TMM - The NZ Mortgage Mag Issue 2 2019

Issue

02

2019 Working together to create tomorrow's advisers today

BROUGHT TO YOU BY:

Getting into the minds of advisers

RESULTS OF TMM ANNUAL SURVEY

HAYNE REPORT

NOT ALL BAD

TRUST IS THE CURRENCY OF SUCCESS

REVERSE MORTGAGE GUIDE

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CONTENTS

20

20

ANNUAL MORTGAGE XX ADVISER SURVEY:

XX

UP FRONT

What challenges are keeping advisers awake at night?

FEATURES

04 EDITORIAL

12 REGULATION

Bring on electronic lodgement

Will NZ follow Australia’s lead on commission?

16 HOUSING COMMENTARY

Our analysis of where the market will head this year

26 REVERSE MORTGAGES Product options for equity release and reverse mortgages

06 OPINION Commission or a fee for service model?

10 PEOPLE

08 NEWS Adrienne Church's new role revealed; In a surprise move Mortgage Supply and NZMA join Astute

A wrap of all the recent movements within the industry

14 PROPERTY NEWS:

The impacts of CGT and the Healthy Homes Bill

COLUMNS 18 KIWISAVER

Has the corporate bond market partied too hard?

19 MY BUSINESS

Float Mortgages’ Naylon Cassidy talks to Miriam Bell

28 SALES AND MARKETING How to develop trust in you and your brand

30 LEGAL

Interpreting the Haynes report

32 INSURANCE

Differentiating between good conduct and good advice

19

Naylon Cassidy

03 03

UPFRONT From the Publisher

BRING ON ELECTRONIC LODGEMENT

I

n this issue of TMM we have lots of change happening in the market, but in some places no change.

With the latter it was somewhat surprising to see that turnaround times on loan applications remains the number one issue of advisers in New Zealand.

If you asked me to pick the biggest issue before we did the survey the answer would probably have been regulation and associated changes like remuneration levels.

The fact that it is turnaround times is an indictment on the industry. At the time of writing this we were hearing that with some lenders it was taking up to 12 working days to get a pre-approval and 10 working days for a live deal.

That is crazy in this day and age where industries are embracing technology to drive efficiencies.

If there is a good side to this we are hearing that there are trials going on which will allow electronic lodgement of applications.

One of our themes this year is to help advisers understand the different groups and more importantly what they are doing for their members.

For years there has been talk of consolidation, but alas it’s been just that … talk. Indeed I could argue there has been growth in the number of options.

That doesn’t seem to be sustainable so seeing Mortgage Supply decide to join up with Astute Financial Services makes sense.

(Even if I didn’t see it coming!)

This also ties back to my earlier comment around turnaround times. Part of Mortgage Supply’s decision was based on Astute’s CRM. This was demonstrated to a group recently and it does look impressive.

It has been built so it can handle electronic lodgement.

There are lots of other changes going on too which suggests we will be in for an interesting year. Resimac New Zealand general manager Adrienne Church has left the business to head up a new SME in the business lending sector ... and it uses technology and a digital platform to provide speed and efficiencies.

First Mortgage Trust has a new owner.

We tipped something was happening in this space in the previous issue.

Philip Macalister Publisher

PUBLISHER: Philip Macalister SUBEDITOR: Dawn Adams SENIOR WRITERS: Miriam Bell, Susan Edmunds, Daniel Dunkley CONTRIBUTORS: Paul Watkins, Steve Wright, Jonathan Flaws, John Bolton, Mark Brooks GRAPHIC DESIGN: Debbie Morgan ADVERTISING SALES: Amanda Ellery 027 420 2083 amanda@tarawera.co.nz

MOVED OFFICES? Make sure you don't miss an issue by changing your address.

Go to www.goodreturns.co.nz/coa SUBSCRIPTIONS: Jill Lewis jill.lewis@tarawera.co.nz HEAD OFFICE: 1448A Hinemoa St, Rotorua PO Box 2011, Rotorua Phone: 07-349 1920 Fax: 07-349 1926 editor@tmmonline.nz

TMM is published by Tarawera Publishing Ltd (TPL). TPL also publishes online money management magazine Good Returns www. goodreturns.co.nz and ASSET magazine. All contents of TMM are copyright Tarawera Publishing Ltd. Any reproduction without prior written permission is strictly prohibited.

TMM welcomes opinions from all readers on its editorial. If you would like to comment on articles, columns, or regularly appearing pieces in TMM, or on other issues, please send your comments to: editor@tmmonline.nz

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Approved applicants only. Lending criteria apply. Fees and charges payable.

Liberty Financial Limited.

OPINION

By John Bolton

Commission: What's the problem we're trying to fix?

A fee for service model sounds good but here's why it wouldn't work.

A

t a superficial and generally uninformed level, it’s easy to have an opinion on mortgage broker commissions. It’s also easy to have an opinion when you have a vested interest as banks do, and, yes, I do, too.

The Australian Royal Commission was always going to be a witch hunt. The public wanted to see seemingly untouchable (or out of touch) bank executives burned at the stake. With bank executives fronting up to the hearings it was always destined to end in ritualistic burnings. After all, like any good witch hunt the Royal Commission only went looking for self-fulfilling bad behaviours. And whilst it found plenty, I’d suggest this was no more than any other monopolistic industry would throw up under the same microscope.

When it came to mortgage brokers, the only detailed wrongdoings were from Aussie Home Loans (owned by Commonwealth Bank) and NAB’s refer-a-loan scheme which related to bank staff paying referrers for dodgy loan applications.

Somehow, the poor behaviour of banks saw mortgage brokers feathered and tarred, without looking at the thousands of very good independent brokers. I’d have thought it hard to ignore that 60% of Australians choose to use a mortgage broker. We’re about 35% in New Zealand, but that’s increasing fast. Mortgage brokers form relationships with their clients, they don’t treat them like a number, and they don’t judge them. Often it’s that simple.

Whilst I’m certain some bad apples exist, and could be found if looked for, there was scant evidence presented of any systemic issues. The only evidence of "failings" was of banks and their governance of their own divisions.

Nonetheless, we heard from Commonwealth Bank on the failings of the commission model. And we heard about the ideological merits of a customer pays fee-for-service.

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In sharp contrast, a study by the Australian Productivity Commission found that banks have too much market power; that brokers have successfully increased competition for the benefit of consumers, and importantly, that a customer pays feefor-service model simply won’t work.

Yet the Royal Commission, with limited substantiated facts and armed with the biased view of a few bankers, recommended a heavily regulated fee-for-service model for home loan borrowers and mortgage brokers.

Mortgage brokering is not simply about negotiating a rate or processing a loan.

About 80% of what we do is helping clients through the whole house buying process.

A fee-for-service model is, without question, ideologically pure. If I didn’t think about it for more than one minute, I’d like it.

For the “fee-for-service” model to work, all borrowers would compulsorily pay a fee of $2,000 to $3,000 for their mortgage where no fee is paid today. In New Zealand, this would result in $300 million of fee income to banks and another $200 million of savings from not having to pay broker fees.

The benefit, as far as the theory goes, is that advisers would then work harder to negotiate rates and banks would compete harder to give borrowers better rates,

such that they would be better-off overall.

Yeah right.

We’re already off to a bad start with this fee-for-service model, but it gets better. Would borrowers refinance if they faced large fees to do so? How would the regulations handle loan top-ups? What about borrowers with smaller home loans, would they still pay the same fee? What about someone who did their loan online, same fee? What would stop a bank from cross-subsidising its own distribution to gradually destroy competition from brokers?

And without brokers, what would happen to non-banks, or our smaller regional banks, or new entrants?

The thought of a regulated fee should be an anathema for just about any New Zealander. It goes completely against the idea of a free market, and the importance of competition. I think it would reduce innovation, and would have many unintended consequences.

At one point Matt Comyn, the new chief executive of Commonwealth Bank stated that brokers write higher LVR loans than banks, along with a statement that brokers don’t work for their trailing commission.

It surprised many in the industry that this was accepted without question given the bank’s obvious bias and self-interest.

It didn’t register with his inquisitors, that borrowers with more complex requirements (and higher LVRs) are more likely to use a broker.

In the immediate aftermath of the Royal Commission report, the media smelled blood and fear, especially in Australia. Was this the end of brokers?

One of the naivest comments I heard during the aftermath was that mortgage brokers were heading towards extinction, that mortgages are commoditised, and comparison sites would fill the void and provide price competition. Digital sites like iSelect and Lendi and Uno Home Loans

were referenced, completely ignoring (1) these sites rely on broker commissions, and (2) they all have mortgage brokers in their businesses.

Mortgage brokering is not simply about negotiating a rate or processing a loan. About 80% of what we do is helping clients through the whole house buying process which is one of the biggest financial investments in their life. This emotional experience will not be replaced by algorithms and is one of the primary differences between what a broker offers and what a bank offers.

Politics is playing a big role in the future of mortgage brokering in Australia. Both the coalition government and the Labor opposition have supported the removal of trail commission from June 2020.

Labor was initially bullish on a fee-forservice model, but has since backtracked and is now supporting an ongoing upfront paid by lenders. There was a lot of public pressure on them from 17,000 brokers as well as non-banks and even the Reserve Bank. The thought of a $3 billion gift to the big banks and less competition finally got through.

So, the current consensus for commission adopts the recommendation of the

Productivity Commission of a single upfront commission of 110 basis points paid by the lender. Noting this is 30% higher than the upfront commissions paid in New Zealand.

During the royal commission there was no evidence that trail commission delivered poor client outcomes. Ultimately this should be the benchmark on what robust decisions are made.

It seems a lot of credit was given to comments by Comyn including that brokers provided no service for their ongoing trail payments. The Productivity Commission was perhaps a bigger influence and had recommended the removal of trail in its report as an added cost with no clear consumer benefit.

Ironically there is no financial difference between a trail commission model and a high upfront commission model – both end up with the same underlying profitability and therefore the same bank pricing. There is no cost difference.

What we should be considering and evaluating is how to get the best customer outcomes, and I personally think a trail commission model is better. It encourages brokers to manage fixed-rate rollovers, and

provide ongoing help and assistance to clients. Trail stops if another adviser looks after the client or the client goes into arrears.

Regular trail income also provides stability. It’s what we use to invest in technology and our client services team. It helps us build less of a “sales” culture with more focus on service.

In New Zealand, we are in a unique situation. Our mortgage brokers are already considered financial advisers and our new industry regulations include a code of conduct and duty of care requirement. We never had added sales incentives. So, we are already well ahead of Australia. Half of our banks pay upfronts and half pay trail, and those that pay trail choose to. They also have the option to step away from it.

