Category: Banking Culture

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

ANZ Hikes Mortgage Rates

The music continues with ANZ announcing it will increase its variable interest home loan rates. This of course is the second of the big four banks to raise mortgages in response to higher funding costs.

Variable interest rates for home and residential investment loans will rise by 16 basis points (Westpac’s was 14 basis points), effective September 27. This means the declared rate for a principal and interest loan will now be 5.36%. That said,  NO rise for ANZ home loan customers in drought-declared regional Australia are planned.

Fred Ohlsson, ANZ Group Executive Australia, says the decision to lift was a difficult one.

“We know the impact rising interest rates have on family budgets,” he says.

“The reality is it is more expensive for us to fund our home loans on wholesale markets and we also needed to balance the needs of all stakeholders.

“There is no change to the effective rates of our home loan customers in drought declared regional Australia benefiting more than 70,000 of our customers.

“We wanted to play our part in keeping cash in regional towns impacted by the drought and we hope this will also assist both families and small businesses in these areas.”

The new rates:

Source: ANZ

 

Getting To Grips With Responsible Lending

Given all the interest in the lending practices across the sector, we have launched a series of DFA video shows on the critical issues surrounding Responsible Lending.

In the series we will look at why responsible lending is so important (for households, industry players and the broader economy), what lessons we did – or should have learnt following the GFC, how changes are likely to play out ahead, and how advice for lending services compares with wealth advice.

Principal at DFA Professor Gill North will lead the shows. The first is an overview of the series and the key themes we will address.

Gill has written widely in this area, and you can access her work via SSRN or though Deakin University

 

 

Regaining trust ‘not the regulator’s job’: APRA

On Wednesday 4 September, APRA chair Wayne Byres addressed the annual Risk Management Association CRO Conference in Sydney and spoke about regaining the community’s trust, via InvestorDaily.

“The broader community has lost confidence that the financial sector understands and acknowledges the privileged position that it holds in society, and the obligations that come with it,” said Mr Byres.

The chairman said that issues brought to light by the royal commission were now front and centre of the public’s consciousness and it was up to the industry to build the trust.

“It is not the regulators’ job to regain that trust for you: the industry needs to earn and sustain the community’s trust through its own actions.

“There are, however, a range of regulatory and supervisory activities that APRA is pursuing that will support and reinforce your own efforts to restore the industry’s standing,” he said.

Mr Byres reiterated his support for APRA to play a role in risk culture and said that APRA was primarily interested in what effects poor risk culture would have on the banks.

“APRA is primarily interested in the potential for a poor risk culture to produce bad outcomes for the bank (and hence depositors),” he said.

The prudential regulator is currently in a process of rescoping their pilot risk culture assessment to make it more useable on a wider basis, said Mr Byres.

“We don’t seek to prescribe the risk culture either. We expect executives and their boards to establish and maintain the risk culture that they consider (and note, we do expect a conscious consideration) to be appropriate to their organisations, given their strategy and risk appetite.”

Mr Byres said an important part of regaining trust was in the commencement of the Banking Executive Accountability Regime (BEAR) – but the work is far from over.

“The BEAR clearly has teeth, and use of the BEAR’s enforcement provisions will demonstrate to the community that there are going to be clear and material consequences for poor prudential outcomes.

“Where I hope the BEAR will have a positive impact is through forcing the industry to hold itself to account much more firmly and quickly than has been the case to date,” he said.

The last area that the APRA chairman flagged concerned remuneration. Mr Byres was keen to stress that APRA is not involved in determining who gets paid what.

Mr Byres said, instead, that APRA had reviewed remuneration policies throughout their entities and found that the frameworks across the board did not consistently meet the objectives of encouraging good behaviours.

“From insufficient challenge to insufficient documentation, it was clear that stronger governance of executive remuneration is needed,” he said.

Concluding his speech, Mr Byres said that if the industry worked together to improve risk culture, accountability and more balanced performance measurements, then the trust in the sector would return.

“As much as we might help, you will have to do the heavy lifting. It will ultimately be the industry’s collective behaviour that determines the extent to which the trust and confidence of the community is regained.”

ASIC prescribes three-year period for credit card responsible lending assessments

Following consultation, ASIC has set a three-year period to be used by banks and credit providers when assessing a new credit card contract or credit limit increase for consumers.

From 1 January 2019, under the revised responsible lending obligations, a credit card contract or credit limit increase must be assessed as unsuitable if it is likely the consumer would be unable to repay the credit limit within this period. The three-year period will apply to all classes of credit card contracts.

ASIC has prescribed a three-year period to strike an appropriate balance between:

  • preventing consumers from being in unsuitable credit card contracts, and
  • ensuring that consumers continue to have reasonable access to credit through credit card contracts.

In July 2018 ASIC released Consultation Paper 303 Credit cards: Responsible lending assessments (CP 303), which outlined the proposal to prescribe a period of three years for responsible lending assessments. The consultation paper suggested this period would apply to all classes of credit card contracts.

Today ASIC published a feedback report (REP 590) which outlines the submissions received and ASIC’s responses. ASIC Credit (Unsuitability-Credit Cards) Instrument 2018/753 has also been created.

