The Commonwealth Bank has provided an update on its business plans and has said it is committed to the exit of its wealth management and mortgage broking businesses; via InvestorDaily.
The update follows last week’s release of the bank’s full response to
implementing the recommendations from the Royal Commission.
While CBA remains committed to exiting the wealth management and
mortgage broking business it has suspended these plans in order to focus
on the priorities of refunding customers and remediating past issues.
Over recent years, the bank has spent $1.46 billion on or provisioned to address refunding customers including $1.21 billion relating to the wealth management business.
The $1.46 billion comprises of over $600 million already paid to customers or provisioned to address issues relating to advice quality, fees for no service and banking fees and interest.
The program costs and processes of this work has cost the bank $650 million and another $200 million has been provisioned for wealth management related remediation issues and program costs, including ongoing service fees charged by aligned advisors.
Editors note: Post updated from millions to billions (source was incorrect).
It promises to be a dog fight Royale. The four big banks can be expected to behave
like uncontrollable Pit Bulls, determined to savage Senator Hanson’s Banking
System Report (Separation of Banks) Bill 2019.
This Bill is about re-establishing confidence in the banking system by
separating ‘core banking’, called retail and commercial banking where deposits
are protected, from the risky wholesale and investment banking.
By Patricia Warren,Byron Echo Vol 33 #40 March 13, 2019 p21
By default the
recent Haynes Royal Commission has brought focus on how banks are currently
structured to do business. It’s their
power base and they will fight to defend it. Fur will fly because bankers do not want a firewall
between deposits and the flow of these into their trading activities. Bloodletting can be expected should this Bill
stand in the way of using your money to cover their gambling in high return
investments, including derivatives.
Learned from the GFC?
People are
reminded that it was the collapse of the derivatives market that brought about
the Global Financial Crisis 2007/08.
Nothing has been learned. In December
2018 “The notional value of the
derivatives cleared worldwide is 4.4 times world GDP, up from 2.8 times in
2008.” While not all derivatives
are evil, it is estimated that Australian banks are currently exposed to more
than $37Tr in derivatives and billions in short term debt. The global derivatives markets are vast,
unregulated, some deliberately untraceable in off-shore entities and commonly
off the books. Currently, there is
potentially US$540Tr of global derivatives set to ignite a global financial
crisis.
Divorce time
The idea of separating core banking activities from the higher
risk investment banking is not new.
Leading financial commentator, Alan Kohl wrote of his random sampling of
10,140 submissions to the Royal Commission, “ Without exception they called for the banks to be broken up and most
of them, surprisingly, used the term ‘Glass Steagall’ suggesting that the
now-repealed American law that used to forcibly separate banking from insurance
and investment banking be introduced into Australia”. Hanson’s Bill has been crafted after the Glass
Steagall and modified to suit the Australian conditions.
There is widespread support for the breaking up of the banks,
including that coming from former CEOs of major banks, academics and former
Prime Minister Paul Keating. In fact,
there are now more people supporting the breakup of the banks since the Royal
Commission than before it.
The banks are powerful and effective lobbyists exercising undue
influence not only in the market place where they work like an oligopoly but
with both major political parties to which they reportedly have donated $2.6m.
Their relationship with Treasury and the regulator, Australian Prudential
Regulatory Authority (APRA) has been described as ‘incestuous’.
Currently there is approximately $2.8Tr held in deposits as
unsecured loans in Australian financial institutions of which over 80% is
concentrated in the four big banks. Banks are currently paying very little interest
on deposits whilst using a significant proportion of funds to trade in high
risk areas.
BAIL IN
Under Australia’s BAIL IN legislation, where there is no explicit
exclusion of deposits in the law, deposits are exposed to cover the gambling
risks of financial institutions in times of financial crisis in the global
system. So, if the derivatives market
collapses, as it did in the GFC, then cash will be used to BAIL IN and stablise
failing global institutions be it from peoples’ term deposits, business
operating and superannuation fund accounts. Politicians have refused to amend the
Financial Sector Legislation Amendment (Crisis Resolution Powers and Other
Measures) Act 2018 (FSLA) to exclude deposits from this and hence are
protecting the bankers and their risk taking behavior.
