Category: Banking Culture

Council of Financial Regulators – Latest

The Council of Financial Regulators (the Council) met on Friday, 29 November. The main topics discussed included the following:

  • Financing conditions and the housing market. Council members discussed trends in credit and recent developments in the housing market. Growth in housing credit remains subdued overall, with credit to investors particularly weak. Owner-occupier loan commitments and housing turnover in Sydney and Melbourne have picked up, suggesting that a strengthening in credit growth is likely. Mortgage lending standards have been broadly unchanged recently. Overall, near-term risks related to the housing market have lessened as housing market conditions nationally have improved. Members discussed the potential for the current weakness in apartment construction to place upward pressure on prices in some cities over time unless construction picks up. They also discussed the tight credit conditions for small businesses and the reduced risk appetite by many lenders for lending to small business.
  • Responsible lending. Members discussed ASIC’s plans to release updated guidance on responsible lending provisions in the coming weeks. The guidance will maintain the current principles-based approach that recognises lenders’ flexibility to determine what is reasonable in individual circumstances. It will also assist lenders to better understand their obligations and reduce the risk of non-compliance. The guidance will also address the confusion around the requirements that apply to small business. It will confirm that responsible lending requirements do not apply to loans made predominantly for business purposes, regardless of the type of security offered for the loan. Council members stressed that the flow of credit is fundamentally important to the functioning of the Australian economy and discussed the concern that lenders’ risk appetite for some types of lending may have swung too far towards caution.
  • Cyber risk initiatives. The Council met with representatives of the Department of Home Affairs and the Australian Cyber Security Centre (ACSC) to review the current cyber security environment. They also discussed key initiatives to improve cyber resilience, including the development of the Government’s 2020 Cyber Security Strategy, and application to the financial sector. Council agencies, the Department of Home Affairs and the ACSC will continue to cooperate to improve the preparedness of the financial sector.
  • Resolution planning. APRA provided an update on its work to enhance plans for the resolution of individual financial institutions that become distressed. These plans aim to protect the interests of depositors and maintain functions that are critical to the economy or the financial system during times of stress. The Council discussed the work being undertaken by APRA to remove potential operational barriers to resolving a financial institution. They also considered possible operational arrangements that could provide liquidity assistance to authorised deposit-taking institutions (ADI) that do not have self-securitised loans available to access liquidity in the event of severe liquidity stress.
  • Non-ADI lending. The Council undertook its annual review of non-bank financial intermediation. Overall, financial stability risks arising from non-ADIs appear limited given the sector’s small size and its minimal links with the banking system. While growth in non-ADI credit for housing has continued to exceed that for ADIs, it remains a small share of total housing lending. The Council welcomed the improvement in data coverage of non-ADI lending following the recent enhancement of APRA’s data collection powers.
  • Policy and other developments. Members discussed a number of developments, including the ACCC’s residential mortgage product price inquiry, AUSTRAC’s court action against Westpac, changes to APRA’s structure and trans-Tasman developments.

The Australian Treasurer and representatives of the ACSC, AUSTRAC and the Department of Home Affairs attended for selected sessions.

Council of Financial Regulators

The Council of Financial Regulators (the Council) is the coordinating body for Australia’s main financial regulatory agencies. There are four members: the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC), the Australian Treasury and the Reserve Bank of Australia (RBA). The Reserve Bank Governor chairs the Council and the RBA provides secretariat support. It is a non-statutory body, without regulatory or policy decision-making powers. Those powers reside with its members. The Council’s objectives are to promote stability of the Australian financial system and support effective and efficient regulation by Australia’s financial regulatory agencies. In doing so, the Council recognises the benefits of a competitive, efficient and fair financial system. The Council operates as a forum for cooperation and coordination among member agencies. It meets each quarter, or more often if required.

ASIC and APRA issue updated MoU

The Australian Securities and Investments Commission (ASIC) and Australian Prudential Regulation Authority (APRA) have committed to strengthen engagement, deepen cooperation and improve information sharing.

The agencies today published an updated Memorandum of Understanding (MoU).

The updated MoU follows on from the recommendations of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry[1]. APRA and ASIC are also working closely with Government on the legislative changes required to implement these recommendations.

