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The New Zealand Reserve Bank will be reporting material breaches from banks on its website from next year, in an effort to improve transparency and market discipline.
The decision follows a public consultation on the matter late last year, and ongoing discussion with stakeholders on a new framework for the reporting of banks’ breaches. The Reserve Bank today published a summary of submissions and final policy decisions on the reporting and publication of breaches by banks.
The new policy will require a bank to report promptly to the Reserve Bank when there is a breach or possible breach of a requirement in a material manner, and report all minor breaches every six months. Only actual material breaches will then be published on the Reserve Bank’s website.
“The policy aims to enhance market discipline by ensuring prompt breach reporting and publication, and by making it easier to find and compare information about banks’ compliance history,” says Geoff Bascand, Deputy Governor and General Manager Financial Stability. “It also encourages bank directors to focus on materially significant issues and the management of key risks rather than concern themselves with relatively minor issues.
“We will be further discussing the implementation of this policy directly with banks, and at this stage we expect it will take effect from 1 January 2020,” Mr Bascand says.
Class action lawyers are having a field day following the Hayne royal commission. A top litigation funder reveals how taking Aussie companies to court has become big business, via The Adviser.
Maurice
Blackburn Lawyers was the first to file a class action against a big
four bank following the publication of the royal commission final report
in February. The law firm filed a class action against Westpac over
alleged breaches of the bank’s responsible lending laws.
But
Maurice Blackburn is now reconsidering after ASIC lost its infamous “red
wine and Wagyu steak” case against Westpac last month.
Meanwhile,
embattled wealth giant AMP is facing multiple class actions in light of
the extensive misconduct uncovered by the royal commission. AMP
advisers are now preparing their own class action against the group.
Neill
Brennan, the co-founder and managing director of litigation funder
Augusta Ventures, believes class action lawsuits improve the regulatory
regime.
“Two
of the bigger regulators, the ACCC and ASIC both favor class actions.
From an ASIC perspective with shareholder class actions, it acts as a
policeman to some extent. So, if there are breaches of rules such as
continuous disclosure, ASIC can intervene, obviously, but it’s from a
regulatory perspective cheaper for an individual group of shareholders
to bring an action on their behalf, for themselves,” Mr Brennan
explained.
“Similarly, for the ACCC, there are kind of three
prongs to how they regulate. There are obviously penalties that they
impose. There are jail terms that can be imposed for cartel activity, et
cetera. But also, if there are damages brought by individuals or by
groups, that helps with the ACCC control of competition as well. So,
from a regulatory perspective, class actions are beneficial.”
In May, Augusta Ventures announced that it would be funding a class action against AMP.
Herbert
Smith Freehills partner Jason Betts said the focus of class actions has
largely been about governance issues and corporate malfeasance.
“When
we started this journey 25 years ago, I think people thought this will
be more a story about traditional products liability, manufacturing
defects, or mass disaster, mass tort accidents, natural disasters,” he
said.
“That hasn’t been the story, I think largely because the
cost of prosecuting these claims is significant, and in Australia, these
claims relied largely but not exclusively on litigation funders to
support them. And funders have, again, largely but not exclusively
focused on corporate malfeasance.
When you talk about the big
cases in Australia at the moment, they are predominately directed toward
corporate governance issues like continuous disclosure, like
misrepresentation in respect of financial parameters, earnings guidance,
impairments, financial calibrated cases.”
We don’t have a lot of
guidance in this country on how the law will determine those issues at
the moment. Statistically speaking, these corporate governance cases
settle. And so we’re in unusual state of opaqueness around how this
regime will look in five or 10 years’ time.
Mr Betts said that
statistically most corporate governance cases settle. He said
Australia’s class action culture, which is very strong, is much like
America’s. With a few cost differences.
“We’ve got a high rate of
adult share ownership. We’ve got the high focus on corporate governance
issues generally. We don’t have guidance from the law. We’ve got an
entrepreneurial funding market, different to really the rest of the
globe,” he explained.
“All of these doctrinal challenges that
that raises, there couldn’t be a more interesting time to sort of think
about the future of class action litigation.”
