APRA happy to have oligopoly / no more competition

Apra saying there is enough competition in the mortgage market and any more could be dangerous. Does anyone else think swannie and his mates are all hat and no cattle with their banking reform proposals? It's like they are striving to make the banks more dominant while jaw boning the public into thinking they are promoting competition. Maybe they are worried about something?

Aussie John also said tonight that he had not even been contacted about how to boost competition. Do you reckon they contacted the head of CBA et al? Off course they did the dice are loaded IMO, there is a hidden agenda or the banking lobby have the ministers ear.
 
pfff - more competition could be dangerous! So no competition is the only safe way to run the banking system?! if that's the case just nationalise the lot of them and be done with it
 
All just perspective ;)

Look at fuel, supermarkets and most other mainstream commodities.

Generally 2 players control ~ 80 % of the market with a dozen also rans making up the balance.

So..........to have 4 sharing 80 % of the pie is somewhat "not normal" and is clearly sufficient competition.

A clear example of contraction of available funds is the recent merger ( takeover?) of St George by WBC

APRA had no issue because, on the average ( for 80 % of borrowers) , the products and services available from ST George were available by x lenders, so competition wasnt an issue. On that assessment Id have to agree, but do we need to look after all, not just the average ?

Well, some time down the track, they now operate under one banking licence and where there were 2 lmi providers with distinct separate policies and aggregates there is now ONE, which is also shared with RAMS. Again for 80 % of borrowers this isnt an issue, but for 1 in 5 it might be..

ta
rolf
 
Aussie John also said tonight that he had not even been contacted about how to boost competition. Do you reckon they contacted the head of CBA et al? Off course they did the dice are loaded IMO, there is a hidden agenda or the banking lobby have the ministers ear.

I think Aussie John's ego was burst when they did not consult him. They really should consult industry bodies and not individual companies in my opinion.
 
What are people's thoughts about the point made that if the industry is too competitive it becomes less stable? The US was used as an example.

Does make some sense: More competition --> Profit margins are squeezed --> Banks take more risks to deliver shareholder profits --> Banking system loses some stability.
 
I agree with that idea / sentiment bene313 but the profit and market share stats don't lie. Majors are dominating and gouging IMO. I am not advocating a return to loose no doc style lending but it's too tight at the moment.
 
I think Aussie John's ego was burst when they did not consult him. They really should consult industry bodies and not individual companies in my opinion.

Which industry bodies apra, aust bankers assoc? They all have vested interests as does aussie John granted, although the later did bring the biggest shakeup to the mortgage market ever and that was the point of the exercise was it not, to find competition solutions?
 
What are people's thoughts about the point made that if the industry is too competitive it becomes less stable? The US was used as an example.

Does make some sense: More competition --> Profit margins are squeezed --> Banks take more risks to deliver shareholder profits --> Banking system loses some stability.

The concept relates to what has been described as "hyper competition" as was seen in the US and also to some extent Australia before the GFC.

More specifically:- as more lenders enterred the market many non banks focused on areas where the banks would not approve loans. Examples include high LVRs (in some cases over 100%), low doc and no doc loans, loans to overseas residents and loans to people with bad credit.

In response and to protect market share the banks follow and also start to offer high LVRs, ignoring defaults and judgements, lending without financials etc etc. All this in conjunction with lowering margins to win deals.

The result of "Hyper competition" is a riskier industry, less profit from a return on investment position, over lending to the property sector and therefore inflated prices. In the case of America it bought the entire country to it's knees.

In short competition is good however not without some strict lending restrictions for the non banks (the NCCP will go part way towards this).

Keep in mind if total property lending takes off by billions - it all goes in to real estate and pushes prices up. For too long this has been happening faster than wage growth and in many ways is destroying the Australian dream for future generations. Eventually money that comes in from other countries will need to go the other way - sometimes we need to discourage lending - not encourage a perception that unlimited credit is good.

In short :- compeition and risk need to be addressed together. If we introduce more competition we need to also introduce some stricter legislation than the NCCP.
 
In short :- compeition and risk need to be addressed together. If we introduce more competition we need to also introduce some stricter legislation than the NCCP.

Hi Vic

well rounded post.

On the above, what type of stricter legislation will help here ?

Some legal interps of the NCCP are.........

1. You cant lend to a single female of child bearing age unless she has 5 % plus buffer and/ or parental or spousal support.

