Commonwealth Bank receives an amended statement of claim from AUSTRAC

Commonwealth Bank (CBA) says it has today been served with an amended statement of claim from AUSTRAC, alleging further contraventions of Australia’s anti-money laundering and counter-terrorism financing legislation. The new allegations, among other things, increase the total number of alleged contraventions from approximately 53,700 to approximately 53,800.

In our ASX Announcement of 13 December 2017 we noted that AUSTRAC had indicated that it proposed to file an amended claim and we are updating the market as this has now occurred.

CBA will review the amended statement of claim and update the market as appropriate. We will file an amended defence in due course.

CBA re-states its position that we take our anti-money laundering and counter-terrorism financing (AML/CTF) obligations extremely seriously, and deeply regret any failure on our part to comply with these obligations.

CBA commenced a Program of Action in 2015 to significantly upgrade and expand its operations to ensure compliance with the AML/CTF Act. During 2017 we have stepped up the rigour and intensity of the program and extended it across all aspects of financial crime obligations and all business units to further strengthen regulatory compliance.

Through its Program of Action, CBA has made significant progress in strengthening its policies, systems and processes relating to its obligations under the AML/CTF Act, and recognises that having increased the scope of work and resources being deployed we may come across additional matters. As CBA continues to strengthen our financial crimes compliance we will continue to work closely with regulators across those jurisdictions in which it operates to fight financial crime.

Suncorp opens the doors of its Sydney Discovery Store

Suncorp has opened their Discovery Store in Sydney’s CBD. It is designed as a flexible, customer centric space, including third party brands and will be open 7 days a weeks. It will be interesting to see how this move fairs against the strong drift to digital based banking which we are observing, but some might draw parallels with the tech-sector retail flagships; we will see.

You can read more about customer channel preference in our recently published The Quiet Revolution Report, available for free, on request.

Customers will be treated to a unique retail experience, a first of its kind for financial services in Australia, with Suncorp opening the doors to its new Discovery Store in Sydney’s Pitt Street Mall today.

The Suncorp Discovery Store is designed to be a destination for customers, where they can access end-to-end solutions tailored to their life events. It draws on all of Suncorp’s brands as well as our innovative third-party providers. Discovery Store delivers an immersive retail journey, where visitors can attend events, interactive workshops and explore solutions tailored to their life goals.

Suncorp CEO Customer Marketplace Pip Marlow said it will be a new experience, which is designed to make financial solutions simpler and more accessible.

“We’re shifting the focus from products and services, to having  conversations that are more about our customers’ aspirations, whether it’s home ownership, saving for a holiday or buying a car, so we can create value for them,” Ms Marlow said.

The store lay-out has been designed with a range of flexible spaces and interactive digital tools, built around a central amphitheatre.

Each month the entire space will be transformed to deliver a brand-new customer experience, with innovative product showcases, guest speakers and workshops focused on improving financial wellbeing.

“We want visitors to really take advantage of the space, drop in, have a coffee and wander around to see what’s on offer. Pitt Street Mall is one of Australia’s busiest retail precincts. It’s not just a place to shop, but also where people socialise and immerse themselves in new brands and experiences,” Ms Marlow said.

The Discovery Store will be open 7 days, including late trading. The upper level of the store is dedicated to customer conversations, learning and interactive workshops, while downstairs provides transactional banking services and access to other financial services specialists.

Key features:

  • First of its kind financial services offering to open in Pitt Street Mall.
  • Access to the breadth of Suncorp’s brands, products and services, and third-party partner solutions.
  • Suncorp’s Australian brands: Suncorp (Insurance and Banking), AAMI, GIO, Bingle, Apia, Shannons, Terri Sheer, CIL, Vero, Asteron Life and Resilium.
  • Convenient trading hours: open 7 days and open for late trading. Spans 446 square metres.
  • A community hub with free wi-fi and coffee.

CBA to introduce major accreditation changes next year

From The Adviser.

Commonwealth Bank has announced that, from next year, it will no longer accept accreditations from new mortgage brokers with less than two years of experience or from those that only hold a Cert IV in Finance & Mortgage Broking.