In REP 590 ASIC provides further guidance on the assumptions that should be made when assessing whether a consumer can repay the credit limit within three years. This includes guidance on:

  • fees on credit card accounts
  • interest rates charged on credit card contracts held with other credit providers, and
  • the effect of the reform on responsible lending assessments for other credit products.

The new legal requirement commences on 1 January 2019. Credit providers are expected to have systems in place to ensure that that they can meet the new obligations.

The revised obligations will apply to licensees that provide credit assistance and licensees that are credit providers for both new credit card contracts and credit limit increases under existing credit card contracts.  ASIC will monitor the prescribed period and our guidance to ensure that it is achieving the goals of the reform.

Background

In March 2018 the Government implemented reforms in response to the Senate Economics References Committee report relating to credit card interest rates. As part of the reforms, responsible lending obligations were amended to require that a credit card contract or credit limit increase must be assessed as unsuitable if it is likely that the consumer would be unable to repay the credit limit within a period prescribed by ASIC.

The purpose of this reform is to make sure that consumers can afford to repay their credit card debts within a reasonable period. Consumers will still retain the flexibility to make low minimum repayments on credit cards.

In July 2018 ASIC released Report 580 Credit card lending in Australia (REP 580), which contained our findings that more than one in six consumers are struggling with credit card debt, and that lenders could do more to take proactive steps to address persistent debt, low repayments or poorly suited products. We also found that in the 12 months to June 2017, $621 million could have been saved if consumers who regularly incur interest charges had used a lower rate card.

In REP 580 ASIC flagged that it would publicly report on the credit providers who do and don’t respond to the findings and this will occur later in 2018.

ASIC received 15 submissions in response to CP 303. ASIC thanks the people, businesses and associations that took the time to provide comments on our proposal.

CBA says breaking the law was an ‘honest mistake’

CBA has rejected claims it broke the law, pointing to an obscure loophole in the Criminal Code and stating that it was “genuinely of the belief” that it was doing the right thing.

Great legal minds are trying to find ways to explain the banks conduct and avoid the worst potential consequences! This from InvestorDaily:

Earlier this month, Colonial First State (CFS) executive general manager Linda Elkins faced the royal commission, where she was questioned about CBA’s handling of the MySuper transition.

From 1 January 2014, employers could only make default contributions to a registrable superannuation entity (RSE) offering a MySuper product.

Counsel assisting Michael Hodge established in his questions to Ms Elkins that CBA had breached the law 15,000 times by receiving default contributions into high-fee-paying accounts after 1 January 2014.

RSEs were also given a deadline of 1 July 2017 to transfer existing accrued default accounts (ADAs) to an approved MySuper product.

Mr Hodge noted that the contravention of s.29WA of the SIS Act is a strict liability offence, a point that was highlighted by CBA in its latest submission to the Hayne inquiry.

“However, it should be noted that in determining whether or not an offence has actually occurred, consideration would need to be given to the defence of mistake of fact available in section 6.1 of the Criminal Code in respect of strict liability offences,” the bank said.

“This is particularly the case here where CFSIL was genuinely of the belief that the members for whom the s.29WA breach occurred were in fact ‘choice’ members who fell outside the requirements of s.29WA and that it was only after engagement with APRA that it understood that the regulator was of a different view.”

In June 2014,  the board of CFS was told by management that APRA had requested it accelerate the transition for 60,000 ADA members, the royal commission heard.

Moving the 60,000 into lower-fee MySuper products would have the effect of turning off grandfathered commissions for advisers, the royal commission heard.

CFS, like other retail super providers, was eager to have ADA clients make an “investment decision” so that they would be considered a ‘choice’ member and therefore ineligible for transfer to a MySuper product.

In Mr Hodge’s submission to the commission following the fifth round of hearings, he stated that it is open to the commission to find that additional breaches occurred.

In response, CBA has stated that “there is no evidence before the commission to suggest that the failure to pay contributions of a subset of FirstChoice Personal members into a MySuper product was anything other than a genuine misunderstanding about the scope of s.29WA and its impact on particular cohorts of members, which CFSIL came to learn APRA did not agree with.”

“CFSIL believed that these members of FirstChoice Personal were choice members, to whom s.29WA did not apply.

“That honest mistake does not excuse CFSIL’s breach of the SIS Act provisions and s.912A(1)(c) of the Corporations Act as it has properly conceded, but it does tell against a finding of a failure to do all things necessary to provide services efficiently, honestly and fairly.”

Westpac admits to breaching responsible lending obligations

ASIC says Westpac has admitted breaching its responsible lending obligations when providing home loans and agreed to submit to a $35 million civil penalty to resolve Federal Court proceedings under the National Consumer Credit Protection Act 2009 (Cth) (the National Credit Act). A three-week trial for this matter was due to commence in the Federal Court yesterday.

