Category: Banking Culture

CFS ‘always’ invests members’ cash with CBA: Slaters

Slater and Gordon has taken aim at Australia’s biggest bank as it prepares to take on the retail super funds in a historic class action lawsuit, via InvestorDaily.

The national law firm this week announced the launch of its ‘Get Your Super Back’ campaign and said it will involve a series of class actions with Commonwealth Bank-owned Colonial First State and AMP super likely to be their first targets.

“The firm will allege the big bank-backed super funds failed to obtain for members competitive cash interest rates on cash option funds, and charged exorbitant fees, affecting millions of members who held part or all of their superannuation in bank owned funds,” they said in a statement.

Senior associate Nathan Rapoport from Slater and Gordon told Investor Daily that the firm chose AMP and Colonial to be first as they were good examples of wrongdoing by superannuation trustees.

“The evidence at the royal commission really highlighted how in our view the trustee companies are letting down members and not acting in accordance with quite elementary trust law in Australia,” he said.

Mr Rapoport said that their case against Colonial First State was to be focused on the way that trustees invested members cash.

“Colonial invests that cash with Commonwealth Bank always and it doesn’t shop around and get the best return for members and we believe that’s a very clear and simple case of the trustee not acting in the best interest of its member,” he said.

The case against the AMP is similar but is also focusing on the fees charged by the bank, said Mr Rapoport.

“The evidence we have looked at indicates that AMP funds are charging as much as half a percent per annum than other comparable funds and even though that may not sound like a lot, over a lifetime it really adds up to quite an enormous amount,” he said.

AMP refuted the claims and said any issues with their business had already been fixed.

“We’re committed to acting in the best interests of our superannuation members at all times and acting in accordance with our legal and regulatory obligations.”

AMP said that they were already working with customers to benefit any affected members and to improve member outcomes.

“We have reduced the administration fees on some of our cash investment options to address the issue of negative returns in the small number of funds impacted by this issue. We are also compensating affected customers for lost earnings,” they said.

Commonwealth Bank also released a statement confirming it was aware of the announcement but that they had “not been served with any legal proceedings”.

The case would not end at those two banks; Slater and Gordon are looking to see what other funds had not acted in the best interest of members, said Mr Rapoport.

“There seems to be a trend in the way they [retail funds] invest the cash with their parent banks so there is a good chance that we will be launching a case against many others as well,” he said.

If the class action is broadened, it has the potential to be the largest class action law suit ever undertaken in Australia.

“We estimate that there could be in the order around 5 million Australians that have at least one account with a retail super fund so if we do broaden the case and launch cases against most of the retail funds then that’s the kind of number we are looking at,” he said.

The allegations arise from evidence given to the royal commission into the banking industry and information released in the Productivity Commission report.

The Productivity Commission report released in May found that retail super funds only brought in members 4.9 per cent per annum in contrast to the 6.8 per cent per annum brought in by industry funds.

In fact, the Productivity Commission report found that retail funds frequently underperformed and charged more fees than industry funds.

Sportsbet is currently tipping Commonwealth Bank to pay back the largest compensation with odds of $1.65, followed by ANZ $4.00, Westpac $7.00 and NAB $8.00.

The Australian Prudential Regulation Authority and the FSC declined to comment and, at time of writing, Colonial First State had not responded to media requests.

NAB makes changes to broker commissions

From Australian Broker.

NAB is introducing the changes in line with recommendations of the ASIC Broker Remuneration Review and Sedgwick Retail Banking Remuneration Review.

From November 2018, NAB will calculate the upfront commission a broker receives for a home loan based on the amount drawn instead of the total approved facility, and net of any offset facility.

This will mean that if a customer receives a $500,000 home loan and puts $100,000 of that loan into an offset account, the broker will receive commission on the drawn amount of $400,000.

NAB executive general manager of broker partnerships, Anthony Waldron, said NAB is committed to mortgage broking as a channel of choice for consumers, and that this change will support brokers to continue to put customers’ interests first.

He said, “Mortgage brokers play an important role in helping Australians arrange their home loans, and NAB continues to value and support them.