2. Lo doc lending without external evidence of income is not possible

3. Borrowers over ~ 45 on an average income can not not be provided a PPOR housing loan for a median city property becaue they cant fully pay it off before notional retirement age

The legal firms have come back with a bunch of other permutations of what the NCCP means for the secured lending industry, and while some may look silly, full compliance of the NCCP seems near impossible as it stands.

Other ideas such as making defs "illegal" look like a good idea, but in reality may favour large multi product financials more than wee mortgage only lenders.

ta
rolf
 
Hi Vic

well rounded post.

On the above, what type of stricter legislation will help here ?

Some legal interps of the NCCP are.........

1. You cant lend to a single female of child bearing age unless she has 5 % plus buffer and/ or parental or spousal support.

2. Lo doc lending without external evidence of income is not possible

3. Borrowers over ~ 45 on an average income can not not be provided a PPOR housing loan for a median city property becaue they cant fully pay it off before notional retirement age

The legal firms have come back with a bunch of other permutations of what the NCCP means for the secured lending industry, and while some may look silly, full compliance of the NCCP seems near impossible as it stands.

Other ideas such as making defs "illegal" look like a good idea, but in reality may favour large multi product financials more than wee mortgage only lenders.

ta
rolf

Nice to see I am not the only nerd talking NCCP at 130am.

Re 1,2 and 3 I think a few people are looking too far in to the legislation.

1 - Single female. Under NCCP you need to have the conversation and most importantly document your conversation.

If someone says they are going to have children the within 12 months - you should be asking how they intend to survive financially and take that in to consideration when you present your solution. If they say they are not planning to have kids in the 'short term' make a file note and record that you have had the discussion.

2 Lending without financials. The NCCP says you must ensure a client can service a loan. It does not state how you must demonstrate servicing. For example: some lenders will still lend on a declaration, some will ask for BAS etc. The major banks generally look only at turnover when they collect BAS. In some cases a declaration can be 90% of turnover which in many industries is impossible (COGS might be 30% but you can still declare 90%).

There are also some private lenders promoting loans in company names as it avoids NCCP. Considering it only costs $400 to start a company there are loopholes and they will be exploited.

3 Borrowers over age 45. Some lenders want the debt amortised to within 30% of original loan. Some just need verification the client has sufficient super to be able to continue to pay or clear balance. Some lenders will also assume a pen pusher e.g. accountant can have a retirement age of 85. Once again you need to have the discussion and keep notes - just like a financial planner.

You asked about stricter legislation and what might help. A couple of ideas are:

  • MAX90% LVR - enforced by APRA / ASIC
  • First Home Buyers to 95%
  • Reserve Bank Variable Range lenders must be within (allows independent movement however blocks high risk/high return lending and also low margin lending which is too risky for lenders)
  • Ban of property investment groups selling /referring finance (conflict of interest)
  • Ban on referral commissions (banks and brokers paying real estate agents etc)
  • Low Doc loan declarations to be provided to ATO to ensure customers declare only realistic declarations

I also think the industry needs to work on a NIL upfront and Higher trail basis (charge say $500 processing fee). This would mean brokers are paid to keep their clients and service them rather than collecting a big lick of the ice cream each time their customers move lenders.

In case the broker commission part sounds unfair - keep in mid someone writing 2M per month at 0.25% trail would be on 60k after year one. 120k year two and so on. Many give their upfront to real estate agents / investors clubs to give them deals so if no referral fees were allowed it would not hurt.

Trail is a payment for servicing clients. Not an entitlement for placing the deal.

A broker on 20k trail per month does not have the same incentive to write a dodgy deal as a poor broker does when they need to large up front to pay their own bills and their referrers.
 
Hi Vic

I will reply in detail later on the NCCP issue. One too many solcitors have driven a semi through the wording already : (

Quick one............500 bucks ..................that worked for me when I was a sole operator.

Almost all brokers that I know that run a business, with premises staff, etc, the average COST per loan is rarely below 1000 and often closer to 1500.

We dont pay much at all for marketing except with existing clients and flatly refuse to pay for a referral fee. We are fortunate in this regard. Many spend more than half of their revenue in getting clients in the door.

We can cope with an all trail model.( at 23 pts or so) .......but I dont believe most new entrants and most smaller guys and girls could.