Deny Risk
CEO’s of the major banks and other leading financial institutions
deny that deposits are at risk. They argue they are controlled by APRA’s
prudential standards and that ‘currently’
and ‘as the legislation sits’, only
‘capital instruments’ can be called upon to stablise a failing
institution. But APRA can change this
under the secrecy provisions of the FSLA to capture deposits as part of BAIL
IN. There is a loop hole which allows
APRA to change its standards to include ‘instruments’ ‘that are not currently considered capital under prudential standards.”
Failed
Gatekeeper
No CEO responded to concerns raised directly with them months ago
about that provision. Nor did APRA! APRA has failed as the gatekeeper on our financial system.
APRA takes recommendations directly from the International Bank of
Settlement (IBS). This means our
financial institutions are influenced by the motivation of the central bankers
to protect the global financial system above depositors.
Under the
Banking System Reform (Separation of Banks) Bill 2019 it is intended to break
that direct connection. Instead, APRA must
not only come before an Australian parliamentary committee for “prior express written approval and consent” to
act before implementing any recommendations or decisions of any foreign bank,
or foreign authority but have Parliamentary approval to change its prudential
standards for the purpose of regulating our financial institutions.
Public Inquiry
Parliament’s
Senate Standing Committee on Economics is currently holding a public inquiry on
the Bill and calling for submissions.
It is a numbers game and broad based support of the Bill is needed to
counter what can be expected from the banks, Treasury and APRA.
Submissions
need only read: I support the Banking System Reform
(Separation of Banks) Bill 2019 and I support the separation of retail commercial banking
activities involving the holding of deposits from wholesale and investment
banking as proposed in the Bill. Submissions
need to be sent to economics.sen@aph.gov.au or mailed to the Senate Standing Committee
on Economics PO Box 6100 Canberra ACT 2600 by 12 April 2019. If you want your cash made more secure then
you’re encouraged to make a submission.
Alternatively, there is always under the
mattress.
Yesterday afternoon, the coalition government announced a dramatic change to its position on the future of trail commissions, via Australian Broker.
Rather than barring trail commissions on new loans starting in 2020,
Treasurer Josh Frydenberg announced that they will be left to operate as
is with a review held in three years’ time.
In the statement, mortgage brokers were said to be “critically
important” for securing better consumer outcomes in the mortgage market.
“The Government wants to see more mortgage brokers – not less,” the media release stated.
MFAA CEO Mike Felton
said, “The announcement reflects the fact that the case for the removal
of mortgage broker trail commission has not been made, nor has it been
demonstrated that existing trail arrangements lead to poor customer
outcomes.”
In past weeks, there has been confusion throughout the broking
industry as to what benefit was being sought from eliminating the trail
commission payment structure.
“Trail commission for mortgage brokers is deeply misunderstood, and
is often confused with ongoing commissions earned by other financial
services providers,” Felton said.
He explained, “Trail is contingent income that is only paid to a
broker if the loan is not in arrears, is not refinanced and does not
involve fraud.
“As such, it is an important control mechanism that aligns the
interests of brokers and their customers, and ensures that the broker
focuses on the customer relationship rather than simply pursuing the
next transaction.”
“Today’s announcement is a positive step by the treasurer and
provides a good timeframe for this consultation process to take place,”
he said.
Meanwhile, FBAA managing director Peter White welcomed the move but said that policy changes were needed to back it.
“The Coalition’s announcement to keep trail commissions has been
delivered in a pre-election environment so uncertainty remains about how
exactly this will work after the election. Hayne simply didn’t get it
but it’s now the case that both sides of politics are now very clear on
the importance of mortgage brokers.
“Both the Coalition and Labor recognise that the recommendations of
the royal commission would in fact hand power back to the big four
banks, which is an absurd result,” he added.
Treasurer Josh Frydenberg has said that the government will look at reviewing the impacts of removing trail in three years’ time rather than abolishing it next year as originally announced, following concerns regarding competition, via The Adviser.
In
an announcement on Tuesday (12 March), Treasurer Josh Frydenberg said
that “following consultation with the mortgage broking industry and
smaller lenders, the Coalition government has decided to not prohibit
trail commissions on new loans but rather review their operation in
three years’ time”.