ASIC Chair James Shipton said the updated MoU builds on the open and collaborative relationship across all levels of the agencies.

‘ASIC and APRA will continue to proactively engage and respond to issues efficiently to deliver positive outcomes for consumers and investors.

‘The MoU facilitates more timely supervision, investigations and enforcement action and deeper cooperation on policy matters and internal capabilities.’

APRA Chair Wayne Byres said enhanced cooperation reinforced the twin peaks model of regulation that has operated in Australia for more than 20 years.

‘ASIC and APRA share an interest in protecting the financial wellbeing of the Australian community and achieving a fair, sound and resilient financial system,’ Mr Byres said.

‘Strengthening engagement is a key priority of the ASIC Commissioners and APRA Members. We will continue to work closely together to enhance regulatory outcomes and achieve our respective mandates.’

This MoU, which will be reviewed on a regular basis, is only one aspect of how ASIC and APRA are establishing closer cooperation. Led by ASIC Commissioners and APRA Members, the agencies are regularly meeting under a revised engagement structure and working together on areas of common interest, including data, thematic reviews, governance and accountability. Both agencies are committed to detecting prudential and conduct issues early and working to revolve them efficiently and effectively. 

The updated MoU is available on the ASIC website here.

Broker Best Interests Duty Bill Released

The final best interests duty bill for mortgage brokers has been tabled in Parliament, outlining the role brokers need to take when helping a borrower from 1 July 2020. From The Adviser.

The amended Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers (2019 Measures)) Bill 2019 has been tabled in Parliament today (28 November).

The key features of the new law are:

  • mortgage brokers must act in the best interests of consumers in relation to credit assistance in relation to credit contracts;
  • where there is a conflict of interest, mortgage brokers must give priority to consumers in providing credit assistance in relation to credit contracts;
  • mortgage brokers and mortgage intermediaries must not accept conflicted remuneration;
  • employers, credit providers and mortgage intermediaries must not give conflicted remuneration to mortgage brokers or mortgage intermediaries; and
  • the circumstances in which these bans on conflicted remuneration apply are to be set out in the regulations.

Notably, the duty to act in the best interests of the consumer in relation to credit assistance is a principle-based standard of conduct that applies across a range of activities that licensees and representatives engage in.

As such, what conduct satisfies the duty will depend on the individual circumstances in which credit assistance is provided to a consumer in relation to a credit contract.

The duty does not prescribe conduct that will be taken to satisfy the duty in specific circumstances. Instead, it is the responsibility of mortgage brokers to ensure that their conduct meets the standard of “acting in the best interests of consumers” in the relevant circumstances.

However, the new duty will mean that there could be circumstances where the mortgage broker may not have acted in a consumer’s best interests even if the responsible lending obligations were complied with. For example, even if a home loan product is ‘not unsuitable’, recommending it to the consumer might not be in the consumer’s “best interests”, the accompanying documentation reads.

The penalty for breaking this duty for both credit representatives and licensees is 5,000 penalty units.

Examples of the duty in action – white label called in question

In the explanatory materials, there are examples of steps that may need to be taken for this new duty. These include:

  • prior to recommending any home loan product or other credit contract to a consumer based on consideration of that consumer’s particular circumstances, the mortgage broker may need to consider a range of products (including the features of those products), form a view about which products are in the consumer’s best interests and then inform the consumer of the range and the options it contains;
  • any recommendations made would be expected to be based on consumer benefits, rather than benefits that may be realised by the broker; that is, a broker should not recommend a loan by prioritising factors that cannot be substantiated as delivering benefits to that particular consumer (such as the broker’s relationship with the lender), over factors and features which affect the cost of the product or are more relevant to the consumer;
  • in cases where critical information is not obtained when inquiring about a consumer’s circumstances, the broker could be expected to refrain from making a recommendation about a loan where there is a consequent risk that the loan will not be in the consumer’s best interests.

Interestingly, the new duty also outlines that “a broker would not suggest, from their aggregator’s panel of lenders, a white label home loan that has the same features as a branded product from the same lender, but with a higher interest rate, because it would not be in the best interests of the consumer to pay more for an otherwise similar product”.

The explanatory materials go on to outline that during a periodic review, a broker “would not suggest that the consumer remain in a credit contract without considering whether this would be in the consumer’s best interests”.