The parties have jointly approached the Federal Court seeking orders that Westpac contravened the responsible lending provisions of the National Credit Act because its automated decision system:

  • did not have regard to consumers’ declared living expenses when assessing their capacity to repay home loans, and instead used a benchmark (the Household Expenditure Measure); and
  • for home loans to owner occupiers with an interest-only period, failed to use the higher repayments at the end of the interest-only period when assessing a consumer’s capacity to repay the loan. For example, for a loan of $500,000 at 5.24% with a term of 30 years and a 10-year interest-only period, the assumed repayment using the incorrect method is $2,758 per month, whereas the actual repayment after the expiry of the interest-only period using the correct method is $3,366 per month.

The litigation related to Westpac’s home loan assessment process during the period December 2011 and March 2015, during which approximately 260,000 home loans were approved by Westpac’s automated decision system. For approximately 50,000 home loans, Westpac received, and did not use, consumers’ actual expense information that was higher than the Household Expenditure Measure. For approximately 50,000 home loans, Westpac used the incorrect method when assessing a consumer’s capacity to repay a home loan at the end of the interest-only period. Of these approximately 100,000 loans, Westpac should not have automatically approved approximately 10,500 loans.

If approved by the Federal Court, this will represent the largest civil penalty awarded under the National Credit Act.

Westpac admitted contraventions of the National Credit Act and the parties filed a Statement of Agreed Facts and joint submissions as to the appropriate penalty. Westpac will also pay ASIC’s litigation and investigation costs.

The National Credit Act provides consumer protections to ensure that credit providers make reasonable inquiries about a borrower’s financial situation, verify the information that they obtain and assess whether a loan contract will be unsuitable for the borrowers.

The responsible lending laws are designed to ensure that lenders have regard to all relevant information about the consumer before approving a loan to minimise the risk of adverse outcomes for the consumer over the course of the loan. Lenders must have in place the right processes to ensure that they comply with these important obligations.

ASIC Chair James Shipton said, ’This is a very positive outcome and sends a strong regulatory message to industry that non-compliance with the responsible lending obligations will not be tolerated. Responsible lending in the home lending market is absolutely vital to consumers, banks and our economy.

‘This outcome, and ASIC’s actions in relation to responsible lending, reinforce that all lenders must obtain information from individual borrowers about their financial situation to ensure that they can properly assess the ability of the customer to repay the loan. Lenders must then verify the information to ensure that it is true, and then assess whether the loan is unsuitable for the borrower. Taken together, these responsible lending obligations are a cornerstone protection for both borrowers and lenders,’ he said.

‘This outcome is a warning to all lenders that they must comply with the responsible lending obligations. If they do not, ASIC will take action to enforce the law.’

Background

ASIC published its review of interest-only loans in August 2015 (refer: 15-220MR), as part of a broader review by the Council of Financial Regulators into home-lending standards. The review included 11 lenders, including the big four banks, and found that lenders were often failing to consider whether an interest-only loan would meet a consumer’s needs, particularly in the medium to long-term (refer: 15-220MR). ASIC was particularly concerned with Westpac’s home loan assessment process, and with Westpac providing very lengthy interest-only periods (up to 15 years) for owner occupiers.

As part of the outcomes of ASIC’s work, ASIC required lenders and brokers to raise standards to ensure they were complying with responsible lending obligations. The 11 firms in our review, including Westpac, all committed to implementing stronger standards.

ASIC has provided guidance on responsible lending in Regulatory Guide 209 Credit licensing: Responsible lending conduct (RG 209). ASIC is updating its guidance this year and will be engaging in a full public consultation as part of this process.

ASIC has also been engaging with the Government in relation to comprehensive credit reporting and a proposed open banking regime. These initiatives will assist in improving responsible lending standards by making high-quality information about consumers’ financial situation available to lenders when assessing the suitability of a loan.

RBA Warns On Housing Loan Performance

The RBA has released their Corporal Plan for 2018/2019. In the section on Financial Stability they call out specific risks in the home lending market, relating to credit quality.

During 2018/19 to 2021/22, the main risks to financial stability will most likely continue to relate to credit quality. Notably, banks’ large exposure to a potential deterioration in housing loan performance is expected to remain a key issue, requiring ongoing monitoring by both banks and regulators.

They also highlight the role of the Council of Financial Regulators (CFR), and the issues raised by the Productivity Commission and Royal Commission:

The Reserve Bank works with other regulatory bodies in Australia to foster financial stability. The Governor chairs the Council of Financial Regulators (CFR) – comprising the Reserve Bank, the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC) and the Australian Treasury – whose role is to contribute to the efficiency and effectiveness of regulation and the stability of the financial system. The Bank’s central position in the financial system, and its position as the ultimate provider of liquidity to the system, gives it a key role in financial crisis management, in conjunction with the other members of the CFR.

The Reserve Bank will continue working with the other CFR agencies to support financial stability. In the period ahead this will be informed by the Financial Sector Assessment Program review of Australia being conducted by the International Monetary Fund during 2018. The Bank and other CFR agencies
will also carefully consider the implications for the resilience of the financial sector arising from findings and recommendations of the final report of the Productivity Commission’s review of competition in the financial system, as well as the outcomes of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. The Bank will also continue working with APRA and with other regulators to monitor and, where necessary, respond to risks that may emerge from economic and financial shocks emanating from Australia or abroad.