“We recognise that Australians increasingly use mortgage brokers, and we want to continually improve as an industry to deliver the best outcomes for Australians.”

Waldron is also chair of the Combined Industry Forum (CIF), which is made up of industry bodies, lenders, mortgage brokers and their representatives, aggregators, introducers, and consumer groups.

“As an industry, we are working together to make changes that are focused on doing the right thing, and to improve consumer trust,” Waldron said.

The CIF released its reform package in December 2017 – six principles that members are committed to implementing to ensure better consumer outcomes, preserve and promote competition and consumer choice, and improve standards of conduct and culture in mortgage broking.

The industry has also proposed a standard definition for ‘good customer outcomes’, which looks at the size and structure of the loan, affordability, responsible lending requirements and individual customer needs.

In coming months, NAB has said it will make further changes in line with the agreed principles of the CIF to ensure better consumer outcomes and improved standards of conduct and culture, while preserving competition in mortgage broking.

Class action lawsuit launched against bank-owned funds

Slater & Gordon is launching the ‘Get Your Super Back’ campaign today and says it will involve a series of class actions with Colonial First State and AMP likely to be their first targets.

“The firm will allege the big bank-backed super funds failed to obtain for members competitive cash interest rates on cash option funds, and charged exorbitant fees, affecting millions of members who held part or all of their superannuation in bank owned funds,” they said.

The allegations arise from evidence given to the Royal Commission into the banking industry and information released in the Productivity Commission report.

The Productivity Commission report released in May found that retail super funds only brought in members 4.9 per cent per annum in contrast to the 6.8 per cent per annum brought in by industry funds.

The Productivity Commission report also found that retail funds frequently underperformed and charged more fees than industry funds

HBSC To Partner With REA Group’s Smartline.

From Australian Broker.

HSBC Australia has confirmed its third broker partnership with REA Group’s Smartline.

HSBC’s products will be available from this month, including Home Value which is available at 3.64% p.a. (comparison rate 3.66% p.a.*) for owner occupied loans paying principal and interest.

In addition, qualifying Smartline customers will have access to HSBC Premier, the bank’s premium banking and wealth management service.

HSBC Australia returned to the broking space with Aussie Home Loans in 2017 and announced its second broker partnership with Mortgage Choice, in January of this year.

Speaking to Australian Broker, Alice Del Vecchio, the bank’s head of mortgages and third party distribution, said, “We hand-picked Smartline because they are a great fit for us.

“They are an extremely compliant business and they work to the highest global standards, but beyond that they also have a really good franchise model. The teams there are long term and the average tenure is 10 to 12 years, so you have some really long term, established brokers who know the market and know their stuff. They really appreciate having the opportunity to bring a brand like ours on board and the value and opportunity it can bring,” she continued.

Smartline has arranged mortgages for more than 275,000 home owners and has a nationwide network of 400 brokers. HSBC joins more than 30 lenders on the aggregator’s panel.

Sam Boer, CEO of Smartline said, “HSBC is a well-recognised global brand with a comprehensive range of home loans that will help us meet the needs of our customers. We take pride in the longevity of our customer relationships and the strength of our customer service, and we believe this partnership is a great fit.”

Why AMP and IOOF went rogue

From The Conversation.

The ‘M’ in AMP stood for Mutual. Like another former mutual, IOOF, it was owned by, and set up to benefit, its members.

Both AMP and IOOF were presented with draft findings that they acted against the interests of their members at the conclusion of the round five hearings of the Royal Commission into Banking and Financial Services.

Although both are now purely commercial organisations, each has marketed itself as different from the others because of its cooperative history and founding ethos.

So what went wrong?

The early twentieth century German sociologist Max Weber argued the culture of an organisation was the product of its history, institutional structure and a consciously held shared ethos of its members. It was a different view to that of mainstream economists who these days assume organisations attempt to maximise profits and that of so-called behavioural economists who assume cognitive biases make decision making less rational.

In his book the Protestant Ethic and the Spirit of Capitalism Weber outlined the ways in which the ascetic sensibilities of the Protestant sects had influenced the growth of commerce in post reformation Northern Europe and 19th century America. They were concerned with thrift as much as with profit.