“For example, it may be a breach of the duty if the broker suggested the consumer remain in their current home loan when they could refinance to a cheaper product as the broker did not want to incur the consequent liability to the lender when their commission payments were clawed back,” it reads.

Helping consumers understand their decision implications

The materials also outline that there may be situations where the consumer does not properly understand the implications of different choices and so the broker may have to assist them to understand why a particular loan is or is not in their best interests, which could inform the brokers’ actions.

An example given is if a consumer asks the broker if they should take out an interest-only home loan on a property they are looking to buy. The home loan will have a higher interest rate than a principal and interest home loan. The broker helps the consumer to understand the difference in cost of the two home loans, and other differences in the way in which they operate, including that the consumer will only build equity if the property’s value increases or they make additional repayments, and the implications of moving to higher repayments at the end of the interest-only period.

Another example is if a consumer asks the broker if they should take out a home loan with an offset account as they have heard this can save them money, even though the interest rate is slightly higher. The broker helps the consumer to understand what is in their best interests, based on the difference between the higher interest rate and the savings that consumer could reasonably expect through utilisation of the offset account.

Comments from Frydenberg

At the second reading this afternoon (28 November), Treasurer Josh Frydenberg said: “[T]he bill introduces a best interests duty for mortgage brokers that will ensure that consumers’ interests are prioritised when a mortgage broker provides credit assistance, as regulated by the National Consumer Credit Protection Act 2009. In practice this will mean that, in accordance with Commissioner Hayne’s recommendations, a duty will apply in relation to the provision of consumer credit assistance and not business lending.

“The government is also reforming mortgage broker remuneration, and the bill provides for a regulation making power to this end. The regulations will require the value of upfront commissions to be linked to the amount drawn down by borrowers instead of the loan amount; ban campaign and volume based commissions and payments; and cap soft dollar benefits.

“Further, the period over which commissions can be clawed back from aggregators and mortgage brokers will be limited to two years, and passing on this cost to consumers will be prohibited.

“After careful consideration, the government decided to delay consideration of aspects of Commissioner Hayne’s recommendations for mortgage brokers—namely moving to a borrower-pays remuneration structure. We will be doing a review with the Council of Financial Regulators and the Australian Competition and Consumer Commission (ACCC). That will be carried out in three years time.

“Implementation of these reforms, as recommended by the royal commission, is a critical component of restoring trust and confidence in Australia’s financial system and is part of the Morrison government’s plan for a stronger economy.”

The government will also introduce the Financial Sector Reform (Hayne Royal Commission Response – Stronger Regulators (2019 Measures)) Bill 2019. The Bill implements a further four additional commitments the Government announced at the time of responding to the Royal Commission and will ensure that ASIC can effectively enforce existing laws.

“The government is taking action on all 76 recommendations contained in the Final Report of the Royal Commission and, in a number of important areas, is going further. Restoring trust in Australia’s financial system is part of our plan for a stronger economy,” Mr Frydenberg said.

Westpac boss Brian Hartzer steps down

ABC is reporting:

Westpac’s chief executive Brian Hartzer will step down, with his resignation effective from December 2.

It comes after the bank was sued by the financial intelligence agency AUSTRAC for allegedly committing 23 million breaches of Australia’s anti-money laundering laws.

The bank’s chairman Lindsay Maxsted also confirmed he would bring forward his retirement to the first half of 2020.

Westpac’s scandal highlights a system failing to deter corporate wrongdoing

The news that Australia’s anti money-laundering regulator has accused Westpac of breaching the law on 23 million occasions points to the prospect that powerful members of corporate Australia are still behaving badly. Via The Conversation.

This despite the clear lessons offered by the Banking Royal Commission.

Regulators are still struggling to find the right balance between pursuing wrongdoers through the courts – an admittedly costly, time-consuming and highly risky business – and finding other means to punish and deter misconduct.

Australia’s anti money-laundering regulator, AUSTRAC, is seeking penalties against Westpac in the Federal Court.

Each of the bank’s alleged contraventions attracts a civil penalty of up to A$21 million. In theory, that could equate to a fine in the region of A$391 trillion. In practice, it is likely to be a mere fraction of that sum. Commonwealth Bank breached anti-money-laundering laws and faced a theoretical maximum fine of nearly A$1 trillion, but settled for A$700 million.