My view is that our lenders do not need to change anything. At the very least watch Australia and see what happens. There is no pressure to change the commission structure from our regulator. What should really matter is lifting industry standards and focusing on the best customer outcome. ✚ John Bolton is the managing director of Squirrel Mortgages.

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TMMONLINE.NZ/NEWS

By Daniel Dunkley

Church looks to Prospa in new role Adrienne Church has been appointed general manager in New Zealand for small business lending specialiat Prospa.

Prospa is the number one online lender to small business in Australia, with ambitions to become the leader in this space in New Zealand.

Church will manage operations and be responsible for building Prospa’s presence in the New Zealand market, driving engagement with partners and small business to deliver finance solutions that keep small business moving.

Prospa provides business loans in New Zealand ranging from $5,000 to $150,000, with no asset security required to access up to $100,000.

Application takes just 10 minutes, businesses can receive same day approval, and funding is possible within 24 hours.

Prospa currently works with more than 10,000 partners, including aggregators, associations and trusted corporate brands and recently joined the NZFSG panel.

Previously, Church spent seven years establishing Resimac's New Zealand operations. “During that time she has led the New Zealand business through a period of

tremendous success and growth," Resimac chief executive Scott McWilliam said in a statement.

The company has built its share of the non-bank space to 42%, up from 35% the year before. The company attributes the growth to a busier adviser channel.

Resimac New Zealand operations will continue to be run locally, rather than from

Australian Labor makes commission U-turn

Adrienne Church

Industry plays down capital gains impact Advisers say a proposed capital gains tax on rental properties will not deter professional, long-term investors in the market.

The Tax Working Group last month recommended that capital gains, including those from rental properties,

Bruce Patten 08 WWW.TMMONLINE.NZ

Australia, following her departure.

McWilliam said that some of the senior management would step up into bigger roles, and the Australian-based chief financial officer, Jason Azzopardi, would have more oversight of the business. "It's important day-to-day operations are run from New Zealand," he said. "We absolutely recognise that."

should face the new tax. The TWG wants to implement a broad capital gains tax to fund lower tax rates elsewhere.

Advisers are sanguine about the potential impact. NZFSG head of growth Bruce Patten said: "I expect an impact on mum and dad investors. This might make them reconsider whether they want to do it or not. That's unfortunate."

But he said established investors, or those with long-term plans, would not be deterred: "Our advice is if you want to be in this, be in it for the long-haul."

Patten said the extension of the brightline test to tax properties held for less than five years had already created a de-facto tax for short-term investors. "I personally see it as business as usual," he added.

The Mortgage Supply Company's David Windler said some clients may need to seek tax advice, but expected little impact on his business. "It will not change the advice we give," he said.

Australian advisers have received an unlikely boost in their fight against remuneration reforms proposed by the Royal Commission. The Australian Labor Party has withdrawn its support for a fee-for-service model and has instead proposed a flat, lender-funded fee.

The opposition party previously indicated it would agree with all of the recommendations from Kenneth Hayne's Royal Commission report.

The Royal Commission final report called for a fee-for-service model paid for by customers, a ban on trail commission, and a broad ban on other forms of commission. Hayne's call to ban trail commission is set to come into effect next year.

Labor's decision to oppose a fee-forservice model is politically significant, and aligns with the country's Liberal party. A move to ban all commission is now unlikely to pass through parliament.

Labor said it changed its mind after reviewing guidance from the Productivity Commission, which warned a fee-forservice model would hurt competition.

The U-turn comes after the Australian broking industry launched a fierce campaign against reforms. Major broking groups including Loan Market encouraged customers to petition the government, while industry body the MFAA rolled out a national advertising campaign.

Labor still supports a ban on trail, but wants lenders to pay brokers a flat, upfront commission. Labor believes the fee will stop lenders and advisers pushing over-sized loans. It wants to introduce a capped commission rate of 1.1%.

Major shake up for groups Consolidation of mortgage advisers groups has started with Mortgage Supply agreeing to move its aggregation to new player Astute.

Under the deal Mortgage Supply’s 20 advisers will aggregate through Astute and the group’s 120, non-branded advisers, currently under the NZMA banner, will become Astute advisers.

Mortgage Supply chief executive Jenny Campbell will become the National Sales Manager for Astute.

Jenny Campbell She says Astute has the “complete package” and that it a high-touch model which is adviser-centric.

The transition of the NZMA advisers to Astute will take a couple of months and Campbell expects some will decide not to make the move.

“Adviser groups should be working together for a better outcome for everybody.”

Campbell working out how to run a group under the new compliance regime which is coming soon has been an issue causing “sleepness nights.”

Joining Astute is the “golden key” she had been looking for because of its systems and the fact it had been through the Australian compliance regime.

She says Astute is setting a high bar and its systems and processes will be hard for a New Zealand group to replicate.

Campbell is highly impressed with Astute’s CRM, GEM. “I’ve studied CRMs until my eyes have bled,” she says. “(GEMS) blew my socks off.”

She describes it as “the most amazing CRM I have ever seen.”

In her opinion it will create time savings for advisers and improve their workflow.

Campbell believes this will be the start of further consolidation in the industry. She says some groups have their heads in the sand over the upcoming regulatory changes and that later this year, early next year there will be a real scramble to when they try to work out what they are going to do under the licensing regime.

“I think there’s going to be a real shake up in the market,” she says.

Adviser groups should be working together for a better outcome for everybody.

Jenny Campbell

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PEOPLE

THE LATEST NEW APPOINTMENTS TMM keeps you up to date with all the new appointments in the mortgage advice profession.

NEWPARK NEW CEO

Melanie Purdey has been appointed as the new chief executive and will take up the role on April 2.

The Board selected Purdey for her 25 years experience in financial services in both Canada and New Zealand, and across the spectrum of lending, insurances and investments.

Combined with this is Purdey’s tenure over the past nine years as the Sales Manager at MAS coaching and leading productivity and performance for a large team of Advisers.

Her understanding of the new regulatory regime and manifest passion for the cultural DNA required to ensure good conduct to protect a client’s best interest made her an obvious choice, chairman Burton Shipley said.

“As one of New Zealand’s largest dealer groups, Newpark’s commitment to supporting Advisers’ success is what drew me to the role. My calling has been to help Advisers find the best version of themselves and give them the tools to succeed. Our goal is to make Newpark the obvious choice for Advisers by ensuring those tools are best of breed, current, and compliant coupled with a brand, culture and team that are unmatched in the market.”

“With a highly motivated Board along with a talented and diverse team of people, Newpark will build a culture that combines performance excellence with a robust set of shared values. Newpark is well positioned to build on its impressive growth story of over 20 years.”

“I am very excited to be working once again with entrepreneurs who understand the value of hard work and a commitment to protecting their clients. Professionals who understand the truth behind Samuel Goldwyn’s comment “The harder I work, the luckier I get.” I am delighted to be leading Newpark as it works to understand, innovate and succeed through the new regulatory issues that will accelerate the pace of change across our industry.”

Cynthia Zhang smooth and stress-free lending experience.

Cynthia Zhang is a new addition in Remuera. She is fluent in English and Mandarin. Her familiarity with Chinese culture helps her forge good relationships with her Chinese clients.

She prides herself on getting to the heart of each client’s concerns and explaining processes thoroughly.

Pete Eastwood is advising in Queenstown.

He focuses on good communication, keeping his clients in the picture every step of the way. He looks at everyone's situation

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RESIMAC IN SENIOR RESHUFFLE

Scott McWilliam Pete Eastwood

NEW ADVISERS AT LOAN MARKET

Dawn Stoddart joins the team in Christchurch. She has 20 years plus banking experience having worked for Westpac, Kiwibank, SBS Bank and the Co-Operative Bank. She is ready to assist her clients with a

with a fresh perspective and strives to achieve a successful result for each of his clients.

Calvin Twigg is based in Tauranga. He is a family man and keen game fisherman. He has travelled and worked throughout Africa, USA, French Polynesia and Australasia and is a member and supporter of the St Vincent de Paul Society and charity.

Sandeep Khanna is based in Christchurch.

He aims to eliminate the burden of dealing with the large bureaucracies associated with the big banks. His focus is customised advice, tailored to each of his client’s circumstances.

Linda Eagleton joins Loan Market in Auckland. She brings with her many years’ experience in the industry. Linda wants her clients to fully understand the process and feel comfortable at all times.

Calvin Twigg

Australia-headquartered non-bank lender Resimac has announced Scott McWilliam as its sole CEO, with long-serving joint CEO Mary Ploughman to leave the group.

The changes, announced by the nonbank lender, follow a period in which both Ploughman and McWilliam held joint responsibility at the top.

Ploughman is to leave the company after 16 years of service. The reshuffle comes after the 2016 merger of Resimac and Homeloans.

The firm has undergone a period of change, choosing to adopt the Resimac name at group level, and moving on from the Homeloans brand. The company is now known as Resimac Group Limited. ✚

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REGULATION

By Susan Edmunds

Commission under scrutiny Australia is cracking down – could New Zealand follow suit?

A

ustralia’s mortgage advice industry has been shaken this year by a recommendation that commissions for advisers should be banned.

Australian Royal Commissioner Kenneth Hayne, who oversaw the inquiry into misconduct in the financial services sector, recommended lenders be required to stop offering commission to mortgage advisers who placed loans with them.

It’s one of the proposals that the Australian Government has been more reluctant to implement – Treasurer Josh Frydenberg said competition in the home loan sector was important and any changes would be made carefully and in stages.

The Australian mortgage broking sector has campaigned hard against such huge reform, with major broking groups encouraging clients to petition the government, and a national advertising campaign from industry body MFAA. So, what does this all mean for mortgage advisers in New Zealand?

NEW ZEALAND REGULATORY RESPONSE

The government has already signalled it wants to get rid of incentives that risk creating poor outcomes for customers.

But it has indicated the primary targets are high upfront commissions for life insurance advisers and overseas travel incentives.

Commerce Minister Kris Faafoi said officials were still working on the options and would probably consult on them in May. “Until we have gone through that process it is too soon to be definitive in regard to mortgage advice commissions. I am keen to hear more from the sector on how we ensure that the way commissions are paid is aligned with good customer outcomes.”

A Financial Markets Authority (FMA)

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spokesman said it did not regulate lenders or the provision of credit.

“Payment arrangements between lenders and RFA brokers are largely outside our remit. AFAs are authorised by us, whereas RFAs are not. The Financial Services Legislation Amendment Bill will level the playing field somewhat. If advice is being given, certain standards will have to be met, including the disclosure of remuneration/ incentives. The FMA will regulate the advice, not the relationship between the lender and the borrower however.”

He noted that the recent report into bank conduct and culture touched on the issue when it said some banks had reported challenges monitoring and managing intermediaries’ conduct.

New Zealand is a totally different market than Australia.

We have a totally different set of events going on.