The ‘P’ in AMP stood for Providence. The AMP was set up to help its members save.

Disengagement, demutalisation and corporatisation changed AMP and IOOF forever

The move away from the government provision of services in the 1970s and Margaret Thatcher’s famous claim in the 1980s that there was “no such thing as society” saw a move away from mutuals and cooperatives in tandem with a move away from thrift.

In the 1990s AMP and IOOF ‘demutualised’, becoming companies listed on the sharemarket. Value that had been accumulated for generations was turned into tradable shares. Members who voted for the change were accused of intergenerational theft. Those who didn’t feel the least bit thrifty cashed-out by selling their shares.

Laws were changed to make it easier.

From a Weberian perspective the current governance problems of AMP and IOOF can in part be attributed to abandoning of the original founding ascetic ideal in favour of an unconstrained focus on profit maximisation for the benefit of shareholders rather than members.

The change in the culture of such organisations in Australia and overseas was accelerated by decisions to put independent directors and executives with “commercial savvy” on boards.

Turning back the clock won’t work

While Weber suggests organisations founded on a particular set of values can be highly disciplined the process of demutalisation/listing can create the conditions for misconduct. Appointing directors and outside managers who have no understanding of the mutual’s ideal allows an aggressive commercial culture to take root. The argument can be extended to former public sector corporations such as the Commonwealth Bank.

Despite calls to wind back the clock very few former cooperatives or public sector entities have. Once they have taken even a half step to corporatisation, as did Telstra, the Commonwealth Bank and the Murray Goulburn Cooperative, the die has been cast. The organisation and its ethos has changed.

Appointing high profile directors and executive directors with CVs that include community involvement is only going to paper over the change.

What might work

Mutual organisations are not misconduct and misstep free. They are vulnerable to ‘groupthink’ in which managers back each other up in order to aviod disharmony.

But commercial organisations that prioritise profits create incentives for managers to rationalise away breaking the law in order to lift short-term profitability or boost share prices and bonuses.

If he were alive today Weber might suggest subjecting such organisations to increased and more effective regulatory scrutiny and increased internal and external democratic accountability would be a necessary first step to improve governance.

Weber might very well argue the Banking Royal Commission itself is helping the community forge a new ethos grounded in community expectations about corporate conduct and purpose, buttressed by strong laws to back them up that will guide individual conduct and organisational governance.

On The Mortgage Industry Front Line

I had the chance to discuss the current state of the mortgage industry with Founder and CEO of Hashching Mandeep Sodhi.

Our conversation covered the recent underwriting tightening, mortgage prisoners, how brokers are helping borrowers navigate the new rules, and the rise of digital channels.

 

 

Prospa removes unfair loan terms for small business borrowers and guarantors

Following an ASIC review, Prospa Advance Pty Limited (Prospa) has changed   loan terms in its standard form small business loan contract to address terms being unfair under the unfair contract terms provisions of the ASIC Act.

The review of Prospa’s contract is part of a broader surveillance by ASIC to examine lenders’ small business loan contracts to reduce the risk of unfair contract terms.

As a result of ASIC’s review, Prospa has made a number of changes resulting in improved terms for borrowers and guarantors. The changes include addressing problematic terms outlined in ASIC Report 565: Unfair contract terms and small business loans, and changes to other terms which could have operated unfairly for borrowers and guarantors.

Prospa has agreed that all customers who entered into or renewed contracts from 12 November 2016 will have the benefit of the changes agreed with ASIC. Prospa will be communicating these changes to its small business customers with the amended contract coming into effect in early October.

ASIC’s surveillance of small business loan contracts is ongoing, and will consider regulatory action where appropriate.