Speaking to The Adviser on Thursday (14 December), CBA’s general manager for third party banking, Sam Boer, and executive general manager home buying, Dan Huggins, explained that the bank would be bringing new benchmarks for mortgage brokers “designed to lift standards and ensure the bank is working with high-quality brokers who are meeting customers’ home lending needs”.
As part of the reforms, from “the first quarter of 2018”, new mortgage brokers will be required to meet new minimum education standards to be able to write Commonwealth Bank loans and demonstrate a commitment to professional development and on-the-job experience.

For CBA accreditation, all new brokers will soon be required to meet the following standards:

– Hold at least a Diploma of Finance and Mortgage Broking Management

– Have at least two years’ experience writing regulated residential loans

– Be a current member of either the Mortgage & Finance Association of Australia (MFAA) or the Finance Brokers Association of Australia (FBAA)

– Be a Direct Credit Representative or employee of an approved Aggregator/Head Group or Australian Credit License (ACL) holder

Cert IV has ‘served its purpose’

Speaking of the changes, Mr Boer told The Adviser: “I actually sat down and reviewed a Cert IV for a friend of mine and looked at the process, and I think that while the Cert IV has served its purpose, with the new standards and expectations that are on us (which have been highlighted through the [ASIC and Sedgwick] reviews and through the Combined Industry Forum reform package), it’s time that we need to look at and set new benchmarks.

“So, that is what we feel is appropriate for the brokers that we want to partner with, to ensure that we are delivering those great customer outcomes.”

Mr Huggins added: “We want to ensure that customers feel confident that mortgage brokers have achieved that minimum standard of education and they can be confident in the advice or the guidance that they are seeing — because home loans are complex products and we want to make sure that customers get good outcomes.”

The executive general manager for home buying continued: “Brokers have done a fantastic job of supporting the industry and supporting great customer outcomes and we want to make sure that that continues for new entrants to the market.”

Two-year requirement

When asked why the decision has been made to only accredit new brokers with more than two years of residential loan writing experience, Mr Huggins said that the decision came down to the quality of loans written.

He told The Adviser: “The data that we have seen on the back book shows that there is a clear correlation that those that are more experienced (and those that are writing more loans) provide better customer outcomes, be they either the ongoing performance of the loan, the ongoing performance of the customer, and adherence to responsible lending as well.”

Mr Boer highlighted that there is a “huge amount of turnover” with new brokers, which he said was a “clear indication that these people need support”.

The general manager for third party banking continued: “They need more training, they need more investment to ensure that they are successful and, of course, with the increased complexity now and expectations on meeting responsible lending, we need to make sure that our brokers are meeting those standards and doing it right.

“So, it is very difficult for somebody without any financial experience, we believe, to be able to meet those standards. And therefore, we need to support, embed and ensure that they have that minimum level of capability.”

When asked whether new brokers coming from financial backgrounds (such as ex-bankers) would also be subject to the two-year requirement, Mr Boer said: “This is really about experience in sitting in front of customers and actually discussing mortgage products. But it’s not the only requirement that we have focused on. There is the education standard as well, which is also a very important part of the requirement.”

Aussie brokers to be held to same standards

Mr Boer emphasised that the new accreditation process holds “the same rules for everyone”, and that CBA-owned brokerage Aussie would also be subject to the same accreditation changes.

He told The Adviser: “It’s the same rules for everyone. We are investing with all our strategic business partners to ensure they meet the new standards.”

“We believe that [the changes] are in the best interest of consumers and the industry alike.”

Accreditation changes form aim to support Combined Industry Forum reform package

The accreditation changes for new brokers come off the back of the Combined Industry Forum’s reform package, which was released this week (and to which Commonwealth Bank was a contributor).

According to Mr Huggins, the new changes form part of CBA’s new mortgage broking model and “long-term commitment” to the industry.

“As a leading home lender we recognise mortgage brokers as a key channel for customers who are looking to purchase a home, and we have been working with the industry forum to find the right balance to ensure the best customer outcomes,” Mr Huggins said.

“Our new standards follow extensive consultation with the brokers, and are another example of our commitment to delivering the recommendations of the Sedgwick Report and ASIC review well before the 2020 deadline.”

Mr Boer added: “We’re committed to the process around the industry reform package – it is significant amount of change with quite a bit of challenge and a lot of investment required by industry. At CBA, we are making a huge investment to support the industry and ensure we are delivering on those standards.”