David Hart “The Australian Royal Commission interim report highlighted concerns about the roles and responsibilities of intermediaries, in particular whether the intermediary acts in the interest of the customer or the bank, and how the remuneration of intermediaries impacts customer outcomes.

“While again our review was limited in this area, we found little evidence of banks having enhanced controls and oversight of their higher-risk products and distribution

channels. More work is required to ensure banks are comfortable with the quality of conversations and advice that occur via intermediary channels, and that the incentives offered to intermediaries are aligned with good customer outcomes.”

Adviser David Hart, of The Mortgage Supply Co, said he would be surprised if changes such as those signalled for Australia were seriously discussed in New Zealand.

“New Zealand is a totally different market than Australia. We have a totally different set of events going on.”

He said brokers were a smaller part of the New Zealand market. Without commission, many could not remain in business. And without mortgage advisers, many banks would lack the frontline staff to be able to deal with customers effectively.

But he said it was good that the sector was being looked at. “There are going to need to be changes made going forward. It’s not bad that the industry is scrutinised to make sure it’s in good shape.”

HOW MUCH IS PAID IN COMMISSION?

David Windler, a director of The Mortgage Supply Co, said a “half-decent” mortgage adviser should earn no less than $100,000 a year. “If they are doing less they are either doing it part-time or they are just not very good.”

At iRefi, manager Timmy Brown said most people would not earn that level until they were into their third year in business. “Unless they join an established team or come in with a ton of experience and connections, most brokers will only earn $20,000 to $30,000 in the first year and if they survive maybe $70,000 to $100,000 in the third year.”

Industry averages were about $1 million per month in settlements, Andrew Taylor, a mortgage broker at Your Home Loan, said.

“On those numbers you’re at about $60,000 to $70,000 in upfront commissions. Once you’ve got a good client base and referrals start flowing you’re at $3 million per month and well over six figures after expenses as a one-man band.

“And the top brokers in the industry – and I mean the very top – who have built businesses over a decade or more and employ underwriters and support staff, they are generating more than $100 million a year in loans. They would get $500,000 to $1 million in upfront commission and a bit of a trail on top, though that would be to fund an entire business, which might be a dozen staff.”

But Windler said commissions allowed brokers to provide a service to clients for nothing. They usually received the benefit of personalised advice without having to pay a fee.

“I still think I get asked every now and then ‘what does it cost to use your services?’ and the answer, generally speaking, is ‘well I am free’. The only time we ever charge fees is when we are dealing with commercial deals, we charge fees around that.”

MORE CHANGES AHEAD

Taylor said he had heard older brokers at a conference saying they would leave the industry because of the regulatory changes coming through – including as part of FSLAB. “From my perspective it seems like a minor change which could create opportunities as their customers will still need good mortgage advice.

“Over the Tasman we're seeing the Aussies go through an interesting process given some of the behaviours and outcomes from their Royal Commission. Because our banks have the same ownership there is potential for some of that regulation to flow through, but we have always had a much tighter regulatory regime – we're an entirely different country.

“Having worked over there I'm not surprised by what's come out of Australia, the culture is extremely different. It's been disappointing to see some senior business journalists try to make the link between their industry and ours based on our banks having the same brand names.”

Windler said it would be important for advisers to have systems and processes that gave them the ability to demonstrate their value to clients.

“There is more onus on us now to evidence and prove that than there has been historically, and potentially with the news coming out from the FMA and the Reserve Bank and the insurance industry I think you can find the same requirements, if not greater requirements are going to be put on the insurance industry too.” ✚

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PROPERTY NEWS

By Miriam Bell

Taxing times

Unlikely as it may seem, tax has been the topic de jour for investors of late yet it’s just one of the many looming changes they are facing ... We explore what the new investment landscape entails.

C

oncerns that a capital gains tax is likely to be introduced were confirmed recently with the release of the Tax Working Group’s final report on the reform of the tax system.

It came as no surprise that Sir Michael Cullen’s 11 member group recommended that income from capital gains – especially those made on residential rental properties – should be taxed more.

Cullen says that all members of the TWG agreed on this, but a majority of the group also support broadening the tax to include all land and buildings, business assets, intangible property and shares.

The TWG recommends that a realisation based tax on capital gains would kick in when an asset, such as a rental property, is sold or changes hands.

It would be applied with no discounted tax rate and no allowance for inflation, and gains would only be calculated from when any new law comes into force. The “family home” and assets like cars, boats and artworks would be excluded from the tax.

But Cullen says the TWG has presented the government with choices and options on

how the taxation of capital gains could be extended rather than a rigid blueprint.

While the government is not due to release its full response to the TWG’s report until April 2019, ministers emphasise they are not “bound” by its recommendations and are working to come to a consensus within the Coalition.

The TWG’s recommendation was very hard line and would impose some of the highest capital gains rates in the world.

Matthew Gilligan However, constant references to the need for greater fairness and balance in the tax system mean alarm bells are ringing for

many property investors.

They are concerned that the government is preparing the way for a modified capital gains tax which would target rental properties.

Gilligan Rowe & Associates managing director Matthew Gilligan says the government is likely to come up with a more moderate version of the TWG’s recommendation on capital gains.

“The TWG’s recommendation was very hard line and would impose some of the highest capital gains rates in the world. I think the government is going to come in with a much more politically sympathetic position. I’d be amazed if they went ahead with it in its current form.”

Gilligan is not unsympathetic towards a tax on property but says it should be less complicated than what has been proposed.

“Extending the bright-line test on residential property sales from five to 10 years would be a better way of going about it.”

Investor advocates also believe the introduction of a capital gains tax on rental properties will exacerbate the existing shortage of rental stock and push rents up.

Healthy homes standards revealed Hot on the heels of the TWG’s report came the much-anticipated release of the Government’s Healthy Homes minimum standards for rental properties.

Housing and Urban Development Minister Phil Twyford says that making sure all New Zealanders have warm, dry homes is one of the most important public health changes the government could make.

“Nearly 600,000 households rent in New Zealand, and our rental stock is of poorer quality than owner-occupied homes. It’s estimated about 200,000 families live in rental homes that do not have ceiling or underfloor insulation.”

The new standards set minimum requirements for heating; insulation; ventilation; moisture and drainage; and draught stopping in residential rental properties. Under the new standards, all rental properties will be required to have: • A heater that can heat the main living area

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to 18C. • Ceiling and underfloor insulation that either meets the 2008 Building Code insulation standard, or (for existing ceiling insulation) has a minimum thickness of 120mm.

• Extraction fans or rangehoods in kitchens and bathrooms in a bid to make properties drier.

• A ground moisture barrier installed if a property has an enclosed subfloor space to stop moisture rising into the home.

• Adequate drainage and guttering to prevent water entering the home.

• Draughts that make a home harder to heat blocked.

NZ Property Investors’ Federation executive officer Andrew King says they are supportive of the need for quality standards in rental properties – but believe they need to be cost effective, especially as tenants pay for the required improvements.

They support compulsory insulation and providing a fixed heating source but don’t believe the current standards around them are cost-effective, he says.

“Topping up existing insulation provides very little improvement for tenants while costing almost the same as installing completely new insulation. Heat pumps are expensive to buy, install, maintain and replace so will increase rental prices by around $15 per week.”

This means tenants who do not want and will not use a heat pump will still be paying for it through higher rent, King says.

“Allowing cheaper but less energy efficient heaters would not require rental price increases and would give tenants greater choice in how they live in their home.”

While the regulations will become law by mid-2019, landlords will have until July 1, 2024 to get their rental properties compliant with the new standards.

Investor confidence rocked Looming policy changes, such as a potential capital gains tax and the Healthy Homes minimum standards are having a significant impact on investors’ attitudes and the way they approach business.

Belief that rental property is the investment most likely to generate good returns just keeps diminishing, the latest ASB Investor Confidence Report shows.

Confidence in rental property returns is sitting at a four year low and dropped to 14% in the three months to December from 16% in the previous quarter.

ASB senior wealth economist Chris Tennent-Brown says that confidence in rental properties was similar to personal homes a few years ago, but that has been sliding since 2017.

“Changing sentiment is particularly noticeable in Auckland. Confidence in property has taken a hit over recent years in the city, particularly rental property. In saying that, Aucklanders’ perception of their own homes providing the best return on investment still stands at 22%, with rental property at 17%.”

But it would be impossible for investors’ confidence to do anything but fall when all the policy changes and uncertainties seen of late are taken into account.

Meanwhile, NZ Property Investor magazine’s annual property investors’

survey provides further evidence of a changed investment landscape and altered investor perceptions.

The 2018 survey, which was sponsored

by Squirrel, generated one of the biggest responses (1,228) in its history. Those responses make it clear that concern is the dominant feeling among investors these days and that most are playing a waiting game as a result.

In a reflection of the new landscape, 90.89% of respondents picked government policy changes as the biggest issue for investors over the coming year. Additionally, 64.98% picked government policy changes as the biggest barrier to growing their portfolio over the next 12 months.

This is a dramatic change from previous years. In recent years, it has been damage to property that has earned the title of investors’ biggest worry.

For example, in 2016 it was the top concern for 54% of investors. Allied to that, meth contamination was cited as the major issue for investors in 2017 (48%) and one of the top three in 2016 (38%).

The survey also reveals that while most investors are not currently buying (56.46% of respondents last bought a property over two years ago), nor are they selling (just 16.88% of respondents had sold a property in the last year).

What do you consider will be the three big issues for residential property investors this year?

Interest rates Tenants Government policy changes Rising house prices Low yields Overseas investors Finding good tenants Other 0%

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20%

30%

40%

50%

60%

70%

80%

90%

100%

015

HOUSING COMMENTARY

By Miriam Bell

Market on repeat Think drama lies ahead for New Zealand’s housing market this year?

Think again. Uncertainty remains but movement is likely to follow a familiar, subdued pattern, writes Miriam Bell.

I

t’s inescapable. New Zealand’s housing market is not what it once was. There’s slowing price growth and subdued sales nationwide, albeit with some regional hot spots still powering on. Given the headwinds of looming tax and tenancy law change, does it all mean the market has finally turned?

There’s many who believe it has and that a wholesale decline in property values is coming. Economist Cameron Bagrie recently said people shouldn’t be sugarcoating Auckland prices and that there are early signs Auckland is starting to follow the lead of the Sydney and Melbourne market. He did add, however, that it was likely an Auckland decline would be a light version.

Yet, in the face of the latest price and sales data, most commentators have a more tempered, and rather less dramatic, view of the likely outlook for the market going forward.

SUPERCITY PRICE DECLINE

Bagrie’s words certainly spring to mind when looking at January’s price data. That’s because, across the board, the data clearly shows Auckland’s prices have declined.