The review, to be undertaken by the Council of
Financial Regulators and the Australian Competition and Consumer
Commission (ACCC) will therefore look at both the impacts of removing
trail as well as the feasibility of continuing upfront commission
payments.
Both the abolition of trail and upfront commissions were recommended by commissioner Hayne in his final report for the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
While the government had initially said in its official response to the final report
that it would ban trail commission payments for new mortgages from 1
July 2020, the Treasurer has now said that the removal on trail will
instead be reviewed in three years’ time.
“Mortgage
brokers are critically important for competition and delivering better
consumer outcomes in the mortgage market. Almost 60 per cent of all
residential mortgages are settled by mortgage brokers,” Mr Frydenberg
said on Tuesday.
“There are 16,000 mortgage brokers across
Australia – many of which are small businesses – employing more than
27,000 people. The government wants to see more mortgage brokers, not
less,” he said.
The Treasurer added that ASIC’s 2017 review of
broker remuneration “did not identify trail commissions as directly
leading to poor consumer outcomes and did not recommend the removal of
trail commissions”.
“Only the government can be trusted to protect
the mortgage broking sector and ensure that competition is strengthened
so consumers get a better deal,” he said.
Mr Frydenberg added that the government was “taking action on all 76 recommendations contained in the final report” of the banking royal commission and had already announced a number of new measures that will be brought in, including:
a best interests duty that will legally obligate mortgage brokers to act in the best interests of consumers;
a new requirement that the value of upfront commissions be linked to the amount drawn down by consumers;
a ban on campaign and volume-based commissions; and
a two-year limit on commission clawbacks.
“These
changes will address conflicts of interest in the industry by better
aligning the interests of consumers and mortgage brokers,” Treasurer Frydenberg said.
The Australian Bankers Association (ABA), says the banking industry welcomes a new independent report by former Public Service Commissioner Mr Stephen Sedgwick AO, which has found that banks are on track to meet their 2020 deadline to overhaul staff pay, a critical issue highlighted by the Royal Commission, while also noting there is more work to be done to ensure full implementation.
In April 2017, the industry announced an overhaul to the way banks pay and reward their retail staff to deliver better outcomes for customers. The deadline to fully implement these changes is the 2020 performance year. These key changes include:
No longer paying retail bank staff bonuses based directly or solely on sales
Where incentives are paid, they will be based on a range of measures such as excellent service and good outcomes for customers (with financial targets not the main component)
Incentives paid will not be based on the type of product (eg one type of credit card over another) but rather rely on the time taken by staff to process an application for a customer
Refocussing workplace culture and leadership structure to ensure a focus on the customer is paramount.
Following the release of the Royal Commission Interim Report, the Australian Banking Association commissioned a progress report by Mr Sedgwick on the changes to ensure the reforms were on track to meet their 2020 deadline.
The key findings of this progress report are:
Banks are on track to implement the report well in advance of the 2020 deadline
Banks have significantly reduced the use of bonuses based on financial incentives for front line staff
Bonuses for bank tellers, typically 10% of fixed salary, are now generally based on broader customer service measures, with ‘sales based’ measures greatly reduced
Salaries for other bank staff such as ‘in house’ mortgage brokers, are now greatly weighted towards fixed pay, rather than variable bonuses
Banks are retraining front line staff to encourage a ‘customer first’ approach, rather than a ‘sales first’ mindset
There is still more work to be done on ‘leaderboards’ (which track individual performance), with the practice still found to be occurring in a limited number of branches.
Regarding third party mortgage brokers, Mr Sedgwick noted his recommendations made in 2017 were not yet fully met (although there is a 2020 deadline). He acknowledged the uncertainty caused by the Royal Commission which itself has recommended different changes to the area and acknowledged the difficulty in navigating reform in a diverse industry such as mortgage broking.
CEO of the Australian Banking Association Anna Bligh said the Royal Commission highlighted the need to continue to implement the 2017 report by Mr Sedgwick as soon as possible.
Commissioner Hayne in his final report stated:
“In my view, full implementation of the Sedgwick recommendations is an important first step towards improving front line remuneration practices. But implementation will only improve these practices if banks implement the Sedgwick recommendations both in letter and in spirit” (pg 370-371 Final Report, Royal Commission into Banking, Superannuation and Financial Services).