Betting on the
outcomes of a legal dispute is a risky game. As a litigation
funder, Mr Brennan said the stakes are higher for class actions where
limited information is available.
“A funder walks into a
situation at the start where legal merit is judged but not obviously
absolutely clear. It’s prior to disclosure, prior to witness statements,
prior to a lot of information, so you’re making a call with limited
information,” he said.
“Then you have question marks over whether
or not the case will actually be run, because of multiplicity [of]
hearings. And then when it comes to the end of it, the court can
actually obviously step in and say, ‘Well, we think the funding
commission should be X instead of Y,’ and that’s a hindsight decision.
“The
risks that a funder faces are large, and if it all goes wrong, the
money is nonrecourse, so the funder’s not going to be paid anything. And
so, the risks a funder faces need to be commensurate with the rewards
that they’re going to achieve in a competitive environment.”
The Australian Prudential Regulation Authority (APRA) notes the judgment today in its court action against IOOF entities, directors and executives.
APRA initiated the action last December due to its view that IOOF entities, directors and executives had failed to act in the best interests of their superannuation members. Before taking the court action, APRA had sought to resolve concerns with IOOF over several years but considered that it was necessary to take stronger action – through use of directions, conditions and court action – after concluding the company was not making adequate progress, or likely to do so in an acceptable period of time.
The court has dismissed APRA’s application for a finding that IOOF entities, directors and executives had contravened their obligations under the Superannuation Industry Supervision Act 1993 (SIS Act). Accordingly, the case cannot proceed to a hearing on penalties, including disqualification.
APRA is examining the lengthy judgment in detail and will then make a decision on whether to pursue an appeal.
Although disappointed by the decision, APRA Deputy Chair Helen Rowell said: “This case examined a range of legal questions relating to superannuation law and regulation that had not previously been tested in court, relating to the management of conflicts of interest, the appropriate use of super funds’ general reserves and the need to put members’ interests above any competing priorities.
“Litigation outcomes are inherently unpredictable, however APRA remains prepared to launch court action – where appropriate – when entities breach the law or fail to act in an open and cooperative manner. APRA still believes this was an important case to pursue given the nature, seriousness and number of potential contraventions APRA had identified with IOOF,” Mrs Rowell said.
Additional licence conditions that APRA imposed on IOOF in December are unaffected by today’s judgment and remain in force.
Despite today’s decision, Mrs Rowell said APRA’s tougher approach to enforcement had led to IOOF being better placed to deliver sound, value-for-money outcomes for its members.
“APRA has seen significant improvement in the level of cooperation from IOOF since this case was launched. Additionally, the new licence conditions have enhanced IOOF’s organisational structure and governance, including the role and independence of the trustee board within the IOOF group. This will better support effective identification and management of future conflicts of interest,” she said.
A former Macquarie banker says hazy guidelines around lending will cause problems for the next six months following the Westpac case, predicting the big four banks will corner ASIC and demand clearer standards, according to an exclusive in InvestorDaily today.
During
a panel discussion at The REAL Future of Advice Conference in Vietnam
this week, former Macquarie head of sales and distribution for
mortgages, Tim Brown, noted the recent Federal Court decision ruling in
the favour of Westpac.
ASIC
had taken Westpac to court over allegations it breached lending laws
between 2011 and 2015 by using the household expenditure measure to
estimate potential borrowers’ living expenses.
ASIC had argued the benchmark was too frugal and that customers’ expenses were higher.
Mr
Brown, who is currently the chief executive of Ezifin Financial
Services, called the current lending landscape a “minefield” where
lenders “can’t get clarification from ASIC” over standards for
evaluating consumers’ eligibility for mortgages.
“I
think the problem with this whole expense discussion, as I was pointed
out earlier on is that a lot of the assessors put their own personal
assessment on what someone else spends money on, which is where the
problem lies,” Mr Brown said.
“It needs to be much more factual.
“I
think it is going to be a problem for at least another six months until
some of the banks get together with ASIC and say look we need to get
some clear guidelines around this. Because they’re basically saying HEM
isn’t acceptable anymore.”
Mr
Brown noted when he first started lending, brokers would sit with
clients, go through their expenses and make sure they had enough
capacity to meet any future increases and interest rates, by using HEM
and allowing up to two and a half per cent above the current rate.