All new accreditations on hold

CBA said it would work closely with brokers who meet these requirements during the accreditation process, including conducting interviews and providing support with professional development plans.

The bank expects to launch the new process in the first quarter of 2018, with all new accreditations on hold until then to ensure the new process is implemented effectively.

In addition to the updated accreditation standards, CBA is also reviewing non-monetary benefits provided to brokers to ensure they support good customer outcomes; improving the value proposition for accredited brokers; and rolling out the industry’s proposed changes to commissions and KPIs. These changes will be in line with the principles announced in the CIF package, and further details will be released in the new year.

Mortgage Brokers To Be Assessed On “Good Customer Outcomes”

An excellent piece from Sam Richardson at MPA.

For the first time in mortgage broking history, a ‘good customer outcome’ has been defined by the industry.

The Combined Industry Forum created the definition as part of wider governance reforms, in response to ASIC’s Review of Mortgage Broker Remuneration.

The CIF defines a good customer outcome as when “the customer has obtained a loan which is appropriate (in terms of size and structure), is affordable, applied for in a compliant manner and meets the customer’s set of objectives at the time of seeking the loan.”

Additionally, lenders will report back to aggregators on ‘key risk indicators’ of individual brokers. These include the percentage of the portfolio in interest only, 60+ day arrears, switching in the first 12 months of settlements, an elevated level of customer complaints or poor post-settlement survey results.

MFAA CEO Mike Felton, who took part in the CIF, told MPA that the definition “it does hold the industry to a higher standard in terms of saying appropriate versus ‘not unsuitable’, but in reality there has been so much change in responsible lending I don’t think it’s going to make that much difference to their current behaviours.

“The regulator has done a lot of research in this area, we are just articulating it…the first time it’s been articulated.”

Not legally binding…yet

According to Felton, the good customer outcome definition will not be applied retrospectively to loans and is not currently legally binding, but will be subjected to an industry code which gives teeth to the reforms.

This has come as a disappointment to consumer advocates, such as CHOICE, which wanted brokers to be legally required to act in the best interests of consumers, in common with financial planners.

The intention of the Combined Industry Forum, however, is for the definition to form the basis for a new system of governance, and become part of licensing conditions. This process of governance will not be in place until 2020.

The first step is for every individual broker to be issued with a unique identifier number, that stays with them throughout their career. MFAA boss Felton told MPA that the being able to track individual brokers would help make governance ‘data-driven’.

Insights from tracking could “provide direction to your monitoring; file monitoring, surveys, mystery shopping. That in turn drives remedial training, education and outcomes, and then reports back to continually improve.”

Felton describes the governance framework as “the centrepiece, the absolute glue, in the reform package.”

Disclosure to customers

Not only will the industry collect far more information about itself, it will also make that information public.

By the end of 2018, brokers will be required to publish to customers the numbers of lenders used in the previous financial year, in addition to the top six years and the proportion of business going to them.

Aggregators will need to provide to ASIC on the spread of lenders being used by brokers, such as brokers using less than 3 lenders or more than eight.

The Combined Industry Forum also calls for lenders to provide ASIC information on the “weighted average pricing of home loans in the previous financial year across their different distribution channels using various standard scenarios.”

UK Banks Not Doing Enough To Combat Online Fraud

The UK House of Commons Committee of Public Accounts has published an important report on The growing threat of online fraud (Sixth Report of Session 2017–19).The key observation is that Banks  do not accept enough responsibility for preventing and reducing online fraud and there is no data available to assess how well individual banks are performing. Unless all banks start working together, including making better use of technology, there will be little progress on tackling card fraud and returning money to customers.

  • One key issue is that unlike credit cards, where transactions are automatically refunded in case of dispute, payments made by customers via online banking on their instruction (“authorised push payments”), to a fraudulent destination is not.  It has been estimated that between 40% and 70% of people who are victims of scams do not get any money back. Banks are reported to be holding at least £130 million of funds that cannot accurately be traced back and returned to fraud victims, an amount that UK Finance said was probably a conservative estimate.
  • As the proportion of payments made by digital means continues to rise, stronger safeguards, and clearer account abilities should be placed on the banks.  This is not a topic the banks want to discuss.  Indeed, in evidence, individual banks know how they compare with others, but told the committee that banks did not publish individual numbers because then the fraudsters would target the ‘weakest’ of the banks. Of course, it might be in the banks’ own interest not to be transparent and publish individual data, as it could deter customers.
  • They found card not present fraud was significant, and needed to be reduced.
  • Finally, there was a need for better consumer awareness.

