Category: Banking Culture

No more volume-based bonuses for mortgage brokers

The ABA says that Australia’s mortgage broking industry has ended the use of volume-based bonus commissions, campaign-based commissions, and other volume-based bonus payments. This is one of the main findings of an interim report prepared by the Combined Industry Forum.

In making these changes, the industry has responded to concerns that the previous structure of incentives risked customers being encouraged to borrow more than they need.

The move follows findings of ASIC’s Review of Mortgage Broker Remuneration and the Australian Banking Association’s Sedgwick Review which identified there was a risk with volume-based incentives.

Volume-based incentives in residential mortgage lending were also identified during the Royal Commission as not meeting community standards and not delivering the best results for customers.

The Combined Industry Forum has been working with the industry since May 2017 to facilitate progress of the adoption of ASIC’s recommendations.

“The work of the Combined Industry Forum shows how the industry is committed to reform and to raise the bar in support of good customer outcomes,” Chair of the Forum, Anthony Waldron, said.

“Mortgage brokers enable greater access and affordability for all consumers to lending, and these changes are a positive step towards setting new standards and shaping the future of the broking industry.”

CEO of the Australian Banking Association, Anna Bligh, said the interim report outlined important changes which would help refocus the industry on producing strong outcomes for its customers.

“The ASIC Review, the Sedgwick Review, the Productivity Commission and the Royal Commission have all shown us that the industry has a problem with these types of payments that may encourage customers to borrow more than they need,” Ms Bligh said.

“These types of payments present a risk that brokers will place customers with lenders for the wrong reasons.

“By addressing these types of incentives, the industry has acknowledged their failings and taken responsibility to fix the problems to ensure Australian customers are receiving high quality advice,” she said.

Mortgage and Finance Association of Australia CEO, Mike Felton, said he was pleased with the progress made by the industry as outlined in the interim report, noting that the industry has taken decisive action on this key issue and other recommendations raised by ASIC and the Sedgwick review.

“I am particularly pleased with the progress made this year. This move gives consumers continued confidence that recommendations from brokers are not biased towards a particular lender,” Mr Felton said.

“The abolishment of volume-based bonus commissions by members is a significant milestone for the industry. I look forward to continuing our work with industry and consumer groups as we implement additional reforms in response to ASIC’s Report,” he said.

Finance Brokers Association of Australia Limited (FBAA) Executive Director Peter White said the change was a fantastic outcome.

“Moving away from campaign based incentives and other volume-based bonus payments is an important step in addressing community concerns about remuneration practices in the mortgage broking industry,” Mr White said.

“Scrapping these bonuses that encouraged a focus on sales is an important step for the industry and demonstrates its commitment to change while also maintaining healthy competition.

“Each member of the Combined Industry Forum is committed to driving change and to ultimately rebuilding trust with our customers,” he said.

The industry has begun overhauling agreements between providers and brokers to remove discount or ‘free aggregation’ for specific loans. This will substantially reduce incentives for brokers to sell loans from one particular provider. This work will be completed by the end of the year.

These changes are part of a package of reforms recommended by the Forum at the end of last year, which includes further changes to the standard commission model, a new regime for controlling and disclosing non-monetary benefits, and improved public reporting and disclosure requirements.

As part of the commitment made by the Forum, Treasury and ASIC have been briefed on the interim report.

Royal Commission Moves On To Insurance

The Royal Commission in Financial Services Misconduct has announced that the sixth round of public hearings will focus on the Insurance Industry and will be held in Melbourne from Monday 10 September to Friday 21 September.   AMP, CommInsure, IAG and Youi are among the case studies to be considered. More grief for the industry we suspect as more bad behaviour is uncovered!

The sixth round of public hearings will consider issues associated with the sale and design of life insurance and general insurance products, the handling of claims under life insurance and general insurance policies, and the administration of life insurance by superannuation trustees. The hearings will also consider the appropriateness of the current regulatory regime for the insurance industry.

The Commission presently intends to deal with these issues for the purposes of the public hearings by reference to the case studies set out below. These include the natural disaster case studies that were originally to have been examined in the fourth round of public hearings. Entities are named in alphabetical order and not in the order in which the evidence of those entities will be heard.

  Topic Case Studies
1. Life insurance
  • AMP
  • ClearView
  • CommInsure
  • Freedom Insurance
  • REST
  • TAL
2. General insurance
  • AAI (Suncorp)
  • Allianz
  • IAG
  • Youi
3. Regulatory regime
  • Code Governance Committee
  • Financial Services Council
  • Insurance Council of Australia

During the hearings, evidence will also be given by consumers of their particular experiences. The entities that are the subject of consumer evidence will be informed by the Commission.