According to the latest REINZ data, Auckland’s median price has fallen to its lowest point in over three years. It has the region’s prices down by 2.4% to $800,000 in January, as compared to $820,000 in January 2018. It is Auckland’s lowest median price since February 2016.

REINZ chief executive Bindi Norwell says they are watching closely to see whether the region’s price fall is just the usual summer slowdown or whether it’s the start of something wider. “What we can say, is that it’s too early to call this a trend and it’s too early to confirm whether the Auckland market has actually turned.”

The song remains the same in other data. QV’s January House Price Index has Auckland’s value growth down by 0.1% over the past quarter and by 0.9% year-on-year, leaving its average value at $1,045,775.

In Realestate.co.nz’s data, the Auckland region’s average asking price remained flat: it was up by a mere 0.7% to $960,482, as compared to December 2018.

Barfoot & Thompson also recorded

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While the loosening of the LVRs will have enabled some new buyers to enter the market, this has been offset by a number of policy changes that have put a dampener on investor enthusiasm in the short term.

Paul McCorry

Auckland prices as continuing to flat line in January. Both the average sales price ($927,181) and the median sale price ($827,500) were down on December, by 2.4% and 5.4% respectively.

The agency’s managing director Peter Thompson says January’s prices reflect the state of the market seen in December, which saw prices edging back. “But there is certainly no indication that there is a major decline in prices and we continued to sell properties across all price bands.”

TWO-TIER MARKET AT PLAY

Around the rest of the country, the price data was somewhat more mixed. It clearly

highlights the difference between some of the big city markets and many of the regional markets.

In the REINZ data, Christchurch also saw an annual decline in house prices. The Garden City’s median price was down by 0.7% to $435,000 in January, as compared to $431,900 in January 2018. In contrast, the country’s other 14 regions saw annual increases in their median price, with five regions recording new record median prices.

Those regions were Waikato (up 12.6% to $550,000), Manawatu/Whanganui (up 21.7% to $348,000), Marlborough (up 16.3% to $477,000), Otago (up 6.4% to $475,475), and Southland (up 15.6% to $277,500).

Wellington also saw strong annual growth of 12.2%, which took the region’s median price to $562,000 in January, as compared to $501,000 the year before.

However, QV’s data leaves little doubt that property value growth is slowing around the country. It has nationwide values growing by just 0.9% over the three months to January and by 2.9% over the past year, leaving the national average value at $684,468.

Likewise, many markets around the country saw drops in the rate of quarterly value growth in January as compared to recent months. This was particularly evident in centres like Dunedin and Wellington which have seen strong growth of late.

Only one region went against the grain and recorded particularly strong value growth: that was Hawke's Bay. Hastings saw quarterly growth of 10.8% while Central Hawke's Bay continues to build on a strong annual growth figure of 19.6%.

QV senior consultant Paul McCorry says affordability constraints and low supply continue to maintain modest value growth across most areas. “While the loosening of the LVRs will have enabled some new buyers to enter the market, this has been offset by a number of policy changes that have put a dampener on investor enthusiasm in the short term.”

ALL QUIET ON THE SALES FRONT

The price data may not offer up an easy or consistent message, but the January sales data certainly does. It shows that sales

WHAT’S DRIVING HOUSE PRICES?

activity can best be described as subdued.

REINZ’s data has sales down nationwide with the number of properties sold during January falling by 2.5% year-on-year to 4,372. It also reveals that Auckland sales volumes decreased by -2.8% year-on-year to 1,152. These sales volumes were the lowest in two years.

On top of the decline in sales, the median number of days to sell a property nationally has increased to 48, which is its highest level in nearly seven years. The number of days it takes to sell a property in Auckland is now 51, which is the highest number since February 2009.

Norwell says sales activity generally picks up after the holiday period ends. “This is something we’d expect to see again this year with no signs yet pointing to a significant, longer term decline in sales volumes.”

However, Barfoot & Thompson’s January sales data was more positive for Auckland.

It has the region’s sales numbers up considerably – at 653 they were 29.6% higher than in December and 10.1% higher than at the same time last year.

Thompson says January’s sales were the highest they have been in a January for three years. “It points to vendors accepting that the market has moved in favour of buyers, and they are trimming their expectations as to the price they will accept.”

Meanwhile, the amount of housing stock on the market continues to cause concern.

Both the REINZ data and Realestate.co.nz’s January data reveal low levels of stock in markets around the country. And the REINZ data has four regions (Wellington, Gisborne, Otago, Hawke's Bay) with less than 10 weeks’ inventory available.

Auckland went against the grain somewhat in this area. Barfoot & Thompson ended January with the highest number of listings they have had at the end of January for seven years. While, according to Realestate.co.nz, Auckland’s stock was up by 12.1% increase on January 2018.

BALANCED BUT BORING

So what does this slightly confused state of affairs leave commentators predicting for the market?

At the Reserve Bank’s February Monetary Policy media briefing, the bank’s Governor, Adrian Orr, made it clear they are forecasting a historically low level of house price growth around New Zealand – and negative growth in Auckland.

He says it is the Auckland component which gives them confidence that on average there will be low nominal growth nationwide. But many parts of the rest of the country will still be strongly positive on average, making it a good outlook.

Further, Orr says they don’t project an Armageddon in house prices in New

REINZ HOUSE SALES: DOWN

Sales volumes both nationwide and in Auckland were down year-on-year in January. But, once seasonally adjusted, they were actually up on December.

INTEREST RATES: DOWN

The mortgage rate war is back on, with many banks offering sub-4% rates again. But, while commentators say rates will hover around historic lows, they do expect them to start inching up eventually.

It’s a balanced outlook [for 2019], with overall volumes set to be similar to 2018 and value growth generally continuing to be constrained.

OCR: DOWN

The Reserve Bank left the OCR on hold at the record low of 1.75% in February and Reserve Bank Governor Adrian Orr says they expect it to stay on hold through 2019 and 2020.

Kelvin Davidson

Zealand because there are so many factors supporting that asset class at the moment – although investor perceptions are currently being tested.

For CoreLogic senior property economist Kelvin Davidson, the market started 2019 in the same subdued way as it ended 2018.

The Auckland data is worthy of note but, in his view, jumping to any conclusions about it having entered a new weaker phase wouldn’t be advisable.

“After all, many solid foundations remain: an ongoing shortage of property, low mortgage rates which are unlikely to rise significantly in the near term, the LVRs have been relaxed, and most people are in work.”

While there are headwinds for Auckland, and the market as a whole, the prospects for 2019 haven’t changed, Davidson says. “It’s a balanced outlook, with overall volumes set to be similar to 2018 and value growth generally continuing to be constrained.”

BNZ chief economist Tony Alexander has a slightly different take on the Auckland market. He says he can run a theory that a period of downward adjustment in residential real estate activity from high levels over 2016 may have come to an end.

“That then just feeds into my central view for the Auckland market for the next three years more or less – sort of boring. But that is good for young buyers as they can peruse the market without frenzy and without get rich quick investors in play.” ✚

IMMIGRATION: DOWN

A new migration measuring system suggests annual net migration in recent years has been lower than previously thought. The December data shows that net migration was down 25% from its earlier peaks.

BUILDING CONSENTS: UP

Building consents hit a 14 year high in December. The strong growth is being driven by increases in consent issuance in Auckland and Wellington.

MORTGAGE APPROVALS: DOWN

Reserve Bank data shows mortgage lending overall was down in December, after inching up in previous months. New lending to investors was down from previous months, as well as on December 2017.

RENTS: UP

Both the average national rent and Auckland’s average rent moved up to record highs in January, after flat-lining for months. And Wellington rents were up again to remain the 017 highest in the country.

KIWISAVER

By Mark Brooks

Has the corporate bond market partied too hard?

Mark Brooks gives us his opinion on the future of the BBB rated investment bond market.

F

inancial markets over the last few years have enjoyed the equivalent of a “long hot summer� characterised by calm weather and warm sunny days. From experience, we all know that long hot summer days can occasionally encourage excess in the form of too much sun or fun.

The same excess is also a risk for financial markets and the wider economy.

Locally the good times are obvious in the number of cranes on the skylines of our major cities and in the difficulty of finding staff. The United States is also seeing similar capacity constraints as labour market surveys show there are more job openings than there are unemployed.

There is a saying that financial bull markets do not die of old age. Instead, they end due to a combination of capacity shortages constraining growth and central banks increasing interest rates to counter the risk of rising inflation.

In the United States this process in now well under way as the Federal Reserve has raised interest rates eight times already and will probably do so again in December. Higher interest rates have tightened monetary conditions in the United States and globally. This squeezes those in a weaker position, primarily those with excessive debt loads and/or economically sensitive incomes. During the global financial crisis this was predominately households in the United States and in New Zealand, non-bank lenders such as finance companies.

This time round, a key area of stress is likely to be the corporate bond market. A decade of ultra-low interest rates forced many investors out of cash as it did not generate a return into other investment assets. Much of this money flowed into the corporate bond market.

Globally, companies were more than happy to accommodate this demand by issuing bonds at historically low interest rates. In the United States, this has seen the corporate bond market double in size over the past decade to more than $5 trillion.

Initially the bond issuance was used to replace higher cost debt with cheaper

funding but as the cycle continued, companies have increasingly used this as an opportunity to borrow aggressively to fund the purchase of their own shares.

Excessive buybacks can leave a company with more debt to repay and no new sources of revenue with which to repay it. Many of the bonds used to fund buybacks have been issued by companies at the lower end of the investment grade spectrum: BBB rated bonds rather than A rated bonds (BB, B and CCC rated bonds are not considered investment grade). BBB rated bonds now account for over 48% of the United States investment grade bond universe, up from 34% at their low 10 years ago.

The pattern in New Zealand is different as we have not seen companies increase their debt levels to the same degree. However, companies have increasingly issued bonds to replace bank debt, issued subordinated debt and removed investor friendly terms from their bond documents. This makes these bonds more exposed to any slowing in the economy. In a slowing economy the combination of declining earnings and rising debt costs will see interest coverage erode

and make the BBB investment grade bond universe look shaky.

At this point the reaction for many investors will be to sell these bonds. This can be more challenging for bonds. Unlike shares, the secondary market for bonds is limited and this is especially true in New Zealand. It is easy to buy a bond when it is first issued, but more difficult to sell the same bond before it matures. We therefore anticipate the markets may struggle to absorb this selling without a significant re-pricing. In anticipation of this, we have substantially reduced clients' exposure to lower quality investment grade bonds and have invested in downside mitigation strategies that are designed to limit the impact of a downturn in investment grade bonds.

Mark Brooks is Head of Income at New Zealand Funds Management Limited (NZ Funds). His opinions are personal, and do not necessarily reflect the position of NZ Funds.

Mark's advice is of a general nature, and he is not responsible for any loss that any reader may suffer from following it.