We suspect the situation in Australia is somewhat similar.

In summary, Online fraud is now the most prevalent crime in England and Wales, impacting victims not only financially but also causing untold distress to those affected. The cost of the crime is estimated at £10 billion, with around 2 million cyber-related fraud incidents last year, however the true extent of the problem remains unknown. Only around 20% of fraud is actually reported to police, with the emotional impact of the crime leaving many victims reluctant to come forward. The crime is indiscriminate, is growing rapidly and shows no signs of slowing down. Urgent action from government is needed, yet the Home Office’s response has been too slow and the banks are unwilling to share information about the extent of fraud with customers. The balance needs to be tipped in favour of the customer.

Online fraud is now too vast a problem for the Home Office to solve on its own, and it must work with a long list of other organisations including banks and retailers, however it remains the only body that can provide strategic national leadership. Setting up the Joint Fraud Task in 2016 was a positive step, but there is much still to do. The Department and its partners on the Joint Fraud Taskforce need to set clear objectives for what they plan to do, and by when, and need to be more transparent about their activities including putting information on the Home Office’s website.

The response from local police to fraud is inconsistent across England and Wales. The police must prioritise online fraud alongside efforts to tackle other sorts of crime. But it is vital that local forces get all the support they need to do this, including on identifying, developing and sharing good practice.

Banks are not doing enough to tackle online fraud and their response has not been proportionate to the scale of the problem. Banks need to take more responsibility and work together to tackle this problem head on. Banks now need to work on information sharing so that customers are offered more protection from scams. Campaigns to educate people and keep them safe online have so far been ineffective, supported by insufficient funds and resources. The Department must also ensure that banks are committed to developing more effective ways of tackling card not present fraud and that they are held to account for this and for returning money to customers who have been the victims of scams.

Commonwealth Bank files response to AUSTRAC claims

Commonwealth Bank (CBA) today filed a response to the civil proceedings commenced by AUSTRAC on 3 August 2017.

CBA contests a number of allegations but admit others, including the allegations relating to the late submission of 53,506 threshold transaction reports (TTRs), which were all caused by the same single systems-related error.

The Defence focuses on key factual and legal matters in the claim. CBA confirms that in our Defence we:

  • agree that we were late in filing 53,506 TTRs, which all resulted from the same systems-related error, representing 2.3% of TTRs reported by CBA to AUSTRAC between 2012 and 2015;
  • agree that we did not adequately adhere to risk assessment requirements for Intelligent Deposit Machines (IDMs) – but do not accept that this amounted to eight separate contraventions – and agree we did not adhere to all our transaction monitoring requirements in relation to certain affected accounts;
  • admit 91 (in whole or in part) but deny a further 83 of the allegations concerning suspicious matter reports (SMRs);
  • admit 52 (in whole or in part) but deny a further 19 allegations concerning ongoing customer due diligence requirements.

Further detail can be found in CBA’s Concise Statement in Response.

We continue to fully cooperate with AUSTRAC in relation to our obligations under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (AML/CTF Act) and respect its role as a regulator.  The nature of the regime involves continuous liaison and collaboration with the regulator as risks are identified.  As such we are in an ongoing process of sharing information with the regulator.

AUSTRAC has indicated that it proposes to file an amended statement of claim containing additional alleged contraventions.  If an amended claim is served on us, we expect the court would set a timetable for CBA to file an amended defence. We will provide market updates as appropriate.

We take our anti-money laundering and counter-terrorism financing (AML/CTF) obligations extremely seriously. We deeply regret any failure to comply with these obligations. CBA is accountable for those deficiencies.

We understand that as a bank we play a key role in law enforcement. AUSTRAC’s former CEO has publicly acknowledged our contribution in this regard. We have invested heavily in seeking to fulfil the crucial role we play. CBA has spent more than $400 million on AML/CTF compliance over the past eight years. We will continue to invest heavily in our systems relating to financial crimes thereby supporting law enforcement in detecting and disrupting financial crime.

During the period of the claim, CBA submitted more than 36,000 SMRs, including 140 in relation to the syndicates and individuals referred to in AUSTRAC’s claim.