Changes to Prospa’s loan contract

Prospa has agreed to make the following changes to its standard form small business loan contract:

  • amended the early repayment clause so that borrowers can now      prepay their loan early without requiring Prospa’s consent, and removed      Prospa’s absolute discretion whether to provide a discount for prepayment – Prospa will now apply a published Early Prepayment Policy so borrowers  can determine the discounts they they can expect to receive if they do pay back their loan early;
  • amended the ‘unilateral variation’ clause to significantly limit Prospa’s ability to unilaterally vary contracts to specific instances. Prospa has also extended the notice period to 60 days where Prospa intends to vary fees;
  • amended clauses defining events of default to add remediation periods and materiality thresholds and to permit changes to control of the Borrower with the lender’s consent (not to be unreasonably withheld);
  • removed a broad ‘cross-default’ clause which allowed Prospa to call a default under the loan contract due to any default under another finance document related to the loan (for example, guarantee or security document);
  • restricted the borrower’s indemnity to ensure that:

–    the borrower is required to indemnify only Prospa, its employees and agents (and not third parties that are not parties to the contract such as receivers or contractors); and

–    the borrower is not required to indemnify Prospa for losses or costs incurred due to the fraud, negligence or wilful misconduct of Prospa, its employees, officers, agents, contractors or receivers appointed by Prospa;

  • removed an ‘entire agreement’ clause which absolved Prospa from contractual responsibility for conduct, statements or representations made to borrowers about the loan contract;
  • limited the class of people who can provide guarantees under the loan contract to:

–    people who are actively involved in the management of a borrower’s business;

–    if the borrower is a company, people who are directors or shareholders of the borrower; and

–    if a shareholder of the borrower company is a company, directors or shareholders of that company.

  • inserted a 5-business-days’ notice provision to guarantors about:

–    borrowers who are 30 calendar days behind their agreed repayment schedule; and

–    the commencement of legal proceedings against a borrower or the appointment of a receiver.

  • limited the guarantor’s liability so that the guarantor is not liable for any increase in the amount of the loan principal and interest agreed at the start of the loan(but the guarantor is liable for fees and reasonable enforcement costs).
  • inserted a provision to obtain consent of the guarantor:

–    where there is a discharge or release of any security held by Prospa given by the borrower or a guarantor; and

–    where there are multiple guarantors, before releasing a guarantor.

  • limited the actions of lender-appointed attorneys where there is an event of default under the loan contract so that an appointed attorney cannot act in a way that prefers the interests of the attorney over the interests of the borrower or guarantor.

Prospa’s Interest Charges and Late Fees

Prospa charges a factor rate for interest on its fixed term loans. The amount of interest, which can be considerably higher than bank loans, is fixed and disclosed at the outset and does not vary even if the loan term is extended.  The amount of interest is therefore part of the “upfront price” of the loan and is excluded from review under the unfair contract term provisions.

Late payment fees for missed payments are, however, subject to review under the unfair contract term provisions. ASIC will be undertaking further monitoring of Prospa’s charging of late payment fees to assess whether the manner in which the fees are being charged is unfair in practice.

Background

In March 2018, ASIC published REP 565, which outlines changes to small business loan contracts made by the big four banks to comply with the UCT law. This report also provides guidance to the broader small business lending industry.

At the same time ASIC announced that it will also examine other lenders’ small business loan contracts to ensure that their contracts do not contain terms that raise concerns under the UCT law. ASIC is reviewing the contracts of bank and non-bank small business lenders, including Prospa, to check their compliance with UCT law.

Since publishing REP 565, ASIC is also monitoring the big four banks’ compliance with the UCT law. In March 2017, ASIC and the ASBFEO completed a review of small business standard form contracts and called on lenders across Australia to take immediate steps to ensure their standard form loan agreements comply with the law (refer: 17-056MR).

In August 2017, ASIC and the ASBFEO welcomed the changes ASIC required to small business loan contracts by the big four banks (refer: 17-278MR) that have:

  • ensured that the contract does not contain ‘entire agreement clauses’ which prevent a small business borrower from relying on statements by bank officers (for example, about how bank discretions will be exercised)
  • limited the operation of broad indemnification clauses
  • addressed concerns about event of default clauses, including ‘material adverse change’ events of default and specific events of non-monetary default (for example, misrepresentations by the borrower)
  • limited the circumstances in which financial indicator covenants will be used in small business loans and when breach of a covenant will be considered an event of default
  • limited their ability to unilaterally vary contracts to specific circumstances with appropriate advance notice.