Leverage is concentrated in lower rated BBB corporates

Source: International Monetary Fund. Barclays Capital. Tse Capital.

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MY BUSINESS

By Miriam Bell

Sailing to success Being a successful adviser is all about building long-lasting relationships and taking special care of clients, Float Mortgages’ Naylon Cassidy believes.

WHAT PROMPTED YOU TO GO INTO THE MORTGAGE ADVICE BUSINESS?

I worked in banking for 12 years prior to becoming a financial adviser. I worked in numerous roles within BNZ and also at HSBC. The majority of my time was spent as a relationship manager in the business and commercial space.

From this, I learnt that it is actually relationships that matter the most to clients rather than who they bank with. It became obvious to me that moving into a position where I could best utilise my skills and provide clients with a much greater range of options was always going to be a winner.

So I founded Float Mortgages because I wanted to focus on building relationships and really looking after my clients.

HOW DID YOU LEARN THE BUSINESS?

I learnt the business largely through my time working with the banks. But, in saying that, beginning to understand the financial advice industry has been a massive learning curve and there is still plenty of learning to be done.

WHY ARE YOU PASSIONATE ABOUT BEING AN ADVISER?

For me, it’s all about having the ability to give our clients a greater range of options. Being able to help a diverse range of clients – right through from assisting first home buyers into their first homes to helping business owners with the ongoing growth and success of their business – it’s just a huge buzz.

I also love the way being an adviser allows me to take care of people on a personal level. And I’m proud of the way the Float team looks after people and builds strong relationships with clients, which keeps them coming back year after year.

HOW DO YOU APPROACH BUSINESS DIFFERENTLY TO OTHER ADVISERS?

I don’t think we approach business any differently to the majority of other advisers.

I would like to think the industry as a whole approaches the job with the mind-set that our clients are always put at the centre of what we do.

But we ensure we deal with our clients in a transparent manner and always put their

interests first. At the end of the day, we want to be in this game for the long term and we can only remain in it by treating our clients in such a manner that they stick with us.

I UNDERSTAND THAT YOU DO A LOT OF WORK IN THE BUSINESS/COMMERCIAL SPACE. CAN YOU TELL US A BIT ABOUT THAT?

My background (and passion) is helping small and medium size business owners from a financing perspective. Too often customers in this segment are frustrated that they have lost their banking/finance relationship due to an individual/employee having moved on or they are not able to deal with the same person each time they need to discuss banking/lending requirements. As a financial adviser and a business owner myself, I can say that we are not going anywhere.

WHAT HAVE BEEN THE HIGH AND LOW POINTS OF YOUR TIME IN THE BUSINESS?

There have been plenty of high points so far.

But being involved in the growth of a new company and employing some awesome people definitely ranks highest.

The low points would probably involve taking on too much and sometimes not being able to deliver. I think this is something that a lot of small business owners encounter in the early years.

WHAT’S THE BEST ADVICE YOU’VE RECEIVED?

The best advice I have received would be to understand what your weaknesses are and don’t be afraid of surrounding yourself with those that own those weaknesses as their strength. To that end, I need a few more employees ...

WHAT CHALLENGES – FOR YOURSELF OR FOR THE INDUSTRY – DO YOU SEE AHEAD?

I think the obvious challenges for us, as an industry, at the moment are what is happening with the Royal Banking Commission and the recommendations that have been made regarding the banking and finance industry in Australia.

Without going into detail about my thoughts on the recommendations being

FROM: Born in Palmerston North, raised in Auckland – Mangere Bridge and still there.

FAMILY: Partner Cate and two kids – Frank (3) and Eve (6 months).

OUT OF WORK INTERESTS: Anything ocean and boating related.

FAVOURITE FILM OR TV SHOW: The Blind Side FAVOURITE READING MATERIAL: Boating magazines and motorcycle parts catalogues.

FAVOURITE MUSIC: Too diverse to name anything in particular. made to the advising industry in particular, I think that advisers need to remain faithful to the fact that what we do is instrumental to the country. In my view, that’s because our work is all about helping New Zealand’s population with their financial and business success.

WHAT ARE YOUR BIGGEST LONG-TERM BUSINESS AND PERSONAL GOALS?

My long-term business goals are to build up a team of successful people who love their jobs and what they do. If we are able to enable this, I feel we will be positioned to look after our clients in the best possible manner. That is success for me.

On a personal level – and at a later stage – travelling around the South Pacific on a yacht with my family for six months at a time would be the ultimate success.

WHAT ARE YOUR TOP TIPS FOR OTHER ADVISERS?

Be transparent. And always strive to help your clients with their success because, if you do, ultimately it will arrive for you too. ✚

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SURVEY

By Daniel Dunkley

3

Top Concerns FOR ADVISERS

We examine the results of TMM’s Annual Mortgage Adviser Survey – the current challenges facing advisers and their predictions for the immediate future.

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R

ecent developments in the Australian market cast a cloud over this year’s TMM Annual Mortgage Adviser Survey, with uncertainty around banking and broking regulation adding to ongoing changes in New Zealand.

TMM has gauged the mood across the country, asking more than 240 advisers about their biggest hopes, challenges and predictions for the coming year. Three big issues stood out for advisers: regulation, turnaround times and trail commission.

While the fallout from Australia’s Royal Commission is unclear for NZ advisers, the broking community believes regulation and compliance, and keeping up to date with policy changes, will be two of the biggest challenges for the year ahead.

Advisers will have to contend with the new financial advisers’ regime, in the form of the Financial Services Legislation Amendment Bill. With the FMA and Reserve Bank taking aim at life insurance advisers, regulation has become a more concerning issue for our survey respondents.

For the third year running, advisers say their top concern is the familiar menace of turnaround times. It shows little progress has been made from the big banks using technology systems to push through home loan applications. Advisers expressed their frustration and anger at the lack of improvement.

Will the volume of loans settled this financial year (to March 31) be higher than last year?

Meanwhile, scrutiny on trail commission is also set to be a big theme for the year ahead. Advisers are unsure whether the Aussie ban will affect New Zealand banks.

Our survey reveals trail makes up a large proportion of advisers’ income. One in five said trail made up between 25 and 50% of their yearly revenue, putting them at risk if trail is scrapped or reduced.

BOOMING LENDING VOLUMES

While there are obvious concerns for the adviser industry, the property market remains solid across the country, particularly in the regions. As prices continue to creep up, except for Auckland, advisers predict loan volumes will increase this year.

About 80% of respondents to our survey said they expected loan volumes to increase this year. Confidence is high, and 29.9% of advisers expect to write 25% more than they did in 2018.

We’re getting more referrals, and gaining market share.

Survey respondent

A further 22% said they expected to settle between 15-25% more, 20% said they would settle 10-15% more, and 11% expect an increase of up to 10%.

Bullish advisers said they were confident as house prices and loan sizes rise. Many said they had built a bigger book, developed more partnerships, and expanded their business over the past year. “We’re getting more referrals, and gaining market share”, said one broker. “We’re getting out there more, and getting more referrals from existing clients”, said another respondent.

Some say the softening market in Auckland has allowed more first home buyers into the market, boosting adviser business. “The non-election year and softening house market has allowed first home buyers to re-enter the market with confidence,” said one adviser.

Some advisers said credit tightening from the major lenders had worked in their favour, with more clients seeking specialist nonbank finance. “Clients are finding it harder to do it themselves,” one adviser noted.

“Specialist lending is growing,” another respondent said.

Credit tightening was a cause of concern for others, however. A total of 12% of advisers say they expect to settle fewer loans in 2019. “Banks are unwilling to support advisers, and the Australian Royal Commission has had the desired effect on the public. The banks are feeling stronger.”

What will be the difference in the volume of loans settled this year?

an s th r n Les tsyethaa r lLaess t yea las

URE NOT S URE NOT S

N No c froforocmh han m alang ge las ste t y yea ea r r

NONO

25% more 25% more than last year than last year

0-10% more 0-10% more than last year than last year

YES YES

10-15% more 10-15% more than last year than last year

15-25% more 15-25% more than last year than last year

UNDE UNDE

021

SURVEY

Which lenders get your business?

0%

1-24%

25-49%

50-74%

75-89%

90-100%

Big banks

0.75%

4.48%

6.72%

17.91%

49.25%

20.90%

Small banks

7.21%

79.28%

12.61%

0.00%

0.90%

0.00%

Specialist lenders

4.92%

85.25%

5.74%

2.46%

0.00%

1.64%

Credit Union or Building societies

48.72%

51.28%

0.00%

0.00%

0.00%

0.00%

Private funders

52.00%

45.33%

0.00%

2.67%

0.00%

0.00%

BIG BANKS CONTINUE TO DOMINATE

As the Australian-owned big four banks face a regulatory onslaught across the Tasman, they continue to dominate the New Zealand market. About 20% of our advisers place more than 90% of their business with ANZ, ASB, BNZ, and Westpac.

Smaller lenders aren’t completely frozen out, however. About 80% of advisers said up to 24% of their business went to non-major banks, such as TSB, SBS, or the Co-op.

About 84% of advisers said they placed up to 24% of their loans with non-bank lenders.

Non-banks have grown market share over the past few years, with banks enforcing tighter credit conditions.

Aside from the Royal Commission threat, the big banks face a challenge in New Zealand in the face of the Reserve Bank’s new capital requirements. The RBNZ is set to force major lenders to hold more capital to guard against risks in the financial system. It is expected to force banks to raise interest rates and lower term deposits.

The new requirements are set to “level the playing field”, as the big Aussie banks have been able to get away with holding a smaller proportion of capital, Reserve Bank deputy governor Geoff Bascand said in February.

Rating agency S&P predicts nonbanks will be able to gain market share over the next year if the RBNZ proposals are introduced. They will go through a consultation period early this year.

WHAT KEEPS YOU AWAKE AT NIGHT? Tough turnaround times

Mounting regulation, more paperwork, a new financial advisers’ regime, and the risk of the house-price boom coming to an end.

The list of concerns for the sector is long, but a familiar, long-term issue remains the biggest headache for advisers.

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For the third consecutive year, mortgage advisers picked turnaround times as their biggest problem. Lenders have failed with initiatives to implement a technology-driven approach over the past year. Development has been slow, and mortgage advisers say they still face significant delays placing and securing loans for customers.

Nearly 20% (19.5%) of respondents said turnaround times “keep me awake”, while 46% of brokers said it was “of some concern”. Just 9% said turnaround times were not a problem for their business.

Craig Pope, of Wellington-based Pope & Co. Mortgages, said turnaround times were “definitely the biggest issue” for the sector.

He said banks were “pedantic” on details, causing delays and affecting customers.

“We sometimes have to wait 5-7 days. It makes it difficult because you don’t know when they’re coming back to you.”

Pope added: “It makes the job really hard.

