in Google, or your methods of promotion.

Even if a prospect becomes highly informed about how to go about getting a mortgage, the ace up your sleeve is that you can offer confirmation or advice on what they discovered.

And the biggie? You do all the work for them.

Embrace the opportunity

Ask loads of questions about mortgages, house buying, interest rates, challenges, house prices, and so on.

As you do so, you will learn how to refine the questions to get answers that make sense.

Most answers will give a reference to a website as the authority it took the information from, which will rarely be your own website. Oh dear.

What will also become apparent is that so long as your questions are wellconstructed, your role as an adviser may be challenged.

The prospect will learn a lot about how to do for themselves what you should be

In my opinion, mortgage advisers should embrace ChatGPT as a social media, blog and newsletter content aid. Familiarise yourselves with its power; watch relevant YouTube videos on the subject, which are currently being posted at the rate of many per day.

AI is not going away. Its use and power will grow exponentially, as all technologies do - and as people’s imagination sparks new ways to use it.

Many headlines predict that it will replace jobs and it probably will, but not ones which require a high level of expertise or which take the hard slog out of a process for the time-poor public.

So is ChatGPT the death of mortgage brokers? Nope! ✚

Paul Watkins is a marketing adviser to the financial services industry.

‘Mortgage advisers should embrace ChatGPT as a social media, blog and newsletter content aid’

You don’t know what you don’t know

In his closing column for TMM, Steve Wright reminds advisers that we all have ‘gaps’ in knowledge and skills – and zeroes in on your job description: what, actually, is the role of insurance adviser all about?

This is my final article for TMM: 80-plus articles later, it’s time for a change.

I’ve given a lot of thought to my final words and decided I’d bow out by gazing into my proverbial crystal ball, to identify some issues I suspect will become important in the near future.

By now you should have your compliance processes well embedded because I suspect ‘advice’ –recommendations - will be next to come under the magnifying glass.

Process, no matter how valuable, is not advice. Process can be the same for all clients, advice cannot.

Advising clients on their life, disability, trauma, and medical insurance risks, and creating appropriate solutions, is complex - and compliance with regulations and process is no guarantee of suitable or competent advice.

Achieving the Level 5 qualification does not guarantee competence either.

If it did, there would be no need for continuing professional development (CPD) as required by Code Standard 9.

Code Standard 9 requires that

individuals must, at least annually, plan for and progressively complete learning activities designed to ensure that they provide advice with competence, knowledge, and skill.

And it’s not just individual advisers who must do this; ‘entities’ (which are liable

for the advice given by their advisers) must also, at least annually, review their procedures, systems, and expertise (my emphasis) to ensure that they maintain their capabilities.

What are your ‘gaps’?

These Code Standard 9 requirements, it seems to me, require individual advisers and FAPs to actively consider any knowledge or skills gaps, identify learning activities to close or eliminate these gaps, prepare a suitable ‘learning’ plan, and then actually undertake that learning.

This is all good and well, but how do you identify knowledge or skills gaps if you don’t even know these ‘gaps’ exist?

I’ve spoken with, presented to, and trained hundreds, maybe even more than a thousand, advisers over the past 10-15 years, and we all have gaps.

Some have fewer gaps than others, but we all have them.

As I see it, the greatest impediment to effective CPD and professional

‘We need to reach general consensus that advisers are not obligated always to recommend the most generous (and most costly) product’

development is lack of recognition of these ‘gaps’ – and a false sense of comfort in our own ability, due to not knowing what we don’t know.

Actively seeking out these skill and knowledge gaps is a critical step towards improving our knowledge and ability to give acceptable advice (and complying with the Code and various laws which demand we give competent advice!)

Ensure clients will get enough

In terms of advice, I believe we need to reach general consensus that advisers are not obligated always to recommend the most generous (and most costly) product, particularly if consequent unaffordability leaves the client underinsured against big financial risks.