In the same period we submitted more than 17 million reports in aggregate, including SMRs, TTRs and in respect of international funds transfer instructions. CBA will submit over 4 million reports to AUSTRAC in this year alone.

CBA also responds to large numbers of law enforcement requests for assistance each year, including approximately 20,000 requests this year. Some of the information provided directly resulted in disrupting money laundering and terrorism financing activity and prosecuting individuals.

Any penalty imposed by the Court as a result of the mistakes we have made will be determined in accordance with established penalty principles. For example, the Court may consider whether any contraventions arise out of the same course of conduct and will assess the appropriate penalty for that conduct accordingly, as it recently did in the Tabcorp decision.

CBA’s submissions at trial will also highlight steps that we have taken since 2015 as part of our Program of Action to strengthen and improve our financial crimes compliance.

 

Program of Action

CBA has made significant progress in strengthening our policies, processes and systems relating to its obligations under the AML/CTF Act through our Program of Action.  While this is a continuing process of improvement, progress achieved since the issues concerning TTRs associated with IDMs were first identified and rectified in late 2015, includes:

  • Boosting AML/CTF capability and reporting by hiring additional financial crime operations, compliance and risk professionals. As at 30 June 2017, before the claim was filed, CBA employed over 260 professionals dedicated to financial crimes operations, compliance and risk.
  • Strengthening our Know Your Customer processes with the establishment in 2016 of a specialist hub providing consistent and high-quality on-boarding of customers, at a cost of more than $85 million.
  • Launching an upgraded financial crime technology platform used to monitor accounts and transactions for suspicious activity.
  • Adding new controls such as using enhanced digital electronic customer verification processes to supplement face-to-face identification to reduce the risk of document fraud.

The Program of Action has also addressed issues that AUSTRAC alleges were ongoing contraventions in its claim. For example, CBA recently introduced daily limits for IDMs deposits for CBA cards associated with a personal account. We understand CBA is the first major Australian bank to implement a control of this type.

CBA is committed to continuing to strengthen our financial crimes compliance and to working closely with regulators across all jurisdictions in which we operate to fight financial crime.

CHOICE ‘Welcomes’ Broker Commission Changes But…

Consumer group CHOICE says the proposed CIF mortgage broker reforms are positive, but do not address their key concerns of ensuring brokers act in the best interests of their customers (currently they are not obliged too), and potential conflicts about poorly disclosed trail commissions.

This from Mortgage Professional Australia.

Consumer advocate CHOICE and other consumer groups have welcomed changes to broker commissions proposed by the Combined Industry Forum.

“This announcement from the mortgage brokers, aggregators and lenders is a positive first step towards ensuring that mortgage brokers act in customer interests,” said CHOICE’s director of campaigns and communications, Erin Turner.

CHOICE, which was harshly critical of brokers in their submission to ASIC earlier this year, said CIF’s proposals “shows that all parties in the home lending industry have taken ASIC’s report into mortgage broker remuneration seriously.”

It adds that the changes could increase transparency by informing consumers about the number of lenders brokers used.

CHOICE became part of the CIF after complaining to the Treasury in July that “reform must be focused on what’s best for consumers, not what works for brokers, aggregators or lenders.”

Broker heads hopeful

Both following ASIC’s review, an ongoing Productivity Commission review and in an earlier ‘shadow-shopping’ report, CHOICE have been critical of brokers in the past two years.

However, broking industry associations are hopeful that CHOICE’s involvement in and endorsement of the Combined Industry Forum’s recommendations could lead to a more cooperative relationship.

“I would hope so,” FBAA executive director Peter White told MPA. “it has turned out to be a good result, they have been involved. It’s no ‘roll over, we’ll do this because I say so’; there’s been debate and meaningful discussion about things.”

MFAA CEO Mike Felton said he looked forward to working with consumer advocates going forward: “we the MFAA and the Combined Industry Forum recognise that the consumer is a key stakeholder and that it was critical that the consumer be represented throughout this process. I think that gives credibility to the reforms that have produced.”

Still concerned about trail commissions

Consumer advocates did not entirely welcome the recommendations of the Combined Industry Forum, however.