People's expectations are ever-increasing, and patience isn’t. People don’t seem to understand things are taking longer these days and it is difficult to juggle clients’ expectations.”

Pope doesn’t believe poor turnaround times will improve any time soon. “There’s no sign of that happening. Banks are not good at communicating on this issue. I question if they are trying hard enough.

There’s lots of talk around e-lodgement, but I haven’t seen it, and I’m not holding my breath.”

The Mortgage Supply Company’s David Windler said New Zealand was still way behind Australia with e-lodgement, and cited frustration at the lack of progress.

“The banks have been saying they want to tackle this issue for about a decade, but it has never been implemented. It’s not like the technology isn’t there.”

Regulation

Regulation is an obvious concern for the industry, given recent developments on both sides of the Tasman. The final details of the new financial advice regime are still to be determined, with the Financial Services Legislation Amendment Bill still progressing through parliament.

We know Kiwi advisers are due for enhanced regulatory scrutiny, more paperwork, extra compliance, and in many cases, new minimum qualification requirements.

Regulation is a big concern for about half of our respondents. A total of 12% of brokers said regulation changes and compliance kept them awake at night, while 46% said the issue was of “some concern”.

Andrew Scott, Newpark Home Loans general manager, said one of the biggest issues facing advisers was the choice of

Thinking about the biggest issues facing your business, please rank them from most concerning to no concern at all Keeps me awake

It is of some concern

Mildly concerning

Not an issue

Turnaround times

19.55%

46.62%

24.06%

9.77%

Regulation changes and compliance

11.94%

47.76%

31.34%

8.96%

Keeping up with policy changes

4.48%

29.85%

33.58%

32.09%

Getting applications arpproved

5.97%

23.88%

38.81%

31.34%

Finding new clients

6.02%

16.54%

30.08%

47.37%

Securing finance for property investors

1.49%

15.67%

38.81%

44.03%

Succession planning

3.79%

13.64%

28.79%

53.79%

023

las ge ty ea

NO

0-10% more than last year

SURVEY YES

10-15% more than last year

UNDECID ED

UNSURE

YES

25% more than last year NO

10-15% more than last year

15-25% more than last year

ADVISERS UNSURE ON NEW TRADE BODY

ED

UNDECID

Industry trade body Financial Advice NZ officially kicked off last year, promising to fight the sector’s corner amid an onslaught of new regulation and public scrutiny.

The trade organisation, led by Katrina Shanks, has more than 1,670 members across the financial advice industry, representing 90% of the original founding body YES membership.

Our survey reveals the mortgage advice industry is not entirely sold on the new organisation. A total of 36% said they were not members UNSURE of Financial Advice NZ, with a further 5% undecided. Just under 60% of responders are NO members of the organisation.

NO

YES

Are you a member of Financial Advice NZ?

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15-2 than

Will the Australian government's move to ban trail commission impact lender behaviour in New Zealand?

an s th r Les t yea las

whether to become a Financial Advice Provider (FAP) or a Financial Adviser (FA) under the new financial advice regime.

“It will boil down to whether adviser businesses are prepared to cede control.

It comes with a degree of risk operating under someone else’s licence,” Scott said.

“It would also make it more difficult to sell your business, and staff would look to someone else as your boss,” Scott said.

Keeping up to date with policy changes was cited another major worry for advisers.

A total of 29% of our respondents cited it as an issue of concern.

The Mortgage Supply Company’s David Windler said the cost and resources N spent on compliance would fr o ch om an be the major challenge, rather las ge ty than the regulation itself. “If ea r it’s about doing the right thing for clients then there’s nothing 0-10% more to worry about. The main issue last year will be the time and what itthan will cost to comply. Will that allow advisers to maintain the same level of output?”

YES

2 t

r

Insurance adviser Financial planner

NO

If it’s about doing the right thing for clients then there’s nothing to worry about. The main issue will be the time and what it will cost to comply.

Insura

David Windler TRAIL TROUBLE AHEAD?

Following the damning Australian Royal Commission into financial services, the Hayne report recommended a series of radical changes to lender-adviser remuneration. In February, the Australian Mortgage government announced it wouldadviser ban trail commission from July 2020.

The Hayne report recommended a ban on other forms of upfront commission, an idea that has since been rejected by Australian politicians. The country’s Labor Party has proposed a flat commission of 1.1%, a far more palatable outcome for the sector.

The uncertainty around trail and commission is a concern for advisers, with the big four New Zealand banks all Australian-owned. A total of 44% of our respondents said they were unsure whether NZ banks will cut trail commission completely. A total of 23% think banks will remove trail, while 32% believe it is here to stay.

Nearly all of the advisers we surveyed (93%) expect the Royal Commission to

Mort and i

UNSURE

YES

NO an s th r Les t yea las

URE NOT S

NO

N fro o ch m ang las e ty ea r

NO

YES

Q13 NO

0-10% more than last year

advice they need.”

What is your main area of Windler of the Mortgage Supply Company business? added: “Banks will take the opportunity Insurance adviser to review remuneration, and will get away with whatever they can. The most at risk Financial element will be trail. We are a cost centre 10-15% more 15-25% more planner for them.” than last year than last year

TRAIL TICKS ALONG – FOR NOW

Following the reintroduction of trail commission from Westpac and BNZ in recent years, trail has become an important part of many advisers’ revenue streams.

Our statistics show many advisers are still reliant on trail. One in five respondents (20%), said trail made up between 2550% of their yearly income.

The findings underline the importance of trail at a time when Australian banks could take it off the table.

About 4% of our respondents were even more reliant on trail, saying it made up 50-75% of their yearly revenue. The advisers could be vulnerable to a major hit.

Meanwhile, 64% of respondents said trail makes up somewhere between 0-25% of their total income. Just 7% said they had no trail commission.

TIME TO BRANCH OUT?

Mortgage and insurance...

Mortgage adviser

Oth

er

ED

Do you think trail commission will be banned in New Zealand?

25% more than last year

UNDECID

have an impact on the behaviour of New Zealand-based lenders. Advisers shared their concerns. “Banks like to have kneejerk reactions,” one adviser said. “One has already informed us they will make any YES changes before legislation is made. They are all about bottom line and want to improve that any way they can.”

“The Royal Commission is very concerning,” said another adviser.

“Unfortunately, NZ lenders tend to follow behaviour in Australia, since the banks areYES Aussie-owned. It’s very troubling, and we are putting our growth plans on hold as a result.”

“The banks are money-making bullies that change the rules to suit themselves,” said UNSURE another angry adviser.

There are concerns changes to trail could prevent advisers from managing long-term relationships with clients. “It will go back to upfront commissions which NO will promote some brokers to churn – potentially a bad result for the customer,” one respondent said.

Craig Pope of Pope & Co. Mortgages said the end of trail would be a big challenge for the sector.UNSURE “I’ve got two staff dedicated to YES re-fixes and renewals, and if we’re not paid trail, it changes the dynamic. We won’t have the time and resources to help people and customers will miss out on advice.”

He said upfront commission models could make advisers more focused on new business rather than servicing existing clients. “Brokers will have to be careful their NO refinancing puts customers in a better position, and that they give customers the

UNSURE

YES

NO

YES

There’s lots of talk around e-lodgement, but I haven’t seen it, and I’m not holding my breath.

Insurance adviser

As the traditional mortgage advice model comes under pressure, should more people in the industry branch out to offer a wider range of products?

More than 74% of respondents said mortgages were their main source of Survey respondent Financial business, while 20% said they advised planner on mortgages and insurance.

It looks like more advisers are view of advice. They should be looking willing to try something new. at advice and referrals for anything to do About 34% of respondents with financial services. It’s about making said they plan to offer a sure advisers know they have clients that broader range of products trust them. They just need to maximise in the coming year. that opportunity.”

Most of the 34% said Newpark’s Andrew Scott believes they were considering diversification canMortgage prevent advisers from insurance... investment or KiwiSaver becoming a victimand when the next downturn advice, or referrals. hits. “Diversification was one way advisers Others said personal Mortgage got through the GFC. It has always been a adviser loans, car loans and target for advisers, but many do not follow Oth business loans were areas through with that.” er they wanted to look into.

He sounded a word of warning to advisers NZFSG’s head of growth branching out: “You need to keep control Bruce Patten called on of that client, either by keeping it in-house, advisers to broaden their or ensuring your partner offers that service service offering: “Client databases under your brand. That’s the only way you are rich with information, and will have end-to-end control of the customer advisers should take a more holistic journey.” ✚

025

REVERSE MORTGAGES

By Daniel Dunkley

Reversing

AHEAD

Older Kiwis are turning to reverse mortgage and equity release products.

What are the options, and who are the big players in the market?

P

icture three different mortgage clients. A sixty-something looking for extra cash to improve their retirement home. A seventyyear-old retiree seeking funds for a dream bach on the east coast. An elderly client in their eighties with expensive care costs. What do the three have in common?

A reverse mortgage could help with their financing needs.

Reverse mortgages, or equity release products as they are sometimes known, are increasingly popular across New Zealand, as customers late into their working life, or near retirement age, tap into their home loan equity. Whether it’s for simple home improvements, funding a once-in-a-lifetime OE, or helping with medical emergencies, more New Zealand borrowers have begun to view reverse mortgages as a viable funding option. It comes as our population continues to get older — between 2011 and 2021, the country’s elderly population is projected to grow by about 200,000.

How do reverse mortgages work? They allow people to convert equity in their home to cash. Customers who own their home outright, or have a small remaining mortgage, are eligible. Any remaining home loan is taken over by a reverse mortgage provider, which arranges cash payments to the borrower. Reverse mortgage providers make payments to the homeowner, either gradually or in lump sums. Borrowers are not required to pay anything back until their home is sold.

The products were originally devised in the US to help borrowers with limited income, but have become more popular across the world as people enjoy a longer retirement.

Like most financial products, there are pros and cons. Interest compounds and grows during the life of a reverse mortgage, making them riskier for borrowers who have many years to live. Rates are also higher than typical home loans.

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It’s another tool for brokers to help customers and their families.

Lisa Hatfield, National Manager, Reverse Mortgages, Heartland.

However, the products can also come with safeguards, such as negative equity guarantees, which stipulate the repayment value cannot exceed net home sale proceeds. They can also come with equity protection, whereby customers can keep a guaranteed percentage of home sale proceeds. This option limits the amount clients can borrow, but can provide peace of mind to borrowers looking to provide their family with inheritance money.

Why would a customer take out a reverse mortgage over another product? Market experts say personal loans and other facilities can be too expensive for retirees.

“Most customers are on their super, and cannot afford payments on a personal loan,” says Lisa Hatfield, National Manager for Reverse Mortgages at Heartland. “Interest rates are higher than standard mortgages but not as high as personal loans. Not having to make repayments is also beneficial for seniors.”