No doubt the reality that companies can minimise penalties is a factor in why breaches continue.

This impression is reinforced by revelations last week that financial services company AMP continued to charge fees to its dead clients despite the shellacking it received at the hands of the royal commission.

Last month a Federal Court judge refused to approve a A$75 million fine agreed between the Australian Competition and Consumer Commission and Volkswagen to settle litigation over the car company’s conduct in cheating emissions tests for diesel vehicles. The judge was reported to be “outraged” by the settlement, which meant Volkswagen did not admit liability for its misconduct.

The A$75 million is a drop in the ocean of the likely profits obtained from this systemic wrongdoing and pales into insignificance next to fines imposed in other countries.

Proposals for law reform

So business as usual, right?

Maybe not for long. The Australian Law Reform Commission has just released a discussion paper on corporate criminal responsibility.

It points out that effective punishment and deterrence of serious criminal and civil misconduct by corporations in Australia is undermined by a combination of factors.

These include a confusing and inconsistent web of laws governing the circumstances in which conduct is “attributed” to the company. Similar problems of inconsistency arguably also undermine other key areas, such as efforts to give courts the power to impose hefty fines based on the profits obtained by the wrongdoing

The repeated attempts to come up with new and more effective attribution rules arise because corporate wrongdoers are “artificial people”. For centuries, courts and parliaments have struggled with how to make them pay for what is done by their human managers, employees and (both human and corporate) agents. All too often a company’s directors disclaim all knowledge of the wrongdoing.

To fix this, the ALRC recommends having one single method to attribute responsibility. It builds on the attribution rule first developed in the Trade Practices Act 1974 (Cth) and now used, in various forms, across various statutes.

The ALRC proposes that the conduct and state of mind of any “associates” (whether natural individuals or other corporations) acting on behalf of the corporation should be attributable to the corporation.

This goes well beyond the traditional focus on directors and senior managers and would provide some welcome consistency in the law.

Importantly, serious criminal and civil breaches that require proof of a dishonest or highly culpable corporate “state of mind” can be satisfied either by proving the state of mind of the “associate” or that the company “authorised or permitted” the conduct.

A “due diligence” defence would protect the corporation from liability where the misconduct was truly attributable to rogue “bad apples” in an otherwise a well-run organisation. There would be no protection in the case of widespread “system errors” and “administrative failures” so pathetically admitted during the royal commission.

The ALRC also proposes that senior officers be liable for the conduct of corporations where they are in “a position to influence the relevant conduct and failed to take reasonable steps to prevent a contravention or offence”.

This would place the onus on those in a position to change egregious corporate practices to show they took reasonable steps to do so.

Removing the penalty ceiling

These recommendations, if adopted could prove a game-changer for regulators asking themselves “why not litigate?” and corporations used to managing the fall-out of their misconduct as simply a “cost of business”.

The ALRC’s recommendations that the criminal and civil penalties should be enough to ensure corporations don’t profit from wrongdoing will be welcomed by many. Some academics have gone further and argued that the law should be changed to make it clear that civil, not just criminal penalties, should be set at a level that is effective to punish serious wrongdoing.

The ALRC also raises the question whether current limits on penalties should be removed. The Westpac scenario might be just the kind of case to make that option attractive.

Authors: Elise Bant, Professor of Law, University of Melbourne; Jeannie Marie Paterson, Professor of Law, University of Melbourne

Westpac Responds To AUSTRAC But…

A statement by Lindsay Maxsted Chairman of Westpac:

The past week’s events have been deeply distressing.  

The issue raised by AUSTRAC that weaknesses in our systems failed to detect criminal actions by customers is incredibly serious and unacceptable. This is not the company we aspire to be and I, again, apologise unreservedly. 

As a long-time director, shareholder and customer of Westpac, I know we can – and will – do better for all stakeholders in meeting our Anti-Money Laundering and Counter-Terrorism Financing obligations. Being one of the country’s biggest financial institutions, we are alert to the critical role we play in helping law enforcement agencies such as AUSTRAC prevent criminals from carrying out illegal activity. 

Today, we provided an update on how we are responding. 