Broker ‘misstatements’ drop but still ‘concerning’: UBS

A substantial reduction in reported “misstatements” was primarily due to a “material improvement” in the quality of loan applications submitted via the broker channel, according to a new UBS report; via The Adviser.

According to the investment bank’s latest Australian Banking Sector Update, which involved an anonymous survey of 1,008 consumers, there was a “sharp fall” in the number of “misstatements” reported in mortgage applications over the fourth quarter of 2018 (4Q18).

The survey revealed that 76 per cent of respondents reported that the mortgage applications were “completely factual and accurate”, up from 65 per cent throughout the first three quarters of 2018.

According to UBS, the improvement in lending standards was largely driven by the scrutiny placed on the industry by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, and not off the back of regulatory intervention.

“We believe this implies that despite the efforts of the regulators and banks to tighten underwriting standards from 2015 onwards, these appear largely ineffective,” UBS noted.

“Our survey suggests that improvements in factual accuracy in mortgage applications have only come in response to the royal commission.”

The bank stated that the improvement was spurred by a “material improvement” in quality of mortgages submitted through the broker channel.

The research found that 26 per cent of borrowers who applied for a mortgage via the broker channel in 4Q18 “misstated” their loan application, down from 41 per cent in previous quarters.

However, UBS noted that fewer borrowers reported misstatements in loans submitted via the propriety channel (19 per cent).

Despite the improvement, UBS claimed that it’s concerned about the 10 per cent of respondents that reported that their broker-originated applications were “partially factual and accurate”, which it considers a “low benchmark”.

Moreover, UBS stated that it continues to find that a “substantial number of applicants state that their mortgage consultant suggested that they misrepresent on their mortgage applications”.

According to the figures, of those who misstated their broker-originated loan applications, 40 per cent said that their broker suggested that they misrepresent their application, which UBS claimed implies that 15 per cent of all mortgages secured via the broker channel were “factually inaccurate following the suggestion of their broker”.

“This is concerning given the heightened scrutiny on the industry, in particular following findings of broker misconduct and broker fraud in the royal commission,” UBS added.

Additionally, the report noted that 15 per cent of respondents who misrepresented information in a broker-originated application said that they exaggerated their household income, and 31 per cent said that they under-represented their living costs.

Turnaround times

The UBS research also revealed that 63 per cent of respondents who submitted a loan application via the direct channel received approval for the mortgage in one week or less, compared to 48 per cent of respondents who submitted via the broker channel.

Further, UBS stated that 31 per cent of direct-channel applicants received approval for a mortgage in two to four weeks, compared to 43 per cent of those who applied for a loan through the broker channel.

However, the investment bank added that when examining the approval duration between those who were completely factual and accurate on their application and those that misstated, “there was no statistically significant difference in mortgage approval duration”.

Fees for no service: ASIC commences Federal Court action against NAB companies

ASIC has today commenced proceedings in the Federal Court of Australia against two entities in NAB’s wealth management division, NULIS Nominees (Australia) Limited (NULIS) and MLC Nominees Pty Ltd (MLC Nominees). The court proceedings relate to fees charged by both entities to a significant number of their superannuation members for services not provided.

ASIC alleges that NULIS and MLC Nominees (as the current and former superannuation trustee of NAB) misled members of MLC MasterKey Super products.

ASIC also alleges NULIS and MLC Nominees deducted approximately $33m Plan Service Fees from 220,000 members of MLC MasterKey Business and MLC MasterKey Personal Super who did not have Plan Adviser (No-Adviser Members).  NAB also deducted approximately $67m Plan Service Fees from 300,000 members of MLC MasterKey Personal Super where Plan Advisers were not required to provide services and members did not receive services (or any services they could not otherwise obtain for free).

ASIC seeks from the Federal Court declarations of contravention and a civil penalty.

The commencement of this civil penalty action is part of ASIC’s broad-ranging and significant investigations currently underway into fee for no service failures in the financial services industry. Alongside these investigations ASIC is obtaining considerable remediation for impacted customers, currently estimated to exceed $850m.

