Category: Banking Culture

ABA Says Overhaul of Bank Staff Pay Is On Track

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 provides update on further reviews into fees-for-no-service failures

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.

Report card on further reviews undertaken by the institutions

Westpac denies offering ‘bundled services’ to win BT customers

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.”

US Bank Disclosure Reduced Again

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.

Conduct and Compliance Issues Weigh on Australian Banks

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 in trading halt, flags loss

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%.

Best interest duty “an impossible standard”

The royal commission’s recommendation that brokers work under a best interest duty has been called “an impossible standard” by an association CEO and former regulator who saw Canada try and fail to do the same, via Australian Broker.

In 2016, Canada’s regulatory body the Canadian Securities Administrators (CSA) announced it would introduce a best interest standard after a four-year investigation exploring how the requirement would alter the market.

Within two years, each of the country’s regional regulators had scrapped the duty having failed to define “best” or sufficiently demonstrate how the value judgment could be enforced.

“When you’re talking about the ‘best’, it’s just an impossible standard. How are you supposed to nail down all the options?,” said Samantha Gale, CEO of the Canadian Mortgage Brokers Association in British Columbia.

“When push came to shove, when the principle was explored in terms of application, everybody had a hard time trying to figure out what it meant and what it would require. It sounds good, it sounds like the right thing to do, but it wasn’t quite clear what it meant.

“It’s an unreachable, unsurpassable, unattainable standard,” she told Australian Broker.

Several articles that circulated after the duty was discarded pitted the interests of financial advisers as conflicting with those of the consumer. 

To Gale, this is not a fair representation. She explained, “The two aren’t necessarily opposed to each other. Looking after yourself in a professional capacity means that you need to be compensated. Looking after your client means they need to be the recipient of your professional services. Hopefully, you’re both satisfied.”

On the spectrum of possible regulatory models, Gale places rule-based regulations on one end and principle-based regulations on the other. The proposed best interest duty falls in the latter group.

“With rule-based regulations, there’s complete clarity. The law says, ‘You must do a, b, c.’ But principle-based regulations say, ‘we have these lovely standards and you must abide by these lovely standards, so figure out a plan to do that’,” she said.

In Gale’s experience, regulators typically shy away from providing clarity due to liability concerns, despite the fact that regulated professionals require and tend to even explicitly request, clear rules. It is a contractual business relationship between lawyer and client, with both parties understanding the terms of the arrangement.

“Regulators are good at coming up with standards, but they’re short on applying that to practical circumstances so the industry is left to wonder, ‘what does this mean and how does it apply?’ That’s the challenge of it,”  Gale said. 

When it comes to the future of the duty in Australia, Gale foresees the need for “balanced rules that provide for standards, but that also provide clarity.”

“Without that it’s like you’re trying to connect dots, trying to figure out what the right answer is, but the regulators are moving the goalposts along the way,” she concluded.

ACCC Ups The Ante

The ACCC has established a Financial Services Competition Branch, which it says will provide support for the Commonwealth Director of Public Prosecutions’ prosecution of ANZ, Citigroup, Deutsche Bank and six senior officers, via InvestorDaily.

The unit, enabled by an allocation from the government’s mid-year budget, falls under the ACCC’s new Compliance and Enforcement Policy and includes a permanent competition investigation team.

The competition regulator expects its team to complete a number of investigations that could result in court proceedings.

The announcement made by ACCC chair Rod Sims during his address to the Committee for Economic Development Australia comes on the back of AMP executives facing potential criminal charges, in a case against ASIC over charging fees for no service.

“In commenting on regulators, the final report of the financial services royal commission focused on issues that were of primary concern to ASIC and APRA,” Mr Sims said.

“However, an underlying theme of the royal commission final report was that competition is not vigorous among the major banks or in some parts of the financial sector.”

The watchdog is also writing rules for the Consumer Data Right system, known as ‘open banking’, which will determine how banks must operate under the scheme.

The ACCC’s work will also focus on foreign exchange fees remaining high, Mr Sims added.

The ACCC said the finance competition investigation team will complement a market studies unit that focuses on the financial sector, which has been in place for a year.

NAB Confirms CEO Exit

In an ASX announcement, National Australia Bank Limited confirmed arrangements for outgoing Group CEO Andrew Thorburn and interim Group CEO Philip Chronican.

Mr Thorburn has resigned and will finish at NAB on 28 February 2019. In accordance with his contractual entitlements, Mr Thorburn will receive payment of $1,041,449 in lieu of 26 weeks’ notice, along with accrued leave entitlements. All Mr Thorburn’s unvested deferred awards will be forfeited in accordance with plan rules.Interim arrangements for Group CEO.

Mr Chronican, a current Non-Executive Director, will commence in the role of Group CEO (subject to regulatory approvals) on 1 March 2019, serving until the appointment and commencement of a new Group CEO. For the period Mr Chronican serves as Group CEO, he will receive a fixed monthly fee of $150,000including superannuation, representing an annualised remuneration of $1.8 million. Mr Chronican will not be eligible for any variable remuneration, nor will he receive Non-Executive Director fees while in the Group CEO position.

