(Photo by Mark Tantrum/Getty Images)
(Photo by Mark Tantrum/Getty Images)

BusinessApril 28, 2018

Banking inquiry revelations are rocking Australia. What would a NZ inquiry reveal?

(Photo by Mark Tantrum/Getty Images)
(Photo by Mark Tantrum/Getty Images)

New Zealanders might complain about their banks but all signs suggest a Royal Commission into the industry here would fail to uncover serious problems, writes Massey Business School’s Dr Claire Matthews.

One banking boss collapsed under cross-examination, another resigned after revelations that clients were charged for services they did not receive. There’s no doubt Australia’s Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has had the media glued to their seats.

But given the largest banks here are owned by the ‘Big Four’ Australian banks, New Zealand is following events with particular interest. The question that many are asking is, “Should we have concerns about the same issues in New Zealand?”

First of all, it is important to note that the Royal Commission’s remit ranges beyond the banks into the wider financial services market in Australia, but some of those organisations, such as AMP, also operate in New Zealand. To date, there have been two rounds of public hearings to address consumer lending and financial advice. The next round, in May, is focused on SMEs, and further rounds will follow.

So, let’s take a look at the issues raised so far and whether they apply to the New Zealand financial services environment.

The main concerns raised during the first round of hearings on consumer lending related to loans made to people who could not afford them, and the involvement of mortgage brokers in the home loan process. In 2014, New Zealand added responsible lending principles to the Credit Contracts and Consumer Finance Act 2003. The Act says: “A lender must, in relation to an agreement with a borrower, make reasonable inquiries, before entering into the agreement, so as to be satisfied that it is likely that … the borrower will make the payments under the agreement without suffering substantial hardship” – that is, the lender must be confident the borrower can afford to repay the loan.

This should provide confidence that lenders in New Zealand are not making loans to people who cannot afford them, but Australia has similar regulatory requirements, which suggests this confidence may be misplaced. Nevertheless, while lenders may not get it right every time, there does not appear to be widespread examples of inappropriate loans being made in New Zealand.

The issue of mortgage brokers primarily relates to the way they are remunerated. In both countries, mortgage brokers generally offer their services free to their clients and are remunerated by the lenders via commission made up of an upfront payment and a trail commission paid until the loan is repaid. The Royal Commission has heard the structure of commission payments in Australia incentivises mortgage brokers to maximise the size and term of the loan to maximise their own remuneration. The New Zealand situation is different, as the balance between upfront and trail commissions here are weighted towards upfront commissions. This view is supported by occasional complaints of churn by mortgage brokers seeking a new upfront commission by assisting a client to refinance with another lender.

While the hearings on financial advice are still underway, two key issues have been getting publicity: the quality of advice provided, and the charging of fees to dead clients.

The quality of advice issue appears focused on superannuation savings, and this is an area where there is a key difference between the two financial systems. New Zealand does not have compulsory retirement savings – the closest we have is KiwiSaver, which is fully implemented via managed investments with KiwiSaver providers. Much of Australia’s compulsory retirement savings are managed investments too, but Australians also have the option of self-managed superannuation funds (SMSFs). These have regulatory advantages over ordinary managed funds.

With SMSFs, the few members are usually also the trustees and have responsibility for complying with super and tax laws. There are considerable opportunities for professional advisers to assist with SMSF administration and management, for a fee. The issues raised at the Royal Commission appear to primarily relate to SMSFs, and are not confined to banks.  We don’t have anything equivalent to SMSFs in New Zealand, so similar issues are unlikely here.

It is worth noting, however, that concerns have been raised in New Zealand about the independence of bank staff providing advice, and the impact this may have on the quality of the advice provided. In part, this concern is about banks advising customers to purchase the bank’s own products, but this does not automatically mean that the advice is not appropriate as has been suggested.

Charging fees to deceased customers is also not necessarily wrong. It very much depends on the type of fees being charged and the service being provided. The Australian Securities and Investment Commission notes ongoing financial advice fees may cover regular reviews with the financial adviser, regular investment portfolio reports, access to the adviser, newsletters and seminar invitations. The estate of a deceased customer may still require some of these services, particularly the reports. A fee would therefore still be appropriate, but you would expect it to be a reduced fee due to the more limited service provided.

In New Zealand, public concern is focused primarily on the banks, so it is useful to examine statistics from the Banking Ombudsman. In the five years to June 2017, the Banking Ombudsman Scheme completed 1264 disputes, averaging 252 per year. Of those, 9.5% were resolved solely in favour of the customer, with a further 22.2% resolved with a result for both parties. By contrast, more than half (52.5%) were resolved in favour of the bank, including those that were withdrawn or abandoned. This does not support widespread issues in the banking sector.