Reflecting on his expenses when buying his first house, said he did not think he would have passed current standards.
“But
within the first six months of buying a home, and we know this
factually and we’ve recently seen ASIC having these discussions, that
most people will reduce their discretionary spending by 20 per cent.
“Now,
most assessors in the past could make that decision without any
concern. But in the current environment, they are afraid to make those
decisions now because there’s a way around it and ASIC might review
that. And this comes back to this personal assessment of someone else’s
opinion on what someone should have a discretionary not a discretion.
“Because
ASIC just goes ‘well you know best endeavors, you know, whatever you
think is reasonable.’ And then they’ll charge you if they don’t think
it’s reasonable.”
‘We want some direction’
Talking
about missing clarity from ASIC, Mr Brown said: “The banks are sick of
this game that they’re playing with ASIC at the moment and eventually
the four of them will get together and say look, you need to give us
some clear guidelines.”
“At
the moment, I think the industry bodies are trying to come together
with something they can take to ASIC both from a vendor’s perspective
and also from a MFAA (Mortgage and Finance Association of Australia) and
FBAA (Finance Brokers Association of Australia).”
Mr Brown noted every time he had been on a panel, he had been asked about the Westpac decision.
“There’s obviously a real concern among the number of people at the moment,” he said.
Australia’s customer owned
banking sector welcomes reports that the Australian Competition and Consumer
Commission (ACCC) is requesting to conduct an inquiry into the banking
industry’s competitiveness.
Customer Owned Banking Association CEO Michael Lawrence
says the request from the ACCC and the comments from Tim Wilson MP were
encouraging for credit unions, building societies and mutual banks who have
been leading the charge for a more competitive retail banking market.
“The enduring solution to concerns about the banking
market is action to promote competition.
“We don’t have sustainable banking competition at
the moment. A lack of competition can contribute to inappropriate conduct
by firms, and insufficient choice, limited access and poor-quality products for
consumers.
“We strongly support the ACCC’s calls for an
inquiry to examine the banking industry’s competitiveness. It’s encouraging to
see that the ACCC and Tim Wilson MP share our sector’s concerns about
competition and what an uncompetitive banking market means for consumers.
“Last year’s Productivity Commission’s report on
competition in banking sent strong messages to regulators and policymakers that
regulation is hurting competition and consumers are paying the price.
“The regulatory framework over time has
entrenched the dominant position of the largest banks.
“The PC report shone a light on a problem that is not
well enough recognised – that more and more regulation can be harmful to
consumers because it weakens competition.
“The Productivity Commission found that competition
drives innovation and overall value for customers.
“The Financial Services Royal Commission
looked into misconduct, now is the time to look into competition.”
ASIC says Australian financial services (AFS) licence holder ClearView Financial Advice Pty Ltd (ClearView) has completed a review and remediation program for over 200 clients who received poor life insurance advice.
Under this program, ClearView reviewed 4,269 advice files from 279 of
its advisers and remediated clients who had suffered loss. 215 clients
were offered $730,138 in financial compensation and 21 clients received
non-financial remediation through reissued advice documents and fee
disclosure.
ASIC first identified issues of non-compliant advice by ClearView’s
representatives during an industry-wide review of retail life insurance
in 2014 (14-263MR).
A sample review of ClearView’s advice files highlighted broad areas
of concern such as inadequate needs analysis for client, insufficient
explanation about the pros and cons of using superannuation to fund
insurance premiums, inadequate consideration of premium affordability
issues and poor disclosure about replacement products. ASIC raised these
issues as well as some concerns related to the conduct of Jason
Churchill, one of ClearView’s advisers at the time.
In 2016, ASIC accepted an enforceable undertaking (EU) from Mr
Churchill for failure to meet his obligations as a financial adviser (16-008MR).
Under the EU, Mr Churchill agreed to undergo additional training,
adhere to strict supervision requirements and have each piece of advice
audited by his authorising licensee before it was provided to clients.
Separately, ClearView undertook to review advice previously provided by
Mr Churchill and remediate clients who had received inappropriate
advice.