CHOICE noted that “we are disappointed that brokers aren’t required to act in the best interests of consumers and that there are few changes to overall commission structures. In particular, there is little clarity about the consumer benefit of trail commissions.”

“Consumer groups will continue to discuss these reforms with industry and look forward to their implementation.”

CHOICE has complained about trail commissions to an ongoing review by the Productivity Commission into competition in the financial system. The review, which reports in July 2018, could lead to changes by the Government, depending on its recommendations.

Brokers to have new code and unique identifier numbers

From The Adviser.

By the end of 2020, brokers will be given a “unique identifier number” and be subjected to a new code of conduct, following changes that are to be instituted by the Combined Industry Forum.

The newly released reform package from the Combined Industry Forum has outlined changes to remuneration structures (including changes to upfront and trail commissions) and recommended that the sector would be subject to new code and identifier numbers “to allow for more complete reference checking and identification of poor performers”.

New industry code

While the industry code is yet to be developed, the CIF outlined that it would begin working on a new code by “mid 2018”.

The report read: “The proposed reforms will be industry-led, and individual industry participants have committed to taking immediate steps (having regard to competition law requirements) to implement the reform package. However, to ensure the ongoing viability of the reforms and equal consumer protections, the reforms will need to be captured in an industry code that enables enforcement, applies across the industry and includes new participants over time.

“The CIF is considering a number of approaches, including working with ASIC on establishing an ASIC-approved code for all participants in the mortgage industry, and/or repurposing current industry codes to include these reforms, and to house the appropriate monitoring and compliance functions.”

The code will reportedly take into account the outcomes of the ASIC Enforcement Review’s assessment of ASIC’s code approval powers, and any new obligation for industry participants to subscribe to an approved industry code.

The report continued: “A ‘mortgage broking industry code’ would apply to mortgage brokers, lenders, aggregators and, where appropriate, referral businesses and would be subject[ed] to all applicable regulatory and competition law approvals.”

Speaking to The Adviser about the code, Combined Industry Forum chairman Anthony Waldron said: “It’s really important that we work with ASIC and the government on this to get it right. So that’s whether we repurpose one of the existing codes (for example, there are codes with the industry bodies) or whether it is another ASIC-led code.

“We are still working through exactly how that works, but we think codifying these changes is important to ensure that the industry absolutely implements them. This is a coded, directional piece to say, [and] we want to make sure that the industry takes it seriously and that the government and all players can be ensuring that they are comfortable the industry is moving forward. The code will provide that ongoing monitoring to ensure that it will happen in the future.”

The CEO of the Mortgage & Finance Association of Australia (MFAA), Mike Felton, said: “This ‘mortgage broking industry code’ would apply to all players across the value chain. It may be a new standalone code or an addition to existing codes, and adherence to it could even become a future licence condition of relevant ACL holders.

“We are completely confident in brokers’ ability to create consistently good consumer outcomes, but we’re equally confident in the industry’s ability to do more to show transparency and ensure the trust we’ve earned from consumers is maintained in the long term. I am looking forward to continuing our work with the CIF and ASIC and implementing these reforms.”

Likewise, Peter White, the executive director of the Finance Brokers Association of Australia (FBAA), said: “Both associations already have a code of conduct, so this is a serious work in progress that is more of a headline statement with a desire as much as anything.

“It could be that we take the best of breed of everything and turn it into one. That is a decision that would have to be made by the MFAA and FBAA boards to see if we are prepared to replace the code or have it as an additional code on top of the ones we already have.”

He added: “Bankers already have their code of conduct, and I can’t see anyone replacing that — so they would have that and this newly proposed code as well. So, it could be that we have two as well, but these discussions are yet to be had on what the code would look like.”

Unique identifier numbers

Another aspect of the CIF’s “landmark reform package” that aims to “improve consumer outcomes and confidence in mortgage broking” is the introduction of a new unique identifier number for brokers.

First suggested by the MFAA to help provide ASIC with “the complete and accurate broker picture it desires”, the association suggested the industry bring in a “single broker identifier number” that would be mandatory for use on each home loan sold.

“Such a unique identifier of the broker that has intermediated any loan must be provided to the lender with the application and stored by the lender throughout the life of the loan and for a period of seven years after the last interaction with a customer in line with other NCCP Act requirements,” the MFAA stated in its response to Treasury.