These build on several actions we have already been working on, including implementing a multi-year financial crime program, undertaking leadership changes in risk and financial crime and doubling the resourcing dedicated to financial crime to around 750 people, which we expect will further grow. 

As a starting point, it’s important to note that we understand the gravity of the issues raised by AUSTRAC and the importance of – and focus on – accountability. To ensure we get all the facts and assess the issues fully, we will appoint an external expert to provide independent oversight of the process and will make the recommendations public. In the interim, all or part of the 2019 short term variable rewards for the full executive team and several general managers will be delayed, subject to the assessment of accountability. 

We also understand the importance of urgently fixing the issues raised by AUSTRAC, lifting our standards, and doing this effectively. As a board, we treat our oversight responsibilities with the utmost seriousness. 

Our response has been divided into three areas: immediate fixes, lifting our standards and protecting people. 

Firstly, we need to step up to better assist law enforcement agencies in tracking and ultimately stopping payments that can facilitate wrongdoing. When we introduced our LitePay product in 2016, transaction monitoring was put in place to identify suspicious transactions. However, more advanced monitoring, including updated “typologies” from AUSTRAC regarding child exploitation were not put in place for LitePay payments to the Philippines until June 2018. 

While the updated detection scenarios are now in place for the Philippines across the SWIFT payment channel, we accept this should have occurred earlier and was not handled appropriately. 

As part of our range of immediate actions, we are now closing LitePay. 

Where Westpac flags transactions that suggest potential child exploitation in high risk locations, these transactions are now prioritised for action and reported to AUSTRAC within 24 hours. This is faster than regulatory standards require.

We have re-reviewed the 12 customers highlighted by AUSTRAC and taken action and are working with authorities. We are also providing $18 million over the next three years to International Justice Mission, a global not for profit that protects vulnerable people from violence, to assist their critical work in Southeast Asia in relation to Online Sexual Exploitation of Children (OSEC). 

On the separate issue of International Funds Transfer Instructions (IFTIs) – which make up the bulk of the 23 million alleged contraventions of the AML/CTF Act – we have closed the relevant Australasian Cash Management (ACM) product enabling these transactions with foreign banks and reported 99.99 per cent of all the relevant transactions to AUSTRAC with the remaining to follow shortly.

For context, the vast majority of the IFTIs we failed to report related to two overseas “correspondent” banks. These are relationships that we have with foreign banks and include them using our infrastructure to process payments, in this case predominantly foreign government pension payments to people living in Australia. 

Again, we accept this problem, while unintended, should not have occurred and dates back to a series of human and technical errors in 2010-11. 

In terms of the second area of our response, lifting our standards, we are establishing a dedicated Board sub-committee for financial crime, which will commission an external expert to independently review our financial crime program. We are also investing $25m to improve cross industry data sharing analysis capabilities, including via potential partnerships with industry and government partners. 

But we understand banking affects real people, which goes to the heart of our belief that banking is a service business rather than a product business. 

As such, we will convene an expert advisory roundtable and provide up to $10 million per year for three years on the subsequent recommended actions to support the prevention of online child exploitation. We will also match the Australian government’s funding for its SaferKidsPH partnership with Save the Children, UNICEF and The Asia Foundation, investing $6m over six years. 

These initiatives and actions are just the start and the board will continue to provide updates, including on accountability, while working constructively with AUSTRAC and other agencies.

As the board of Australia’s oldest company dating back more than 200 years, we are committed to showing all our stakeholders we can – and will – address these issues so we can continue playing our critical role for the economy into the future. 

This seems to me, too little too late, and an attempt to “manage” the PR aspects of the issue. Frankly, senior heads need to roll. They do not get how much their brand has been trashed, and this stems from a basic set of cultural norms which are not aligned to community expectations. Behaviours, which are unfortunately widespread across the sector.

Banking Code Changes to Assist Low Income Customers and Farmers in Drought

The ACCC has authorised changes to the Australian Banking Association’s (ABA) Banking Code of Practice, after imposing several conditions aimed at improving the code’s benefits to low-income customers. 

The ABA, on behalf of its 23 members, sought ACCC authorisation for changes to update its Banking Code in response to recommendations of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Hayne Royal Commission).