ClearView also began a review of the personal insurance advice
provided by its advisers to determine if there was a systemic issue
related to the broad areas of concern identified by ASIC and engaged
Deloitte to provide independent oversight. This review found that a
number of ClearView’s advisers did not undertake adequate ‘needs
analysis’ for clients.
The needs analysis is a critical part of the financial advice
process. It enables advisers to understand their clients’ financial
situation, needs and objectives, and provides the basis for the
financial advice.
To identify all instances of this issue and to remediate any
adversely affected clients, ClearView undertook a full review and
remediation program in accordance with Regulatory Guide 256: Client review and remediation conducted by advice licensees
(RG 256). Deloitte oversaw the review and remediation program to
ensure that it was conducted in accordance with the principles set out
in RG 256.
The Reserve Bank of New Zealand (RBNZ) and Financial Markets
Authority (FMA) today released their findings on life insurers’ responses to
the joint Conduct and Culture Review.
Overall, the regulators were
disappointed by the responses. Significant work is still needed to address the
issues of weak governance and ineffective management of conduct risk,
identified in the regulators’ report earlier this year.
Rob Everett, FMA Chief
Executive, said: “While we’re disappointed, we’re not surprised as the
responses confirm what we found in our original review. It’s clear that
progress has been slow and not as far-reaching as required.
Some providers have started
work to identify the customer and conduct issues they face, others have not
provided any detail on this.”
Sixteen life insurers were
asked to provide work plans outlining the steps they will take to improve their
existing processes and address the regulators’ findings and recommendations.
There was wide variance in
the comprehensiveness and maturity of the plans provided.
Adrian Orr, Reserve Bank
Governor, said, “We’re disappointed the industry’s response has been
underwhelming. The sector has failed to demonstrate the necessary urgency and
prioritisation, around investment in systems, to provide effective governance
and monitoring of conduct risk.”
There was also a wide
variance in the quality and depth of the systematic review of policyholders and
products. Some did not complete this exercise and others did not provide data
on the number of policyholders affected or the estimated cost of remediation
activities. Insurers that completed the exercise identified at least 75,000
customer issues requiring remediation, with a value of at least $1.4 million.
Some of the new issues identified included:
Overcharging of premiums and benefits not being updated due to system errors, human errors and under-reporting of deaths
Poor customer conversations overlooking eligibility criteria and poor post-sale communications, which lead to declined claims and underpayment of benefits
Poor value products were identified, where premiums charged were not fair value for the cover provided.
Sales incentives and
commissions
The FMA and RBNZ committed
to report back on staff incentives and commissions for intermediaries. Previous
reports by the FMA reflected the concerns with conflicted conduct associated
with high up-front commissions and other forms of incentives, (like overseas
trips) paid to advisers.
Although some insurers have
committed to removing sales incentives for employees and their managers, not
all committed to removing or altering indirect sales incentives.
Those providers that have
removed sales incentives for employees don’t typically use external advisers to
distribute products. Providers using external advisers told the regulators that
changing long-held business arrangements and distribution models is difficult
and will take time to implement.
Mr Everett said, “We’re
ready to work with life insurers to ensure they prioritise their focus on
serving the needs of their customers, while at the same time balancing the need
to remunerate advisers for the important work they do to help these customers.
But we do not think high up-front commissions create confidence that insurers
and advisers are acting in the best interests of customers.”
Mr Orr said, “Good
governance within insurance firms requires the effective management of conflicts
of interest. We need to see much better systems and controls in place to manage
the inherent conflicts where advisers or sales staff are offered incentives to
sell or replace insurance policies.”
Next steps
Those companies that have
not undertaken comprehensive systematic reviews of policyholders and products
have been asked to complete further reviews of their systems to identify
issues, and to develop mature plans to respond and remediate any of their
findings. These plans must be completed by December 2019.
The FMA and RBNZ will
continue to monitor how the insurers are responding to recommendations and
implementing their work plans. Life insurers are currently not legally required
to become more customer-focused and the FMA and RBNZ found that the sector has
a weak appetite for change.
Deficiencies in some of the
plans received, and some insurers’ lack of commitment to implementing the
regulators’ recommendations, further demonstrates the need for additional
obligations to be included in the regulation of conduct of life insurers.