If we can’t do that then:

• Medical insurance will likely always remain unaffordable for retired people, when medical insurance with a very large excess may be the most suitable (and affordable)

recommendation. For older clients, quick access to private medical treatment for every ailment may not be necessary. What may be necessary is quick access only when quick access is imperative (when using the public health system is not a suitable option) - and for protection of retirement nest-eggs from very high treatment costs which are not publicly funded at all.

• Severe underinsurance against the very large financial implications of severe illness will continue, when trauma and other products designed only to cover severe illness may be the most suitable (and affordable) recommendation.

• Income protection will remain unaffordable for many, when less generous products may be the most suitable (and affordable) recommendation.

I sometimes hear it said that an adviser’s job is ‘to maximize the client’s opportunity to make a claim’.

I think a better job description is ‘to ensure the client gets a big enough claim payment when they need it’.

There are many examples of clients entitled to insurance benefits which simply enrich them, without indemnifying against any actual loss.

Nice as such windfall gains might be, they make for inefficient premium spend and unnecessarily drive-up premium cost.

Advice strategies and combinations of products, priced to allow sufficient cover for more severe illness - even if this is at the expense of unnecessary windfall gains - are an advice alternative to ‘best product only’ that can no longer be ignored in my view.

Finally, I’ve really enjoyed writing articles for TMM and my thanks go to Phil and his team for giving me the opportunity.

I hope you got something out of them too. ✚

Steve Wright has qualifications in law, economics, tax and financial planning and is (was) general manager product at Partners Life.

‘The greatest impediment to effective professional development is lack of recognition of these ‘gaps – and a false sense of comfort in our own ability’’

The TOP 10 stories on tmmonline.nz

A lot has happened in the market since the last edition of the magazine. Here are the most-read industry stories from tmmonline.nz

01 NEW COMMERCE MINISTER BLAMES INDUSTRY FOR CCCFA

The new Minister of Commerce and Consumer Affairs says the finance industry must share responsibility for problems with the CCCFA.

02 HELPING TO SCALE THE COMING INTEREST-RATE CLIFF

It will still hurt, but Squirrel founder John Bolton has come up with ways to make the coming loans crunch marginally less painful for borrowers.

03 NO SENSE OF REALITY IN BANK'S LOW-RATE OFFERS

There is a mix of acceptance and irritation among advisers at a series of cheap mortgage deals done by banks 'on the side'.

04 BIG LOAN MARKET WRITER GOES ALONE

One of Loan Market's top writers has left the franchise to set up his own mortgage advice business.

05 FIRST CLUE ON HOW NEW CONDUCT RULES WILL IMPACT ADVISERS

The much-awaited guidance on how new conduct rules will work with advisers has been released by the Financial Markets Authority.

To keep up with all the news make sure you check www.tmmonline.nz regularly. Or you can get the news and rates update sent to you each day.

06 SMALL CCCFA RELIEF TO STORM VICTIMS

The Government has moved to ease the impact of the Credit Contracts and Consumer Finance Act (CCCFA) on storm-damaged properties.

07 WARNING TO DU VAL OVER MISLEADING INVESTORS

Property development company Du Val Capital Partners’ suspension of cash distributions to investors in the company’s mortgage fund has drawn a formal warning from the FMA for misleading conduct..

08 SECOND PERSON SENTENCED IN $8.7M MORTGAGE FRAUD CASE

An Auckland woman who took part in a multimillion-dollar mortgage fraud scheme with her husband and another couple was sentenced to 12 months home detention after pleading guilty.

09 FINANCIAL SERVICES NOT SMOTHERED IN RED TAPE: NEW MINISTER

The new Minister of Commerce and Consumer Affairs believes the finance industry shares some of the blame for problems with the Credit Contracts and Consumer Finance Act (CCCFA).

10 KIWIBANK SAYS RBNZ SHOULD PAUSE OCR HIKES

Kiwibank is calling on the Reserve Bank to put on hold any official cash rate increases, as the country deals with the aftermath of Cyclone Gabrielle.