It has also established special committees for the selection of a new Chairman and Group CEO.

ASIC Responds To RC

ASIC said the royal commission’s recommendations reinforce and will inform the implementation of steps ASIC has been taking as part of a strategic program of change that commenced in 2018 to strengthen its governance and culture and to realign its enforcement and regulatory priorities; via InvestorDaily. 

“There are 12 recommendations that are directed at ASIC, or where the Government’s response requires action now by ASIC, without the need for legislative change. ASIC is committed to fully implementing each of these,” ASIC said in a statement. 

“Many of the recommendations made by the Royal Commission involve reforms ASIC advocated for in its earlier submissions to the Royal Commission and, in some cases, in earlier reviews and inquiries.” 

These include: 

• an expanded role for ASIC to become the primary conduct regulator in superannuation; 

• the extension of Banking Executive Accountability Regime (BEAR)- like accountability obligations to firms regulated by ASIC, with their focus being on conduct; 

• the end of grandfathering of Future of Financial Advice (FOFA) commissions; 

• the extension of the proposed product intervention powers and design and distribution obligations to a broader range of financial products and services; 

• the extension of ASIC’s role to cover insurance claims handling and the application of unfair contract terms laws to insurance; 

• reforms to breach reporting; and 

• ASIC being provided with a directions power

Recommendation 1.8 – Amending the Banking Code

ASIC confirmed it will commence work immediately with the banking industry on appropriate amendments to the banking code in relation to each of these recommendations.

Recommendation 4.9 — Enforceable code provisions

ASIC will work with industry in anticipation of the parliament legislating reforms in relation to codes and ASIC’s powers to provide for ‘enforceable code provisions’. 

“This work will include a focus on which code provisions need to be made ‘enforceable code provisions’ on the basis they govern the terms of the contract made or to be made between the financial services provider and the consumer,” the regulator said. 

“ASIC will also continue to work within the existing law to improve the quality of codes and code compliance.”

Recommendation 2.4 — Grandfathered commissions

The royal commission recommended that grandfathering provisions for conflicted remuneration should be repealed as soon as is reasonably practicable.

The government has agreed to end grandfathering of conflicted remuneration effective from 1 January 2021.

Consistent with the government’s response to this recommendation, ASIC said it will monitor and report on the extent to which product issuers are acting to end the grandfathering of conflicted remuneration for the period 1 July 2019 to 1 January 2021. 

“This will include consideration of the passing through of benefits to clients, whether through direct rebates or otherwise,” ASIC said. 

Recommendation 2.5 — Life risk insurance commissions

The royal commission recommended that when ASIC conducts its review of conflicted remuneration relating to life risk insurance products and the operation of the ASIC Corporations (Life Insurance Commissions) Instrument 2017/510, it should consider further reducing the cap on commissions in respect of life risk insurance products. 

The final report recommended that unless there is a clear justification for retaining those commissions, the cap should ultimately be reduced to zero.

ASIC today confirmed it will implement this recommendation. 

“ASIC will consider this recommendation and factors identified by the Royal Commission in undertaking its post implementation review of the impact of the ASIC Corporations Life Insurance Commissions Instrument 2017/510, which set commission caps and clawback amounts, and which commenced on 1 January 2018,” the regulator said. 

As noted by the royal commission, and consistent with the government’s timetable, ASIC’s review will take place in 2021.

Recommendation 6.2 — ASIC’s approach to enforcement

The regulator said actions are already underway to adopt an approach of enforcement that considers whether a court should determine the consequences of a contravention. 

In particular, ASIC has adopted a ‘Why not litigate?’ enforcement stance and initiated an internal enforcement review (IER). 

“ASIC’s Commission has determined to create a separate Office of Enforcement within ASIC and this will be implemented in 2019,” the regulator said. 

“ASIC will take the IER report and the Royal Commission’s comments on it into account, as it makes its final changes to its enforcement policies, procedures and decision-making structures to deliver on its ‘Why not litigate? enforcement stance.”

Recommendation 6.10 — Co-operation memorandum

Together with APRA, ASIC has agreed to implement this recommendation, including in relation to any statutory obligation to cooperate, share information and notify APRA of breaches or suspected breaches, that the Government puts in place as part of its response to Recommendation 6.9.

Recommendation 6.12 — Application of the BEAR to regulators

The royal commission recommended that both APRA and ASIC internally formulate and apply a management accountability regime similar to those established by BEAR. 

ASIC agrees to implement this recommendation. In anticipation of the Government’s establishment of the external oversight body, ASIC will commence work on developing accountability maps consistent with the BEAR. 

ASIC will consider the approach of the Financial Conduct Authority in implementing this recommendation. ASIC will develop and publish accountability statements before the end of 2019.