The MFAA noted earlier this year that while there were existing identifiers in use, such as credit licence numbers or credit representative numbers, it is not “clear whether these numbers cover all brokers and staff”.

As such, the association proposed that it could therefore require a “different number” to be used by those who operate directly under their employer’s ACL number.

“This solution may initially be a lender-specific unique identifier, but in time, ideally each broker should receive a single identifier across all lenders,” the submission read.

This suggestion has been taken up by the CIF, whose report stated: “In response to Sedgwick’s recommendation that ‘the industry needs to improve the governance and oversight of brokers, lenders and aggregators, the CIF has proposed that it bring in new unique identifier numbers for brokers.

“The industry intends to work with the government to implement a unique identifier for each broker and introducer/referrer to lender, noting that there is investigation required around how this can be implemented.

The unique identifier should be held on a register of brokers maintained as a reference checking protocol for credit professionals moving between aggregators or moving from working with a lender to an aggregator.

The CIF elaborated: “Ideally, this identifier would be maintained throughout a person’s career across financial services industries, such as financial planning, mortgage broking, referring/introducing and as a lender-employed banker, and be managed centrally by ASIC. Once fully implemented, this identifier would be used by aggregators, lenders, associations and ASIC, and be held against all loans lodged at the lender level to assist with data analytics.”

Mr Waldron told The Adviser: “There is a lot of work still do with this one and we will need to work with ASIC closely on that. This [number] is designed to be portable, so you take it with you no matter where you are working. We think that will improve a whole range of things, but ensuring that the governance that we talk about can be implemented — and that if people change aggregator, for example — that reporting can continue.

“Down the track, we think that efficiencies can be created out of it for the industry as well. But we still have a bit of fair work to do to implement this one and we will need ASIC to implement this.”

The FBAA’s Peter White said that he could “see the value in a unique number that carries across everything and that helps manage the industry”, particularly as bankers who write home loans aren’t captured by ASIC’s current register of those operating with ACLs and ACRs.

He said: “So, I see this new number — if it’s set out in a desirable way — not changing anything else but enhancing what is already in place.”

The CIF outlined that it expects the unique identifier numbers to be implemented by the “end of 2020”.

Third Report On Banks Recommends Focus on IO Loan Pricing

Last Thursday, the House of Representatives Standing Committee on Economics released their third report on their Review of the Four Major Banks.  They highlight issues relating to IO Mortgage Pricing, Tap and Go Debt Payments, Comprehensive Credit and AUSTRAC Thresholds.

Looking back at the issues The Committee raised since inception in 2016, they have had a significant impact on the banks and again shows how the landscape is changing, outside of a Banking Royal Commission.  It also suggests The Commission will not necessarily deflect scrutiny!

Here are the key points from their report:

Since the House of Representatives Standing Committee on Economics commenced its inquiry into Australia’s four major banks in October 2016, the Government has announced significant reforms to the banking and financial sector to implement the committee’s recommendations.

The Treasurer requested that the House of Representatives Standing Committee on Economics undertake – as a permanent part of the
committee’s business – an inquiry into:

  • the performance and strength of Australia’s banking and financial system;
  • how broader economic, financial, and regulatory developments are affecting that system; and
  • how the major banks balance the needs of borrowers, savers, shareholders, and the wider community.

In November 2016, the committee published its first report, which followed the first round of hearings a year ago in October 2016. The report contained 10 recommendations to reform the banking sector, including calling for new legislation and other regulatory changes to improve the operation of the banking sector for Australian consumers. In a second report in April 2017, following hearings in March, the committee reaffirmed the 10 recommendations of its first report and made an additional recommendation in relation to non-monetary default clauses.

In the 2017 Budget, the Treasurer announced the Government would be broadly adopting nine of the committee’s 10 recommendations for banking sector reform. These recommendations include putting in place a one-stop shop for consumer complaints, the Australian Financial Complaints Authority (AFCA); a regulated Banking Executive Accountability Regime (BEAR); and, new powers and resources for the Australian Competition and Consumer Commission (ACCC) to investigate competition issues in the setting of interest rates. The government also adopted the committee’s recommendations in relation to establishing an open data regime and changing the regulatory requirement for bank start-ups in order to
encourage more competition in the sector.