While New Zealanders regularly complain about their banks, and have an innate distrust of their motives, if a Royal Commission was held here I doubt there would be widespread problems uncovered. Sure, there would be cases of inappropriate behaviour by financial services firms and their staff, but I believe such cases would be isolated examples and not indicative of endemic issues within the sector.

The regulatory environment in New Zealand is similar to that in Australia, but sufficiently different to suggest the regulated behaviour would be different. Possibly more important is the culture of financial services firms in the two countries is quite different. But if a ‘lite’ version of the Australian Royal Commission was helpful in addressing New Zealanders’ distrust of the sector, then it’s an exercise that’s probably worth considering.

Dr Claire Matthews is Director, Academic Programmes for the Massey Business School. Her research interests centre around consumer’s financial behaviour, decisions and attitudes, with a particular interest in retirement planning and KiwiSaver.


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Photo: RNZ
Photo: RNZ

BusinessApril 28, 2018

The taxpayer has spent $1.48 billion to bail out AMI. Does anyone care?

Photo: RNZ
Photo: RNZ

Amid all the controversy over EQC re-repairs cost overruns, little attention has been paid to the huge amounts we’re paying to bail out Southern Response, the agency formed to take over private insurer AMI’s earthquake claims. 

This column first appeared on interest.co.nz

There has been much focus in the media recently on the extent of shoddy workmanship carried out by Earthquake Commission (EQC) contractors in the wake of the 2010/11 Canterbury earthquakes.

Stories have resurfaced about people’s properties plummeting in value, and in some cases becoming unliveable, due to inadequate repairs done by EQC via Fletcher Building.

While EQC has provided a vital lifeline to the vast majority of Cantabs, it has left some financially crippled. This is a travesty.

It is on the face of it reassuring to see the new Minister Responsible for EQC, Megan Woods, conduct an inquiry into the organisation.

It is also good to see more eyes and ears exposed to stories from hard-hit Cantabs, as coverage of what they’re facing has again extended beyond The Press and into prime time radio and TV, spearheaded by the likes of journalists John Campbell and Patrick Gower.

Yet as the media has shone a light on the $270 million EQC has spent on re-repairs, it is worth noting the Crown has to date allocated $1.48 billion towards bailing out the failed private insurer AMI in the wake of the Canterbury quakes.

I don’t want to diminish the strife represented by that $270 million, but the amount set aside for Southern Response – the agency formed to take over AMI’s quake claims – is five times larger.

And while part of the debacle around the EQC re-repairs issue is that former Minister Responsible for EQC Gerry Brownlee in June 2016 estimated the overall cost would be only $60-$70 million, the cost blowout around Southern Response is even greater.

In March 2012, Treasury’s “best estimate of the likely cost of the AMI support package over its life” was only $98 million. So the $1.48 billion bill taxpayers now face is 15 times larger than what was initially expected.

The most recent extension of funding for Southern Response was a hefty $230 million.

Buried in the 2017 Budget, news of this “blowout” hardly made national headlines. The greater the grillings Brownlee and EQC CEO Sid Miller receive in the media for EQC’s shortcoming, the more evident the lack of such scrutiny of AMI’s directors becomes.

The costs EQC faces stem from failings of a scheme we are lucky to have in New Zealand, which broadly succeeded in getting Canterbury back on its feet.

Yet the overblown costs taxpayers face for Southern Response is the result of a private insurer concentrating too much of its risk in Christchurch and not buying enough reinsurance.

Which is worse?

How unfair is it that AMI’s former board (consisting of John Balmforth, Kerry Nolan, Richard Flower, Brian Gargiulo, Trevor Kerr, Philip Shewell, and David Wolfenden) hasn’t received renewed scrutiny each time the Crown has dug further into its pockets to cover the cost of the bail out?

Sure, the EQC re-repairs situation is easier for people to relate to; it has affected a large number of Canterbury households and is far from being resolved. No wonder it gets more mainstream media attention than the AMI bailout, which to most people is just a set of numbers on a balance sheet.

Yet the severity of the bailout is easy to grasp when you consider the resulting opportunity cost. How far could $1.48 billion go towards improving roads in Christchurch, doing maintenance on Middlemore Hospital, or building more houses?

One could also call into question the government’s due diligence before agreeing to the bail out, given its cost has by far exceeded expectations. There’s a point here, but it’s worth remembering that all private insurers ended up forking out more for the quakes than initially expected.

The government was also arguably left without much choice but to sign what we know was somewhat of a blank cheque.

Southern Response doesn’t expect its coffers will need further topping up at this stage. But as much as I will be looking at how much funding is allocated towards EQC to tidy up its mess in this year’s Budget, I will also be checking whether anything significant is allocated towards Southern Response.

I will also be thinking about the former AMI directors who are continuing on with their lives as the taxpayer wears the losses for their failings.


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