“The new Banking Code, with the ACCC’s conditions, will help ensure that the harms to low income consumers so vividly identified by the Hayne Royal Commission are addressed,” ACCC Deputy Chair Delia Rickard said.

As authorised by the ACCC, the updated Banking Code now prohibits informal overdrafts on low or no fee basic accounts held by eligible customers, unless agreed to by the customer, and it prohibits overdrawn fees and dishonour fees.

It also sets out the features of a basic bank account product, including that it will have no minimum deposits; and will provide free direct debit facilities, access to a debit card at no extra cost and free unlimited domestic transactions for eligible customers.

In addition, the updated Banking Code will prevent default interest and fees being charged on agricultural loans in areas affected by drought and other natural disasters.

“The new Banking Code will address a significant source of harm to farmers experiencing drought,” Ms Rickard said.

The ACCC foreshadowed in September it would seek to impose conditions to the proposed Banking Code and sought further feedback.

“Our new conditions aim to address concerns that the ABA’s original proposed Banking Code needed to be stronger,” Ms Rickard said.

“We had concerns that the original proposed code did not fully reflect the spirit of the Hayne Royal Commission’s recommendations about basic accounts. For example, low income customers could have been charged interest rates of up to 20 per cent on overdrawn amounts despite not having agreed to take on an overdraft facility.”

Under the conditions, ABA member banks must either not charge interest, or refund any interest charged, on informal overdrafts on basic accounts held by eligible low income customers if the customer has not agreed to an overdraft facility. Banks must also proactively identify customers who may be eligible for basic accounts.  

The ABA must report to the ACCC on several matters; including any changes to the number of banks offering basic bank accounts, how often informal overdrafts are occurring without the customer’s agreement, and the steps that banks have taken to contact existing customers who might be eligible for a basic account. These reports will be made publicly available.

“The ACCC wants to see improved outcomes for low-income customers and farmers, and we also want the new Banking Code to deliver public benefits and address the Hayne Royal Commission’s recommendations,” Ms Rickard said.

The final determination and more information about the application for authorisation is available at The Australian Banking Association

Westpac Hit By AUSTRAC Court Action

AUSTRAC, Australia’s anti money-laundering and terrorism financing regulator, has taken Westpac to court, alleging the major bank violated anti-money laundering and terrorism regulation on over 23 million occasions. Via Australian Broker.

According to AUSTRAC CEO Nicole Rose, the decision to commence civil penalty proceedings came on the back of a detailed investigation into Westpac’s non-compliance.

The regulator has alleged Westpac’s oversight of its program intended to identify, mitigate and manage money laundering and terrorism financing risks was deficient.

AUSTRAC has found the failures led to “serious and systemic non-compliance” with the AML/CTF Act.

“These AML/CTF laws are in place to protect Australia’s financial system, businesses and the community from criminal exploitation. Serious and systemic non-compliance leaves our financial system open to being exploited by criminals,” said Rose.

“The failure to pass on information about IFTIs to AUSTRAC undermines the integrity of Australia’s financial system and hinders AUSTRAC’s ability to track down the origins of financial transactions, when required to support police investigations.”

Westpac allegedly failed to:

  1. Appropriately assess and monitor the ongoing money laundering and terrorism financing risks associated with the movement of money into and out of Australia through correspondent banking relationships
  2. Report over 19.5m International Funds Transfer Instructions to AUSTRAC over nearly five years for transfers both into and out of Australia
  3. Pass on information about the source of funds to other banks in the transfer chain, depriving them of information needed to manage their own AML/CTF risks
  4. Keep records relating to the origin of some of these international funds transfers
  5. Carry out appropriate customer due diligence on transactions to the Philippines and South East Asia that have known financial indicators relating to potential child exploitation risks

AUSTRAC aims to build resilience in the financial system and ensure the financial services sector understands, and is able to meet, compliance and reporting obligations.

“We have been, and will continue to work with Westpac during these proceedings to strengthen their AML/CTF processes and frameworks,” Rose said. 

“Westpac disclosed issues with its IFTI reporting, has cooperated with AUSTRAC’s investigation and has commenced the process of uplifting its AML/CTF controls.”

Westpac is a member of the Fintel Alliance, a private-public partnership established by AUSTRAC to tackle serious financial crime, including money laundering and terrorism financing.