AMP Names New CEO

Former Credit Suisse South East Asia chief executive Francesco De Ferrari has been named as AMP’s new boss.

AMP has announced this morning that Mr De Ferrari would take over from Mike Wilkins, who had been acting as interim CEO since April.

Prior to joining AMP, Mr De Ferrari spent 17 years at Credit Suisse where he served as chief executive, South East Asia and frontier markets, as well as heading up private banking in Asia Pacific.

The appointment means Mr Wilkins will work with Mr Ferrari during the handover period and be returning to the board as a non-executive director.

AMP chairman David Murray said Mr De Ferrari was an “outstanding leader with a strong track record in international wealth management and extensive experience in redesigning business models to drive turnaround and growth”.

The AMP board had conducted “an extensive global search” in order to find a suitable leader, Mr Murray said.

“Francesco is a proven change agent who will bring the strategic acumen and expertise to spearhead the transformation needed in our business.”

The AMP chairman added that Mr De Ferrari had established “a culture that balanced the interests of clients, shareholders and all other stakeholders” during his time at Credit Suisse.

“His experience of transforming and driving growth in businesses in Asia and Europe will be invaluable as he addresses the significant challenges facing both our business and the wider financial services sector in Australia.

“We have designed a remuneration structure to drive the recovery of AMP and recognise the degree of challenge in the task ahead.

“His remuneration and incentives are directly aligned with the interests of shareholders. With his track record of commitment to clients and business performance, I have no doubt Francesco is the right person to lead the recovery of AMP and set the strategy for future growth.”

Commenting on his own appointment, Mr De Francesco described AMP as an “iconic Australian company with strong, market-leading positions in wealth management, insurance and asset management” and said he felt privileged to be selected to the role.

“Throughout its history, AMP has been driven by a strong sense of purpose, helping customers plan for tomorrow and supporting them through the critical moments of their lives.”

He also noted that 2018 had “clearly been a challenging year for the business”.

“I’m confident we can earn back trust which will underpin the recovery of business performance.

“I’m encouraged by the process of change already initiated by the board, and I’m committed to accelerating this change, while maximising the opportunities we have both in Australia and internationally.

“I am excited by the opportunity and am looking forward to working with board and the team at AMP to restore the company to a position of strength and drive its future growth.”

APRA Polices Banking Words

The Banking Act 1959 (Banking Act) places restrictions on financial businesses using certain words and expressions related to banking. APRA just released some updated guidelines.

Under sections 66 and 66A of the Banking Act, only persons that have been granted approval by APRA can use the following words or expressions in Australia in relation to their financial business (unless an exception in the Banking Act applies):

  • ‘bank’, ‘banker’ and ‘banking’;
  • ‘building society’, ‘credit union’, ‘credit society’ and ‘credit co-operative’;
  • ‘authorised deposit-taking institution’; and
  • ‘ADI’ (except where these letters are used as part of another word).

Similar words and expressions, whether in English or other languages, are also restricted. These restrictions apply to any ‘financial business’, meaning a business that includes or relates to the provision of financial services, whether or not in Australia.

APRA only grants permission for financial businesses that are not authorised deposit-taking institutions (ADIs) to use these restricted words or expressions in very rare or unusual circumstances.

If your business is a financial business that is not an ADI, and you wish to use a restricted word or expression, you need to make an application to APRA for approval.

If your business is not a financial business and you propose to use a company name or business name that contains a restricted word or expression, you are still required to obtain confirmation from APRA that section 66 or 66A does not apply before registering the name with the Australian Securities and Investments Commission (ASIC).

Under the Banking Act, there is no restriction on an ADI using the restricted expressions ‘authorised deposit-taking institution’ and ‘ADI’. An ADI is also permitted to use the restricted words ‘bank’, ‘banker’ and ‘banking’ unless APRA determines otherwise. Applicants for authorisation as an ADI should contact APRA about the circumstances in which it may be permissible to use a restricted word or expression.

It is an offence for a person to use a restricted word or expression in Australia in relation to a financial business, except where APRA has granted a consent or exemption, or where a statutory exception applies. The penalty for this offence is 50 penalty units for each day that a restricted word or expression is used. At the time of publication of these guidelines, 50 penalty units is equivalent to $10,500 for an individual and $52,500 for a corporation.