“The way banks pay their staff was revealed as a critical issue of concern throughout the Royal Commission,” Ms Bligh said.
“When investigating the issue of bank staff pay Commissioner Hayne acknowledged these reforms were an important first step towards improving front line remuneration practices.
“In the Final Report, Recommendation 5.5 made it explicitly clear that Sedgwick needed to be fully implemented, which the industry has heard loud and clear.
“Following the Royal Commission Interim Report the industry saw the need to do a ‘check-up’ on the reforms to bank staff pay to ensure they were on track to meet their commitments by 2020.
“Mr Sedgwick engaged a number of stakeholders including the Financial Sector Union, ASIC and APRA to ensure the report was thoroughly independent and gave the most accurate reflection of the current state of the reforms.
“This report has found banks have been on the front foot in implementing the ‘Sedgwick reforms’ to bank staff pay, with many on or ahead of schedule in overhauling their salary structures.
“Bonuses for bank staff are better balanced, focussing on what’s best for the customer and excellent service rather than simply sales targets.
“Mr Sedgwick also highlighted the lack of action on mortgage broking remuneration, however he acknowledged the complexity of the area given the number of parties involved and potential for regulatory intervention following the Royal Commission,” she said.
ASIC today released an update on the fees for no service (FFNS) further review programs undertaken by six of Australia’s major banking and financial services institutions.
ASIC’s ongoing supervision of the review programs undertaken by AMP,
ANZ, CBA, Macquarie, NAB and Westpac (the institutions) has shown that
most of the institutions are yet to complete further reviews – i.e. reviews to identify systemic FFNS failures beyond those already identified and reported to ASIC since 2013.
ASIC Commissioner Danielle Press said the institutions had taken too
long to conduct these reviews, and welcomed the Government’s commitment
to give ASIC new directions powers that could speed up remediation
programs in the future.
‘These reviews have been unreasonably delayed. ASIC acknowledges that they are large scale reviews – they relate to systemic failures over long periods with reviews going back six to 10 years and cover 36 licensees from the six institutions that currently authorise more than 7,000 advisers]. However, we believe the institutions have failed to sufficiently prioritise and resource their reviews, particularly as ASIC advised them to commence the reviews in mid-2015 or early 2016.
‘We are pleased the Government has agreed to adopt recommendations from the 2017 ASIC Enforcement Review Taskforce Report,
which includes a directions power. This would allow ASIC to direct AFS
licensees to establish suitable customer review and compensation
programs,’ she said.
The main reasons for delays by the institutions are:
poor record-keeping and systems within the institutions, which mean
that in many cases they have been unable to access customer files for
review;
failure by some institutions to propose reasonable customer-centric
methodologies to identify and compensate customers despite ASIC’s clear
articulation of expectations. (For example, ASIC rejected a few of the
methodologies such as a requirement for customers to ‘opt-in’ to the
review and remediation program, and a proposal to assess if there had
been a ‘fair exchange of value’ with customers instead of assessing
whether customers received the specific services they paid for); and
some institutions have taken a legalistic approach to determination
of the services they were required to provide. (For example, ASIC’s view
is that if the agreement requires an annual review, the mere offer of
an annual review is not sufficient.)
Overview of ASIC’s FFNS work
ASIC’s large-scale FFNS supervisory work includes overseeing:
the institutions’ programs to compensate customers impacted by the
reported failures to provide advice services paid for by customers (compensation programs); and
the institutions’ reviews to determine whether there were further
systemic FFNS failures beyond those already identified and reported to
ASIC (further reviews).
Under the compensation programs, AMP, ANZ, CBA, NAB and Westpac have
collectively paid or offered approximately $350 million in compensation
to customers who were charged financial advice fees for no service at
the end of January 2019. Additionally, the institutions have provisioned
more than $800 million towards potential compensation for further
systemic FFNS failures. However, these reviews are incomplete.
Along with supervision of the compensation programs and further reviews undertaken by the institutions, ASIC
is also conducting a number of FFNS investigations and plans to take
enforcement action against licensees that have engaged in misconduct.
Westpac chief executive Brian Hartzer has denied claims that Australian employers are offered special deals from the bank if BT becomes the default superannuation provider for employees, via InvestorDaily.