Heartland is one of the most prominent reverse mortgage providers in a small New Zealand market. Southland bank SBS also has a sizeable reverse mortgage book across the country. Other players in the market include non-bank lender First Mortgage Trust, while in limited circumstances, banks can offer equity release to borrowers.

Hatfield, says more people are looking for alternative equity products. The firm has a $480 million reverse mortgage book and has a team across the country dedicated to reverse mortgage products, including contacts for mortgage brokers. “When we started it was small scale for us. But it is growing with increased awareness and education. Customers tend to use us for home improvements. She adds: “We are seeing an increase in customers that have a small mortgage. When we started the product that was unheard of.”

Hatfield says LVRs are kept low, and the bank calculates customer affordability based on age, the value of their home, and the amount of equity held. She says it can help borrowers in a wide range of circumstances. “Aside from those seeking home improvements, it is used for repaying debt, upgrading or getting a new car, or for day to day expenses. Travel and medical are also popular reasons for people taking out a reverse mortgage.”

Heartland allows customers to pick a payment option. They can draw down their loan in a lump sum, take out most of their cash and leave the rest in a facility, or draw a set monthly amount. Hatfield says

customers typically have the products for between five and ten years. Heartland reverse mortgages have an equity protection option and a negative equity guarantee.

Current rates are a variable 7.82% p.a, compounded monthly. Fees deducted on drawdown include an arrangement fee of $1,275 and a valuation fee.

SBS’s most popular retirement loan, SBS Advance, is also aimed at retirees with a limited income. The product has a default interest rate of 8% according to the SBS website. Phil Jamieson general manager, development at SBS, said New Zealand’s ageing population was one factor behind the rise of reverse mortgage products.

“We’re seeing consistently growing demand,” Jamieson says. “As our population ages, the need for this product might well grow.”

Jamieson says SBS receives most demand for its reverse mortgage products in-branch from existing customers. “We’re fulfilling our members’ needs. We believe it provides a mechanism to support people’s retirement.”

The bank imposes a maximum loan ratio, depending on how old a customer is. Those aged 60 can borrow 5% of the value of their

home, 30% at age 80, to a maximum of 50%.

SBS urges those thinking about a reverse mortgage to talk the product through with independent advisers and family members before taking a decision. Jamieson says it is important for lenders and advisers to be “responsible”. “With responsible lending and any lending products, the provision of proper advice is critical.”

The bank calculates customer affordability based on age, the value of their home, and the amount of equity held.

First Mortgage Trust’s Retirement Loan, meanwhile, is limited to those aged 68-years and over, and is open to borrowers

Help your clients get the most out of retirement – with a Heartland Reverse Mortgage.

with a home worth more than $250,000.

Customers can borrow up to 25% of the total value of their home. Once loans are approved, customers can access the full amount immediately, or receive multiples of $1,000 once a month. The firm charges a variable interest rate of 8.25%, according to recent marketing materials.

While reverse mortgages may represent just a tiny fraction of an adviser’s time and business, they can provide small fee incentives. Heartland provides advisers with a flat fee of $500 for each customer referral, which is paid when the loan settles.

SBS, meanwhile, also pays advisers a fee for referring reverse mortgage products, depending on the size of the loan taken out.

Aside from the financial reward, Hatfield believes reverse mortgages present an opportunity for advisers to demonstrate their value. Hatfield says discussing reverse mortgages with clients can help borrowers understand the full range of options upon retirement. “It’s another tool for brokers to help customers and their families. It’s important for brokers to have a suite of products and be able to help them in any situation,” she adds. ✚

A Reverse Mortgage can free up money for your customer and help them live a more comfortable retirement. People have used their Reverse Mortgage for debt repayment, home renovations, medical procedures, or just to remove the everyday stress from bills and rates payments.

Want to know more?

Call your nearest relationship manager to sign up to our referrer program: Luke Meintjes - Upper North Island 027 801 2097 Jim Ward - Lower North Island, Upper South Island 027 534 7150 Ben Jamieson - South Island 027 533 0956

About us.

Heartland is a New Zealand registered bank focused on working closely with customers to make sure their financial needs are being met through our specialised financial products.

Heartland Seniors Finance is a division of Heartland Bank Limited. Heartland Bank Limited’s lending criteria, fees and charges apply.

Seniors Finance

027

SALES & MARKETING

By Paul Watkins

Money is the currency

of transaction: is the currency of interaction

Trust

Trust is important for any relationship. Paul Watkins talks us through gaining trust and turning a prospect into a client.

T

his is a quote from Rachel Botsman, author of a recently released book called "Who can you trust?". In her book she argues that trust has become the single most important factor in any business or personal relationship.

When a movie studio shows a trailer to a new movie, it's designed to impress with key scenes from the movie. Then when you go and see it, you realise that the three amazing scenes shown in the trailer were the only good bits.

We are now far more likely to go into IMDB. com and see what strangers thought of it.

You note that 8,000 people rated it a 5.5 out of 10, meaning mediocre, so you don’t go to it. We are now more influenced by strangers than institutions. We have lost faith in the big brands and their promises. Highly respected car manufacturer Volkswagen got it very wrong with the emissions software in their cars. Trust in the brand was badly hurt.

There is a joke circulating on Facebook right now, that says in 1998, the word was,

028 WWW.TMMONLINE.NZ

"Don’t get into a car with a stranger". Then in 2008, "Don’t meet people from the internet alone". Now in 2018, "Order yourself a stranger from the internet and get into their car with them alone." This refers to Uber of course. Airbnb is the same, in that we stay in stranger’s homes, often with them in the house as well.

Why do we trust these services? In Europe ride-sharing is growing fast. You want to go from one city to another, so go to an app to find someone else also going that way.

You then get into a car with the stranger for the long ride. Really? We still choose these options first in a lot of cases. Why? This change has come about through the advent of the internet and more specifically, social media.

A SAD FACT: TWO-THIRDS OF AMERICANS GET THEIR NEWS THROUGH FACEBOOK – Rachel Botsman Yes, that almost totally unmoderated and free-posting platform where people rant

and rave about their peeves and gripes, is where Americans and many others in the western world get their news. This is helping cause the traditional press to fail. We take it at face value and accept it as news. We have stopped trusting the established and professional press and television and gone for the "real news" from people out there on the ground. “Fake news” in the traditional press has struck a chord with many.

Trust is the new currency. Interaction is what you want. If you trade on price, such as “I can get you the lowest interest rate”, or “I compare all insurance companies to get you the best deal”, then you are offering a transaction-based relationship. Prospects can find those themselves on the internet.

But it’s not what most clients want. If they want a better price, its due to a deeper reason.

I recall visiting a broker to help with ideas for prospecting and he showed me how he compared every available mortgage option under a range of structures and presented all of these to his clients. He then

admitted that most said, “which one do you recommend?” so the work was wasted. It’s never about the price or features (unless it’s something they genuinely can’t afford), it’s about YOU. They want you to make the decisions for them.

A fascinating experiment was undertaken by the American Certified Financial Planner Board. They dressed up a local party DJ in a suit and called him a financial planner.

Named Azymyth Kaminski, he normally has long dreadlocks, piercings and eyeliner. He was given a haircut, dressed in a suit and was schooled-up on a few financial markets phrases to use.

He then sat in a room where he tried to sell financial planning services to potential clients. Little did they know that his real skills lay with music and he had no skills whatsoever in financial planning. All but one prospective client decided to go with him after the consultation. This is because he came across as personable, credible and trustworthy. These qualities trumped any qualifications or track record or skills in managing money. The experiment was staged to encourage clients to ask their financial advisers for their qualifications and backgrounds. But none in the experiment did. Trust was the critical factor.

So how do you engender trust? There are a few hygiene factors that should be part of your dealings with clients and then there is the way you go about prospecting. Here are some negative things that break trust with clients.

Transparency: Never hide things, always keep them informed, disclose any personal preferences for a lender and answer all questions truthfully and in full.

We are now more influenced by strangers than institutions. We have lost faith in the big brands and their promises.

The second is reliability and dependability: Never let them down and keep to your commitments.

Be personable: You are in sales, but don’t act like you are. Act like you are working in their interest and not yours. This is hard to do for some. The particular deal in front of you is not the make or break of your business, so don’t push too hard. It will break trust.

Authenticity: Do what you say you can do. Never make claims you can’t stand behind. Don’t word your website such that you sound like the world’s best, word it in genuine tones that can be taken as authentic statements of fact that you can justify. I have seen some rather overblown claims on some websites. These do not win you business.

At client meetings, don’t say things like, "piece of cake", "easy-peasy" (I know some do this), as these make the client think they are just a number to you. And don’t say "you are like a lot of other clients I have, so this

should be easy". Once again it makes the client sound like a number and a quick buck to you.

You are human – apologise when you must and listen to the client. As the saying goes, you have two ears and one mouth so listen twice as much as you talk, which sure doesn’t happen from what I hear friends say who have had dealings with some mortgage brokers.

The list above is not a beat-up, it’s designed to remind you of things that you may be doing unconsciously.

In terms of how you develop trust in your prospecting, it’s called "Jab, Jab, Jab, Right Hook" and is why Facebook works so well.

In simple terms, you run a video ad on Facebook, that links to a landing page, which in turn gives them something for free in exchange for their name and email address.

Then you set up a "funnel" of emails that progressively take them down a path to increasing trust in what you know, who you are and how you are clearly the only one that can help them.

I have written about this before in this column, full details being in my new book, "Financial Advisers – Disrupted" (available through the Goodreturns.co.nz bookstore).

The book explains how trust has changed and its exponential growth in importance to any client-adviser prospecting. The book then explains how to use Facebook for promoting yourself in a way that engenders trust and makes you the obvious choice for the prospect.

Trust me. ✚ Paul Watkins writes blog content and newsletters for financial advisers.

What used to work is always the thing that is going to put you out of business - Gary Vaynerchuk

IN THIS BOOK YOU WILL LEARN: •

A new book from Paul Watkins.

Uber disrupted the taxi industry, Airbnb disrupted the accommodation industry, and social media is disrupting how financial advisers gain clients.

• • •

How the old ways of prospecting for clients have been seriously disrupted by social media How trust is the new currency Why websites don’t generate leads The 5-steps to growing your perfect client-base using social media

WANT TO BUY? Buy from: intelligentinvestor.co.nz or direct from Paul at: paul@paulwatkins.co.nz

029

LEGAL

By Jonathan Flaws

Aussie Report Card or finger in the dyke

A positive interpretation of the Hayne's report – it's not all bad news for brokers.

I

t’s always interesting reading your children’s report card from school.

Normally its relatively brief and gives a snapshot of what the teachers and headmaster think of your child’s performance. It is something to read with interest and encourage your child to respond positively and either do better or keep up the good work.