ASIC alleges that MLC Nominees and NULIS:

  • contravened s912A(1)(a) of the Corporations Act 2001 (Corporations Act) by failing to ensure that its financial services were provided efficiently, honestly and fairly when it deducted approximately $33m Plan Service Fees from 220,000 No-Adviser Members;
  • made false or misleading representations to No-Adviser Members in contravention of ss 12DB, 12DA of the Australian Securities and Investments Commission Act 2001 (ASIC Act) and s1041H of the Corporations Act by representing that it was entitled to deduct the Plan Service Fee and the No-Adviser Member was obliged to pay it when there was no such obligation;
  • contravened s912A(1)(a) of the Corporations Act when deducting approximately $67.1m Plan Service Fees from 300,000 members of MLC MasterKey Personal Super (Linked Members) in circumstances where it did not oblige Plan Advisers to provide services and members did not receive services;
  • made false or misleading representations in contravention of s12DB and s12DA of the ASIC Act by not disclosing that Linked Members in MLC Masterkey Personal Super had the right to turn off the Plan Service Fee; and
  • contravened s912A(1)(c) of the Corporations Act by failing to comply with financial services laws, including issuing defective disclosure documents within the meaning of s1022A of the Corporations Act and failing to exercise the degree of skill, care and diligence as a prudent trustee would exercise and failing to act in the best interests of members in breach of its general law duties and the Superannuation Industry (Supervision) Act 1993 when making the fee deductions and alleged misrepresentations to members.

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Background

Between October 2016 and June 2017, NULIS remediated No-Adviser Members approximately $35.9m (including interest and less fund tax of $6m).

NULIS also announced on 26 July 2018 that it would refund Linked Members with the total remediation expected to be approximately $87.1m (including interest and less fund tax of $15m).

ASIC also imposed, by consent, additional licence obligations on NULIS in January 2017 following its inquires in relation to several breach reports, including the Plan Services Fee.

ASIC has ongoing investigation in relation to Adviser Service Fees charged by NAB entities in relation to personal advice services.

Commonwealth Bank Dances The Same Tune By Upping Mortgage Rates

Commonwealth Bank of Australia has today announced it will increase its variable home loan rates, following a sustained increase in funding costs. All variable home loan rates will increase by 15 basis points from 4 October 2018.

  • For owner occupiers, the standard variable home loan rate will increase to 5.37% per annum for customers with principal and interest repayments, and 5.92% per annum for customers with interest only repayments.
  • For investors, the standard variable home loan rate will increase to 5.95% per annum for customers with principal and interest repayments, and 6.39% per annum for customers with interest only repayments.

Angus Sullivan, Group Executive Retail Banking Services Commonwealth Bank, said: “We have made this decision after careful consideration. We are very conscious of the impact that increasing interest rates will have on our customers, however it is important that we price our home loan products in a way that reflects underlying costs.

“Over the past six months, we have seen funding costs increase significantly, driven primarily by a rise in the 90 day Bank Bill Swap Rate. These changes have increased the cost of providing loans to our customers.

“We have absorbed these higher funding costs over the past six months in the hope that they would ease. Unfortunately, the costs have remained high and it is now expected that they will remain elevated for the foreseeable future.

“As a result of this, we have made the decision to raise our variable home loan rates to partially offset the increased costs. We understand this will have an impact on household budgets. To allow our customers time to prepare, this change will not take effect for four weeks, giving homeowners an opportunity to look at their options.

“For customers looking for more certainty around their mortgage repayments, we continue to offer a range of fixed rate options that may be suitable. These include a 3.79% per annum two year fixed rate for owner occupier customers, with principal and interest repayments, on our wealth package.

“We also encourage customers with interest only repayments to consider whether a lower rate principal and interest home loan would better meet their needs. Customers can switch online, in-branch or over the phone at no cost.

“Our customers can speak with one of our home lending specialists, who can review their home loan options free of charge, to ensure that their arrangements remain appropriate for their circumstances.”

The increase to our variable home loan rates will come into effect on 4 October 2018