APRA has granted the following types of financial businesses a class consent under section 66, allowing them to use certain restricted words or expressions:

  • building societies;
  • credit unions;
  • trustees of ADI staff superannuation funds;
  • foreign banks issuing securities in parcels not less than $500,000; and
  • offshore banking units.

Time, money and ASIC ‘impeded’ APRA

The main issue with taking legal action against rogue super funds is that the process costs time and money, APRA has told the royal commission, via Investor Daily.

APRA’s Helen Rowell was the first witness to take the stand on Friday 17 August, where counsel assisting Michael Hodge was quick to try and gain insight into APRA’s role as a regulator of the $2.6 trillion superannuation sector.

Mr Hodge asked whether APRA would ever commence litigation against trustees, to which Ms Rowell explained that this is a “potential” action, but that other methods would be preferable, such as an enforceable undertaking.

One of the criticisms that has been made by the Productivity Commission in its draft report of APRA is that the “behind closed doors” nature of its activities is not effective for achieving what Mr Hodge called “general deterrence”.

Ms Rowell disagreed that APRA works behind closed doors but admitted the that no corporate trustee has been required to give an enforceable undertaking in relation to superannuation in the last 10 years.

In her statement, which was referenced by Mr Hodge during his questioning, the APRA deputy chair was asked a question by the Commission to explain any practical limitations or impediments on APRA seeking disqualification orders pursuant to section 126H of the SIS Act.

Ms Rowell’s statement included three impediments.

The first impediment is the resources and expense of gathering sufficient and admissible evidence in the form that would be required by a court. She noted that APRA does not have power to recoup costs of an investigation.

“The second point you make is the legal costs of the court process,” Mr Hodge read. “And then the third point is about the length of time involved with court processes.”

Mr Hodge asked Ms Rowell what the basis is for her judgment that court processes take a long time.

“Our previous experience in dealing with matters through relevant tribunals such as the AAT and observation of other court processes that occur in the wider financial sector,” she replied.

However, Mr Hodge highlighted that APRA hasn’t had any experience dealing with superannuation companies in the courts in the last 10 years.

APRA ‘waiting’ for ASIC

Later, Mr Hodge turned to the question of responsibility. The counsel assisting was eager to identify what action APRA was taking when breaches occur.

“Is there a limitation period on commencing a civil penalty proceeding for a breach of the sole purpose test?”

“I don’t know,” Ms Rowell replied.

Mr Hodge then asked whether APRA had received any suggestion from ASIC that ASIC will commence public enforcement action in relation to ‘fees for no service’.

“I don’t know the answer to that question,” Ms Rowell said.

Mr Hodge asked if it is satisfactory, from the perspective of APRA as a matter of general deterrence, that no proceeding has ever been commenced against a trustee on the basis of a contravention of the sole purpose test where the trustee is deducting money from members’ accounts and paying it to related party advisers who are not providing a service.

“I think it’s too early to form that conclusion because that work is ongoing and APRA has not made any final decisions about what action it may or may not take ultimately in relation to that matter,” Ms Rowell said, adding that APRA is allowing ASIC to complete its work and review.

“When you say APRA is waiting to see what ASIC will do,” Mr Hodge probed, “has there been any consideration at all within APRA in relation to this issue to date?”

Ms Rowell responded: “There has been discussions with individual entities and – on the matter and seeking to get a complete understanding of the issues as they pertain to the individual entities. There would be general discussions occurring at APRAs internal committees about, you know, what the issue was and what was being done to address it, and – and those sorts of things. As I said, I don’t believe that we have made any conclusions at this stage as to what further action, if any, we might wish to take.”

The Million Dollar Man Who Is Waiting For The Bubble To Burst

In the latest edition of my discussions with economist John Adams, we look at recent RBA monetary policy, and conclude is not fit for purpose.

Despite all the hype, the next cash rate move could well be down, as the bursting debt bubble approaches.

John’s original article is here.

 

Broker group established to respond to regulators

From the Sedgewick report, to the Productivity Commission and ASIC’s investigations, brokers – particularly their remuneration – have been under fire from all corners; via Australian Broker.

Now, a cohort of industry execs have come together to help the industry unite through a dedicated forum.

The Mortgage Industry Forum (MIF), is backed by 16 founding members from Yellow Brick Road, Foster Finance, Mortgage Success, Shore Financial, ALIC, Intelligent Finance and Loan Market, among others.