Although the Hon Kenneth Hayne AC QC delivered a 495-page review on misconduct in the Banking, Superannuation and Financial Services Industry only 21 pages were devoted to comments and recommendations on intermediated home lending. To read the response of brokers in the Australian media you could be forgiven for thinking this would be the end of the industry – they would have to either get out or stay in and go broke.

Maybe I am blinded by the fact that Haynes is a well-respected commercial lawyer who sat on the High Court and is

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generally regarded as knowing what he is talking about; maybe it’s because I am sitting on the other side of the ditch and reading the report without being entrenched on the side of Australian brokers; maybe it’s because I suggested some years ago that to survive, brokers would have to consider themselves as professionals and receive a fee for service from clients rather than a sales commission; but I think if the report is approached like a school report card it has some positives that will make the mortgage broking industry sustainable in the long term and keep brokers profitable.

The title suggests there is a flood of misconduct and the credit code dyke, built by the federal legislators to hold back the flood, has holes looking for fingers.

At page 77 of the report, Haynes uses a similar Dutch reference to justify his suggested changes.

“Changes of the kind that I have described

above were introduced in the Netherlands in 2013. The mortgage broking industry continued without significant adverse consequences to its own operations, the market generally or individual participants.

Mortgage brokers offered different remuneration arrangements including charging an hourly rate for advice and flat fees. Furthermore, to ‘create a level playing field’ between direct and intermediated lending, lenders were required to identify their costs of providing advice and other services to borrowers who did not use a broker and expressly charge a fee to recover those costs from those borrowers.”

The Dutch have already placed a finger in the dyke.

What he is saying is that what he is recommending has been tried elsewhere and has worked. His last comment is something that brokers should take to heart because he is suggesting that direct lenders

should be required to create a level playing field so that whether a consumer takes a mortgage direct or via a broker, the same rules about charging for advice apply and the cost to the consumer is the same.

In a nutshell, what he recommends is replacing lender paid commissions, both upfront and trail, with a fee for service that is paid for by the borrower.

But he also says that the borrower should not have to find these from his or her own pocket, they should be included, transparently, in the amount borrowed and repaid over the term of the loan with the principal advanced. Yes, he does have some strong words to say about trail commissions but doesn’t suggest these be removed immediately. He also says that in setting the fees, if a broker wants to receive a trail then he can build an NPV calculation for the trail into what is paid upfront. Which in theory, I suppose a broker could do – in theory.

Haynes concludes that borrowers pay for commissions anyway because it is obvious that the lender will build these into the cost of the loan, whether by way of interest margin or credit fees. But it is only a few really savvy borrowers who realise this. He thinks this goes against the whole concept of consumer lending which is that all aspects of the lending should be transparent to the borrower.

More radically, he says that brokers should not be disadvantaged and cut out of the market by lenders relying on and pushing direct lending. Lenders should also charge fees for advice and loan assistance and include these openly in the loan amount and disclose them to the borrower. Whether a loan is originated direct or through an intermediary the cost should be the same.

In a nutshell, what he recommends is replacing lender paid commissions, both upfront and trail, with a fee for service that is paid for by the borrower.

This doesn’t seem to me like Haynes is bashing brokers, but simply saying you need to change how you do things. In fact, he outlines at the start of the section why borrowers will use a broker: “First, borrowers look to mortgage brokers for advice about how to finance what is, for many borrowers, the most valuable asset they will buy in a single transaction. And brokers not only give advice about what they think is best for the borrower, they submit the loan application on the borrower’s behalf and, to the extent the terms are negotiable, negotiate the terms of the loan for the borrower.”

He points to an ASIC report in March 2017 that says: “three main reasons consumers then gave for using a mortgage broker were to ‘Access a wider range of loans’, to ‘Get a better interest rate/deal’, and because the ‘Broker is knowledgeable/an expert’.”

Giving advice, helping submit a loan application and negotiating the terms of the loan are very valuable things and frankly,

this is the valuable service that brokers provide and for which they are entitled to be rewarded.

Where he sees confusion and conflict is in the brokers relationship with the lender.

The broker is employed by the borrower therefore the borrower is the broker’s client.

The broker owes or should owe a duty of care to act in the best interests of the client.

Interestingly, he does labour the point that in Australia, brokers are not required by law to act in the best interest of the client in the same way that financial advisers have this statutory requirement. The Corporations Act excludes advice on home lending from this requirement. He suggests this needs to change.

The lender pays the commission at present and considers the broker as part of its distribution channel. Lenders seek to foster relationships with brokers that encourage the broker to recommend the lender’s products.

But all lenders contracts with brokers and aggregators very clearly carve out responsibility and state that the broker is the agent of and acts for the borrower and not the lender. He calls the broker’s commission “conflicted remuneration”. If the ASIC report as to why consumers use brokers is correct, then it seems to me that conflicted remuneration is more likely than not to act against those reasons.

In my view, the Haynes report should be read like a school report card and not a bad one at that. Brokers on both sides of the Tasman should take it to heart, consider its recommendations and work towards doing better in the future. ✚ Jonathan Flaws is a partner at legal firm Sanderson Weir.

WE CAN WHEN OTHERS CAN’T WE WILL WHEN OTHERS WON’T FOR ALL YOUR NON BANK LENDING

JEN 021 447 926 AKL & NORTH ISLAND

MICHAEL 0274 219 263 WGTN & SOUTH ISLAND

031

INSURANCE

By Steve Wright

Conduct and advice

what’s the difference?

Good conduct is not good advice. As the ‘performance’ of advisers comes under greater prescription and scrutiny, it is important to differentiate conduct from advice.

G

ood conduct: is behaviour.

Acting fairly, honestly, without undue discrimination and prejudice and in a way which does not mislead. Good conduct is putting the client’s interests ahead of your own (and if you can’t do this refer them to another adviser), disclosing and managing conflicts of interest, being transparent about all matters (full disclosure) and sharing information.

However, while good conduct is conducive to good advice, good conduct alone cannot guarantee good advice.

Advice: while conduct is about behaviour, advice is about knowledge. Advice is the substance of the recommendation you make. Advice is not the process. Process can help though to ensure good, diligent and consistent advice, especially if your process entails the use of intelligent tools that assist with fact finding, needs analysis

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and cover needs. Advice is dependent on knowledge and the diligent application of that knowledge to formulate a suitable recommendation or course of action for the client’s consideration (giving them sufficient and accurate information to make an informed decision).

While conduct is about behaviour, advice is about knowledge. Advice is the substance of the recommendation you make.

In my opinion, unless the client is very specific about their instructions and what they want from an adviser, which almost none of them are, good advice means making a recommendation about a package of insurance that effectively and efficiently, transfers the risk the client cannot accept themselves. Incidentally, there is no such thing as "self-insurance": there is only "self-risk-taking". "Effectively and efficiently" means a package of insurance made up of a combination of products and options which releases the right amount of compensation identified for each risk event (effective) without duplication, excess or possibility of windfall gains (all of which result in inefficiency and unnecessary premium cost).

For life and health insurance, advice is made up of many component parts, for example: • Identifying the risk (the "who", the "what",

how financially dangerous and the likelihood of occurrence); • Minimising risk then transferring the rest (the "what to insure"); • Determining the types of insurance and the sums insured (the type and mix of products and product options and the sums insured); • Determining the most appropriate provider, mix of products and product options (which company or companies’ products); • Determining the premium structure (how to pay for it);

• Determining the ownership structure (who is to get the money); • Getting it all put in place safely (implementation, disclosure, application, underwriting, special terms).

Good conduct is essential to building strong and valued relationships with your client, but clients do not engage you for your good conduct. They engage you for what they cannot do themselves because they don’t have the knowledge. Most people do not understand how valuable good insurance advice is because they don’t know the intricacies of insurance and perhaps this is just as well, or I’d be writing about something else and you’d be doing something else. One of the most important functions of a good adviser is the ability to be an effective educator.

Education matters because there is much clients don’t know when it comes to life and health insurance: • They don’t know how valuable they are, what the financial consequences of their death, disability and poor health might be.

• They don’t know that insurance is a costeffective way of reducing or eliminating the financial risk.

• They don’t know what products they need in order to cover all the risks they face and they don’t know which of the very many product options to select and which to ignore.

• They don’t know the dangers of inflation; declining health but increased need; or how to structure their insurance package to defend against these.

• They don’t know how the premium structures work or which might suit them best.

• They don’t know how important product provider selection is, that one insurer’s trauma policy might pay for their cancer when another won’t or that one company’s income cover with a very inexpensive addon will literally pay hundreds of thousands more than other companies’ products if they can never work again, or, that some companies do not guarantee wording and can take away benefits, but others cannot.

• They will not research the numerous insurer’s different offerings, advantages and short-comings.

• They don’t know how to structure their

insurance so that their death benefit doesn’t get tied up in their estate for months, even years.

• They don’t know what to do at claim time.

The result of all this is that they are very unlikely to stumble on the most effective and efficient product options and even if they do, they do not have a fighter in their corner at claim time.

Designing an insurance package for a family that protects all its members against the significant financial risks caused by death, disability and poor health, as comprehensively as possible and at an acceptable long-term cost, takes a great deal of knowledge, imagination and skill (experience helps too).

Of course, there are examples of conduct that will be detrimental to the ability to provide good advice. I believe the most damaging is unrecognised and continued ignorance. Ignorance displaces understanding of the need for and value of, good advice. Ignorance often does not recognise itself and does not take the time or effort to look around, question assumptions and discover better ways of doing things. Ignorance believes all providers are "more-or-less equal" when it comes to products, or that bigger must be better. Ignorance wants simple products but then is unhappy when every event is not covered, or the price is very high. Ignorance thinks cheap is best, when in fact it could be the most expensive option. Ignorance wants invalid claims paid regardless of the reason but can’t see how prohibitively high premiums would need to be to achieve this.

Once you can get clients to appreciate how important good advice is, you should have no difficulty getting them to: • appreciate that suitable insurance might entail some complexity, but that this works to their benefit by maximising their opportunity for successful claims when they need them, at suitable cost; and • understand the value you bring to them.

You should also have no problem getting clients to understand that doing their own insurance is like defending yourself in court – generally a very bad idea. ✚ Steve Wright is the General Manager Professional Development at Partners Life.

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ife is full of surprises and special things. It may surprise many of you that TMM Publisher Philip Macalister does some crazy endurance events from time to time. It certainly surprised Astute Financial Managing Director Brad Wood that Philip was doing the Kathmandu Coast to Coast event alongside his oldest son this year. (He hasn’t been the only one!)

Brad kindly offered to sponsor Philip for the event and provided a bit of kit and branding.

Thanks Astute Financial for the support.

Here are some pics from the event. ✚

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