Wave of banking fear after landmark report

What are the threats to New Zealand bank customers from the final report of the Australian Royal Commission on Banking?

The leading emotion among under-fire New Zealand bankers, insurers and advisers following the release of the Australian Royal Commission on Banking is fear.

A wave of change is expected to sweep across the Tasman as a result of the royal commission’s 76 recommendations for reinventing the Australian banking and insurance industry as one from which criminality and cynical exploitation of customers is banished forever.

But the impact on New Zealand, where no system abuse of customers has been identified, could be magnified by our Government’s fast-track plans to overhaul banking and insurance, and the Reserve Bank’s costly proposals to strengthen banks’ balance sheets.

Loan rationing, higher mortgage rates, lower interest on term deposits, and commissionbased advisers being driven from the market are all being openly voiced.

Mortgage fears

KPMG banking expert John Kensington says heightened caution in head offices in Sydney could well lead to tightening of lending in New Zealand, making it harder for some people to get mortgages, or business loans.

‘‘You might see a little bit less lending – what’s referred to as credit rationing,’’ Kensington says.

But that wouldn’t happen in isolation. The Reserve Bank plans to make banks strengthen their balance sheets by pumping in fresh capital equivalent to 70 per cent of their next five years’ profits.

The effect of less lending, and having to raise capital, could be banks seeking to increase the amount they earn to pay for it.

That could lead to banks reducing the interest they paid on deposits, Kensington says, and increase the interest on loans by homeowners, business owners and farmers.

It’s even possible this could be felt at the national level, as businesses and homeowners have less money to spend.

‘‘You may then see a general slowing down of the New Zealand economy,’’ Kensington told RNZ.

ACT party leader David Seymour agrees: ‘‘As the New Zealand Initiative’s Roger Partridge has pointed out, Swiss investment bank and financial service company UBS has estimated the changes will raise mortgage rates by a 0.9 to 1.1 percentage points."

‘‘The country is filled with anecdotes that the economy is running out of puff. Putting up mortgage rates by a full point is one way to tip a fragile economy into recession.’’

Intense lobbying

Not everyone believes banks will tighten lending.

Sam Stubbs, founder of KiwiSaver provider Simplicity, says banks in Australia and New Zealand will be hiring lobbyists to push the recession argument to politicians in a bid to water down law changes.

‘‘If you are borrowing at 3 per cent and lending at 5 per cent, you would be crazy not to continue to do as much of it as you can,’’ Stubbs says.

Further, he predicts Australian banks will seek to earn more money from their New Zealand subsidiaries to pay for any reductions in their income from their Australian operations, as well as helping to pay any fines they end up facing.

‘‘They have got to earn their way out of this,’’ Stubbs says.

Decline of Aussie banks Banking commentator Michael Reddell, a former Reserve Bank head of capital markets, says the UBS prediction for mortgage rate increases is too high.

The margin that banks charge on their mortgages over the official cash rate (OCR) will rise, but really big lifts in mortgage rates will lead to both the Reserve Bank dropping the OCR, and a dramatic rise in mortgage lending that is not done through bank balance sheets.

‘‘You would expect to see significant upward pressure on mortgage rates,’’ Reddell says. ‘‘But you would also see new entrants into the market.’’

Non-banks lenders, which are not covered by the Reserve Bank’s capital requirements, could enter the market, and, Reddell says banks will change the way they operate, potentially ‘‘securitising’’ loans, effectively selling them to get them off their balance sheets.

This will all result in a reshaping of the mortgage industry in New Zealand, he believes.

Seymour says Kiwis might not like the reshaping, which could result in the rise of the Chinese-owned banks.

‘‘Another scenario is that the Aussie owners of the big four banks say ‘yeah, nah’ to putting in twice as much capital for the same return and decide to sell,’’ he says.

‘‘Who is out there in the world market that’s prepared to give cheap capital to advance global influence? Someone who sees New Zealand’s population and economy as akin to a small town? If people get het up about

End of commissions

High commissions on life insurance, and bank staff paid incentives to flog products like insurance, loans and KiwiSaver, look under threat both in Australia and in New Zealand following conduct reports on banks and life insurers by the Financial Markets Authority and Reserve Bank.

Advisers who earn their crust from commissions selling mortgages, insurance and investments are nervous their business model is about to be ripped from under them.

Former National MP Katrina Shanks, now chief executive of Financial Advice New Zealand, which represents financial advisers, says a way forward has to be found that does not destroy the financial advice industry.

‘‘The last thing anyone wants – including the regulator – is the dismantling of the insurance advice community,’’ she says.

That’s not quite true. Stubbs supports the royal commission’s recommendation to phase out commissions for things like mortgages, life insurance and superannuation policies.

‘‘Similar commissions are paid here by the same companies. This report rings the death knell for commissions, and it can’t come too soon,’’ he says.

The future is for advice to be delivered online, and for much of it to be delivered by roboadvisers, he says.

Shanks urged the Government to be cautious, and carefully work out what sustainable change looked like.

But time is not something the advice industry has on its side.

The Government has promised fast-track laws will be introduced to Parliament later this year to put a duty on banks and insurers to prioritise the interests of customers.

Commerce Minister Kris Faafoi has made no secret of his concerns around high up-front commissions in the life insurance industry, as well as socalled ‘‘soft commissions’’ where an adviser might be rewarded with a trip overseas for selling a large amount of their insurance.

Proving decency Kensington predicts pressure on banks in New Zealand to prove they are safeguarding the interests of customers.

The social contract between banks and society is changing, on both sides of the Tasman.

‘‘It’s acceptable you make a

level of profit . . . but it’s also not acceptable to act in ways that are harmful to some members of the community, particularly if you are benefiting from some extra level of knowledge of skill that you have over people,’’ he says.

In Australian bank head offices, he expects systems to be created to prove to regulators that they are behaving well, and for those systems to be used by their New Zealand banks too, though it will not be easy. ‘‘Profit is relatively easy to measure . . . culture and behaviours are a lot harder to measure.’’

Kensington says the FMA and Reserve Bank want banks to stop telling them they have behaved differently from their Australian parents, and prove it.