Appearing at the House of Representatives Standing Committee on
Friday, Mr Hartzer was questioned about the major bank’s superannuation
offering through BT Financial.
Labor MP Matt Thistlethwaite asked the Westpac CEO about reports that
employers could be prosecuted for the underperforming retail super
funds that manage staff retirement savings.
Mr Thistlewaite referred specifically to a 21 January news article in The Australian that noted Westpac’s BT super fund was one of the worst performing super funds in the last seven years.
“The article points to ‘bundled services’ for the business behaving
employees in your BT retail fund. What are those bundled services?” the
MP asked.
Mr Hartzer said he was not familiar with the news article.
“I’m assuming that bundled services means you provide concessions to
the employer on other banking products for bringing them into BT’s
fund?” Mr Thistlethwaite said.
Mr Hartzer replied: “We checked quite closely and that is not our
practice. The corporate super that is offered up is meant to be on a
competitive basis for the services provided. We don’t provide
inducements in terms of banking.”
Concerns over the relationship between retail super funds and
employers were raised by the Productivity Commission in its report into
the superannuation sector. Released in January, the report recommended
the creation of a ‘best in show’ list of funds for employees to choose
from.
In December last year, The Australian reported that ASIC
commissioner Danielle Press said the regulator would crack down on
employers who placed employees in poor-performing funds in exchange for
“bundled services” that were provided to them by the banks and finance
companies that owned the funds.
“We’ve got to look at the role of employers in the default system and
how they are making their decisions on what funds are their default
funds,” Ms Press told The Australian.
“At the end of the day, consumers are disengaged. There’s no
obligation on employers to make that default choice in the best interest
of their employees.”
More evidence of the peeling back of US bank disclosure, which may reduce the incentive for bank managements to continually improve their capital and risk management processes.
On 6 March, Moody’s says the US Federal Reserve Board (Fed) announced the elimination of the qualitative objection in its 2019 Comprehensive Capital Analysis and Review (CCAR) for most stress test participants. Only five banks, all US subsidiaries of foreign banks, will remain subject to qualitative objection in the current stress tests cycle. In the past, the Fed has used the qualitative objection to address deficiencies in banks’ capital-planning process. Its elimination is credit negative because it reduces public transparency around the quality of banks’ internal capital and risk management processes.
Under the revised rules, a bank must participate in four CCAR cycles before it qualifies for exemption from a potential qualitative objection in future years. If a firm receives a qualitative objection in its fourth year, it will remain subject to a possible qualitative objection until it passes. For most of the five firms still subject to the qualitative objection, their fourth year will be the 2020 CCAR cycle. In total, 18 firms are subject to this year’s CCAR exercise, with five of them subject to a possible qualitative objection.
All five firms subject to the qualitative assessment in 2019 are foreign-owned intermediate holding companies (IHCs), most of which were first subject to the Fed stress tests on a confidential basis in 2017. If the IHC has a bank holding company subsidiary that was subject to CCAR before the formation of the IHC, then the IHC is not considered the same firm for the purpose of the four-year test.
The Fed noted that since CCAR was implemented in 2011, most firms have significantly improved their risk management and capital planning process. Going forward, its capital-planning assessments will be through the regular supervisory process. The Fed highlighted as an example the new rating system for large financial institutions, which will assign component ratings of a firm’s capital planning and positions. However, these ratings will be confidential supervisory information and unavailable to the public unless the deficiencies are so severe that they warrant formal enforcement action. The new process replaces an independent comparative assessment.
The lack of public disclosure may also reduce the incentive for bank managements to continually improve their capital and risk management processes, which the CCAR qualitative review encouraged.
As previously announced, 17 large and non-complex bank holding companies, generally with $100-$250 billion of consolidated assets, will not be subject to CCAR in 2019 because of the Economic Growth, Regulatory Relief, and Consumer Protection Act (the EGRRCPA), which became law in May 2018. They will next participate in 2020. Most of these banks were removed from the qualitative objection in 2017 and the Fed will only object to their capital plans if they fail to meet one of the minimum capital ratios under the stress scenarios on quantitative grounds.