The Committee’s Third Report makes the following recommendations to Government:

  • The committee is concerned by the increase in transaction costs merchants
    now face as a result of the shift to tap-and-go payments. These costs are
    ultimately borne by customers. If the banks do not act by 1 April 2018, regulatory action should be taken to ensure that merchants have the choice of how to process “tap and go” payments on dual network cards. At present merchants are forced to process these transactions through schemes such as Visa and MasterCard rather than eftpos. It is estimated that this forced processing costs merchants hundreds of millions of dollars in additional annual fees at present;
  • The Australian Competition and Consumer Commission, as a part of its inquiry into residential mortgage products, should assess the repricing of interest‐only mortgages that occurred in June 2017;
  • Despite many commitments by banks in the past to implement CCR, little
    progress has been made. The Government should introduce legislation to mandate the banks’ participation in Comprehensive Credit Reporting as soon as possible; and
  • The Attorney‐General should review the major banks’ threshold transaction reporting obligations in light of the issues identified in the Australian Transaction Reports and Analysis Centre’s (AUSTRAC) case against the Commonwealth Bank of Australia.

Interest Only Mortgage Loans

Specifically on the IO loan situation, while the banks’ media releases at the time indicated that the rate increases were primarily, or exclusively, due to APRA’s regulatory requirements, the banks stated under scrutiny that other factors contributed to the decision. In particular,banks acknowledged that the increased interest rates would improve their profitability. A key reason for such an improvement is that the major banks increased rates on both new and existing interest-only loans in June 2017. This is despite APRA’s interest-only measure only targeting new lending. As of 6 October 2017, analysts at CLSA estimated that the banks’ net interest margins increased by up to 12 bps following the rate increases announced in June and March.

The improvement in net interest margins is forecast to be so beneficial for Westpac that several analysts upgraded their outlook following the price announcements in June 2017.

The ACCC is currently conducting an inquiry into residential mortgage products. This inquiry was established to monitor price decisions following the introduction of the Major Bank Levy. As a part of this inquiry, the ACCC can compel the banks affected by the Major Bank Levy to explain any changes to interest rates in relation to residential mortgage products. The inquiry relates to prices charged until 30 June 2018.

The committee recommends that the ACCC analyse the banks’ internal documents to assess whether or not they are consistent with their statements in their June 2017 media releases and subsequent public commentary. In particular, the ACCC should analyse the banks’ decisions to increase interest rates on existing borrowers despite APRA’s measure only targeting new borrowers. Further, the ACCC should consider whether the banks’ public statements adequately distinguish between new and existing borrowers. The ACCC should consider whether the media statements suggest rates on existing interest-only mortgages rose as a direct consequence of APRA’s regulatory requirement. It will be important that the ACCC conducts granular analysis of the financial modelling of the banks. The ACCC will need to understand the true financial impact on the banks of APRA’s regulatory changes, and assess that impact against the public statements of the banks.

Will The Royal Commission Restore Trust, Certainty and Confidence in our Banking System?

That was the hope expressed during Westpac’s AGM held last Friday. It was interesting to hear from both Chairman and CEO on the upcoming Royal Commission.

Westpac chairman Lindsay Maxsted said

it is our hope that, ultimately, the newly announced royal commission will play a role in restoring trust, respect and confidence in Australia’s already strong financial system.

But, given the multiple inquiries which have run over recent months,  Westpac consistently argued that further inquiries into the sector, including a royal commission, were unwarranted.

He did concede that there had been some instances where the banking sector had failed to meet customer expectations and banks had underestimated the subsequent backlash from customers, regulators and the government.

CEO Brian Hartzer said

We are embracing the royal commission as a way to finally draw a line in the sand on calls for inquiries.

and asserted that the banks have “been a political football for too long”.

That’s why we have now accepted the need for a royal commission to create certainty and confidence in our banking system.

So, it is worth noting that the scope is still being wrangled, and the process will take at least a year. It is also has a broad set of terms, spanning not just the banks. Yes, the  announcement may ease the political debate, but that is not the end of the matter.

If past inquiries are any measure, there will be steady coverage as it progresses, and depending on the findings, it may, or may not rebuild confidence.

It seems to me that there can be no guarantees – and we still await the outcomes of the Productivity Commission on vertical integration, and ACCC on mortgage pricing.

So we think the outlook for the banks remains, at least, cloudy!