As Christmas creeps closer and the year comes to a close, it’s common practice to reflect on the twelve months just passed. In the world of finance, this has been a big year.
Cash rate cuts, a noticeable reduction in consumer spending and rumours of Quantitative Easing (QE) have placed the banking industry in the spotlight, and highlighted the need for financial literacy.
Following the Haynes Royal Commission, regulation has tightened in some areas, whilst in other areas, economic conditions have made it easier for consumers to access finance, with record low home loan rates and the announcement of the First Home Loan Deposit Scheme.
With open banking legislation to begin in February 2020, now seems a good time to review some of the major news stories that put finance front and centre this year. Here's the finance news that really mattered in 2019.
ASIC increased litigation after the Royal Commission
On 1 February 2019, the final report documenting the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was submitted to the Governor-General. Tabled in parliament on the 4 February 2019, the report called for tougher governance on banking misconduct, finding a lack of litigation from banking regulators Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA).
This has resulted in a number of legal battles between ASIC and the banking industry this year to ensure that financial services entities that broke the law were held to account, as the final report documented this was not previously the case. Litigations this year have included a lawsuit that saw an NAB branch manager sentenced to twelve months in jail, and an investigation into a money laundering scandal concerning Westpac CEO Brian Hartzer, which led to his exit from the bank in November, set off by a lawsuit from AUSTRAC, a financial intelligence agency.
Three RBA cuts took the cash rate to 0.75%
In the middle of this year, consumer spending was as low as the 1991 recession. This, amongst other factors, contributed to the RBA cut the cash rate an historical low of 0.75%.
Three 25 basis point cuts sent the home loan market into a frenzy, as the banks tried to keep up with media and consumer pressure to pass on these cuts in full.
The cuts are made to encourage lenders to reduce their current interest rates, so as to boost consumer spending and increase the overall inflation rate. Whilst these cuts did increase the inflation rate from 1.3 in July to 1.7 in December, and dropped home loan rates as low as 2.68%, the full effect is still yet to be seen.
The new Banking Code of Practice was launched
On 1 July 2019, the new Banking Code of practice commenced, managed by the Australian Banking association. This code, approved by ASIC, was created to keep banks accountable, ensuring that they commit to ethical, fair and responsible lending practices.
The document, which you can access here, not only sets the expectations for banks, but also acts provides safeguards and protections, outlining a set of enforceable rights for financial consumers.
Some of the expectations include all banks offering low-fee or no-fee accounts to low income customers, no more unsolicited offers to increase credit card limits and reminders when card introductory offers end.
Rumours of quantitative easing and negative interest rates
In August, after two cash rate cuts, the RBA’s Governor Philip Lowe spoke in parliament about unconventional monetary policy, specifically negative interest rates, and did not rule out Quantitative Easing (QE).
This caused media speculation about the potential of applying quantitative easing to boost the economy if negative interest rates were not in Australia’s best interest. Known as ‘money printing’, QE is a process where the RBA would use their cash reserves to purchase existing government bonds, to pump money directly into the financial system.
On the other hand, negative interest rates are where interest rates drop below 0 per cent, creating a bizarre financial scenario where consumers pay banks to hold their money, whilst ‘earning money’ for taking out a loan.
As of December, we are yet to see either of these unconventional methods employed by the RBA. However, if consumer spending refuses to lift this could be a potential reality in 2020.
The First Home Loan Deposit Scheme (FHLDS) was announced
Widely anticipated since its announcement by the Coalition before the Federal Election earlier this year, the FHLDS aims to give First Home Buyers (FHBs) a potentially better opportunity to get their foot on the property ladder.
Starting January 2020, 27 approved lenders will essentially act as ‘guarantor’ on FHB home loans, including National Australia Bank and Commonwealth Bank.
For FHBs who were previously locked out of the housing market by high deposit amounts and costly LMI fees, the scheme offers 10,000 FHBs each year an opportunity to secure the home of their dreams with as little as a 5 per cent deposit.
There are some restrictions of course, including limits on income and property thresholds. However, this is the first scheme of this kind to help FHBs in a time when a 20 per cent deposit can be hundreds of thousands of dollars.