The Fed’s announcement was incorporated with its release of instructions for the 2019 CCAR cycle. The Fed also provided information on allowable capital distributions for those firms whose CCAR cycle was extended to 2020. For those banks, the Fed published letters that address each bank’s individual 2019 capital plans. The Fed pre-authorized the firms to distribute, net of any issuance of capital, up to the sum of:
The additional capital the firm could have distributed in CCAR 2018 and remained above the minimum requirements; plus
Capital accretion (change in capital ratios since CCAR 2018); plus
its already approved capital distributions for first-quarter 2019 and second-quarter 2019; minus
its actual distributions for first-quarter 2019 and planned distribution for second-quarter 2019
This plan is also credit negative because it permits capital distributions based on last year’s results, which incorporated a modestly less stringent severely adverse scenario than the 2019 stress test, and it also fails to incorporate any interim changes in the banks’ risk profiles. If any of the 17 banks wants to distribute more than its maximum pre-authorized amount, it may submit a capital plan to the Fed by 5 April 2019 and will be subject to the 2019 CCAR supervisory stress test.
Australia’s major banks will continue to face heightened regulatory scrutiny following recent public inquiries, including the Royal Commission, that identified shortcomings in conduct, governance and compliance, and will all be engaged in remediation that could distract management from day-to-day business, says Fitch Ratings. These challenges come amid other near-term pressures on earnings from a generally tougher operating environment.
The four major banks –
ANZ, CBA, NAB, Westpac – have large market shares across most products
in Australia and New Zealand, which support strong earnings and balance
sheets and help moderate risk appetite compared with many international
peers. However, it may be difficult for the banks to exercise these
advantages fully in an environment of increased public and regulatory
scrutiny, and pressure to increase their focus on customers rather than
shareholders.
In the longer term, there is a risk that the
findings of the inquiries may erode the market position of the four
major banks, either by reducing management focus on revenue growth or
through reputational damage – of which there is so far little evidence.
CBA
and NAB were found to have the most significant weaknesses in their
operational and compliance risk frameworks, and therefore face larger
risks from the remediation process. This is reflected in the Negative
Outlooks Fitch has assigned to these banks’ Long-Term Issuer Default
Ratings. Shortcomings that allowed misconduct issues to arise were
particularly evident at CBA, which is the only bank that will go through
to a formal remediation process and face increased capital
requirements.
Addressing conduct, culture and governance
problems should improve the soundness of the system in the longer term,
but will exacerbate banks’ short-term challenges. Fitch maintains a
negative outlook on the sector as earnings are likely to remain under
pressure in 2019 due to slower loan growth, especially in the
residential-mortgage segment, falling net interest margins, rising
wholesale funding costs, and increasing impairment charges, albeit from a
low level.
The main downside risks to bank performance continue
to stem from the housing market, where prices continue to decline after
large increases up to mid-2017. A sharp drop may result in negative
wealth effects for consumers and could undermine banks’ asset quality.
However, our central scenario is that house prices will fall by only
around 5% in 2019, which would represent a gradual easing of housing
market risks. Moreover, regulatory intervention in the mortgage sector,
including more stringent underwriting measures, has helped to reduce
risks in newer vintages of loans, and should make the major banks more
resilient to any downturn.
YBR told the market on Friday it will incur a statutory after-tax loss for the six months to 31 December 2018, via Financial Standard.
The
results include a material non-cash impairment charge on the carrying
value of the wealth management and lending business and various other
assets across the group, it said.
However, the impairment will not
affect the net present value of the group’s net trail commission
receivable from its underlying mortgage book or book of insurance
premiums under management, but will be applied against goodwill and
intangible and other assets.
The
charge results from assessing goodwill and other intangibles in light
of recent events, including the Royal Commission, YBR said.”It is a
non-cash balance sheet adjustment and has no impact on the underlying
operations of the business.”
One of the Royal Commission’s final
recommendations is to ban lenders paying trail commission to mortgage
brokers and other commissions for new loans.
This
should be enacted within two or three years, Commissioner Kenneth Hayne
said. “The borrower, not the lender, should pay the mortgage broker a
fee for acting in connection with home lending.”
YBR expects the audited half-year report to be lodged before the Corporations Act deadline of 15 March 2019.
It last traded at 5.4 cents per share, plunging from about 14 cents compared to a year ago, down more than 61%.