The bigger issue there is, the aggs would die a painful death.

ta
rolf
 
  • MAX90% LVR - enforced by APRA / ASIC
  • First Home Buyers to 95%
  • Reserve Bank Variable Range lenders must be within (allows independent movement however blocks high risk/high return lending and also low margin lending which is too risky for lenders)
  • Ban of property investment groups selling /referring finance (conflict of interest)
  • Ban on referral commissions (banks and brokers paying real estate agents etc)
  • Low Doc loan declarations to be provided to ATO to ensure customers declare only realistic declarations

If they (the gov) really wanted to bullet proof the banking system then I think they should have increased the capitalisation requirements of our banks. Clearly they cannot do it in one hit but it could be used to force them over a period of a few years to retain profits allowing them to increase their loan / deposit books without government guarantees in the long term, or covered bonds.

Really something should have been sought in return for giving them a guarantee and the guarantee only for a set period of time. In stead they said our banks are different so we will just leave them with the old capital ratios but not so different that they do not need a guarantee to attract funds.

If they were really different then why were funds becoming more difficult and expensive to get to the point that now in effect the government are guaranteeing all funding including offshore by allowing banks to issue covered bonds covered by loan assets before deposits. They might as well have just been done with it and said we will guarantee all bank funding sources.

If it was all about competition then why have the government given the most generous (based on qty of funds) concessions to the banks! I imagine in the coming years the banks will be issuing truckloads of these bonds with non banks without large loan asset buffers / deposit liabilities not being able to take advantage of such bonds to the same extent.

I think they are trying to make funds for residential mortgages cheaper sure but it has absolutely nothing to do with competition within the Australian banking industry, more to do with helping our banks compete for international funds.

Like last time it is likely to end up being a bigger help to banks then non banks anyway with the RMBS being small fry help to non banks compared to the greater assistance covered bond issues are going to be for the big 4.
 
Vic I don't mind the idea of the industry moving to a more trail orientated model but it's the lenders themselves who decreased trail more than upfronts a couple of years ago and it was your mob who first brought in 0 trail in the first year together with Upfront clawbacks out to 2 years and to boot def's for the clients. So I don't think it's the way they want to go but it does have merit.

Like Rolf said as well outsiders always look at broker revenue and assume our businesses have no costs. I wish. While I am a one man band at the moment And my costs are low my previous business had $200k in annual fixed costs (one of the reasons I wanted out as exposed to the whim of the banks in terms of changing the playing field).


The other issue the privacy brick wall most lenders put up in regards to client information, I would love to be able to see my clients loan accounts live.
 
You all have some good points.

In my opinion. Moving the industry to a trail only commission would have the following effects almost instantly;

• no more deferred establishment fees (lenders won't be starting with the original loss)
• no more claw back required
• big incentive for brokers to service their clients and focus on customer service. Keeping clients long term would be where you make money
• new brokers would need capital to enter the industry (say 100k to last until they build a loan book)- alternatively go and work for someone established
• it would eliminate ( or at least help to prevent) kick back to real estate agents, property spruikers and anyone else trying to profit from referring clients for finance.
• would make broker businesses focused on client retention, quality of business and supporting the client rather than simply setting deals
• turn the focus to managing clients rather than selling finance - a far better proposition for the customer.


Note: the last thing I would want is a broker with 6 months experience who has done a mortgage course and started a business. If brokers are looking after the most important transaction in someones life it is fair to assume they have some financial backing and won't leave the industry due to lack of funds the following month. I would support a minimum capital ratio for brokers e.g. 100k cash in bank to get a license.

If you wrote 2-3 m per month at .25% it won't take long to cross 200k p/a trail. I you have staff you should be aiming 5-10m per month therefore 3-4 years over 500k in trail.

It would clean up the industry and sort out the crap from the good brokers pretty fast.
 
If you wrote 2-3 m per month at .25% it won't take long to cross 200k p/a trail. I you have staff you should be aiming 5-10m per month therefore 3-4 years over 500k in trail.

It would clean up the industry and sort out the crap from the good brokers
pretty fast.

Writing, settling and retaining are different things these days. On averages to settle 2 mill ( with min clawback) , a broker would need to write and have approved 50 % more, so 3 mill. Average App to settled ratios with the likes of CBA 3rd party are 65 % :( .

I have no issue with an equitable trail only model...........but I cant see it working to replace us old folk in the industry............and I see that as an issue.


sure would sort the wheat though : )

Id guess from our group aggs numbers ( which have approx 35 % of total broker biz lst time I looked) 90 % of brokers do less than those volumes..............the majority MUCH less.

Its the 90 % that everyone like aggs make their living from. Its not from the 2 to 5 mill plus folk.......so there is a conflict issue too perhaps.

Those doing 100 mill plus a year in settlements are in the top 2 % of their game...........and arent very common.

ta
rolf
 
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