Revealing the details during a National Finance Broker Day event in Sydney, YBR executive chairman Mark Bouris said, “This is important. It’s about time we reacted and there is something happening, that I’m involved in, and I would be happy for you to join us.”

Reiterating that MIF is “not against ASIC” or intending to become a competitor to the MFAA or FBAA, the group is intended to be “adjunctive to the Combined Industry Forum”.

Bouris continued, “The objective is to assess all the recommendations that are being made about us as an industry

“I paid for it, we meet every week or two and we cull through every recommendation that has been made by the CIF, Sedgewick, every recommendation from the Productivity Commission, ASIC and anybody else who matters,” he added.

MIF has written and submitted its own report to Treasury and the royal commission, which contains industry observations and recommendations from the broker perspective, with a heavy focus on protecting trail commissions.

Bouris explained, “We are trying to build a case for brokers so we, as a segment of the market can hand over …. a document to show how we should be regulated or managed around fee structures, our obligations, our transparency, training and compliance for the future. “

Next, a survey of broker input on the six CIF recommendations – available for all brokers to contribute towards through MIF’s Facebook page – will also be taken to key decision makers.

“We need to take to the government a document that will say, of the 17,000 brokers in this country, this many support all the recommendations. Otherwise all we have is people speaking for us, on our behalf, and that doesn’t work,” Bouris continued.

In addition to gauging sentiment, the group will also make practical suggestions as to how brokers can demonstrate the ongoing work they do in return for trail commission. Further, the group will also suggest new tools to support compliance and best practice.

Among the ideas floated, Bouris revealed an idea for a broker app that records client conversations and uploads them to a cloud accessible by ASIC, banks, aggregators and other key players in monitoring and compliance.

Adding that he believes the chances “right now are 50/50” that remuneration structures will change, Bouris said, “If 20% of our income is lost, the industry will collapse and if our industry doesn’t survive, the banks will just get stronger.”

He added, “We are the easy ones to target. We are fragmented. Banks have teamed up together and they have massive balance sheets and lobby groups, they are politically connected and they are the biggest tax payers in the country – so nobody is going to hurt them.

“If you don’t support the group and something happens that isn’t in your favour, you have only yourselves to blame. Something radical could happen – I’ve seen it happen in the past.”

Research suggests bigger banks are worse for customers

From The Conversation.

Yet again this week, the Hayne Royal Commission has brought disturbing news of misconduct toward customers of our largest financial institutions. This time super accounts have been plundered for the benefit of shareholders.

Recent research from economists at the United States Federal Reserve suggests this problem is not unique to Australia. If true, this supports the argument that larger financial institutions should be broken up or face more regulatory scrutiny.

The researchers found that larger banking organisations are more likely than their smaller peers to experience “operational losses”. And by far the most significant category (accounting for a massive 79%) within operational losses was “Clients, Products and Business Practices”.

This category captures losses from “an unintentional or negligent failure to meet a professional obligation to specific clients, or from the nature or design of a product”. When a bank is caught out engaging in misconduct toward customers, it is required to make good to customers – the so-called process of remediation.

It’s a category that perfectly captures the issues under review in the royal commission. Operational losses also include things like fraud, damage to physical assets and system failures.

In recent weeks we have heard a lot about Australian banks having to compensate customers. The cost to the bank is, however, far greater than the dollar value received by customers.

The administrative costs of such programs are significant, and then there are legal costs and regulatory fines.

While no-one feels sorry for banks having to suffer the consequences of their misconduct, regulators monitor these losses due to the possibility that they may increase the chance of bank failure.

Another aspect of the Federal Reserve’s study is the size of the losses. One example is where the five largest mortgage servicers in the United States reached a US$25 billion settlement with the US government relating to improper mortgage loan servicing and foreclosure fraud.

In another example, a major US bank holding company paid out over US$13 billion for mis-selling risky mortgages prior to the 2008 crisis. Settlements of this size have simply not occurred in Australia.

Why larger banks?

One might assume that economies of scale – reduced costs per unit as output increases – also apply to risk management. The larger the organisation, the more likely it has invested in high-quality, robust risk-management systems and staff. If this holds, then a large bank should manage risk more efficiently than a smaller one.

The possibility of unexpected operational losses should then be reduced. Larger financial institutions might also attract greater regulatory scrutiny, which might help to improve risk-management practices and reduce losses.

But the reverse seems to be true, based on the analysis of American banks from 2001-2016.

For every 1% increase in size (as measured by total assets) there is a 1.2% increase in operational losses. In other words, banks experience diseconomies of scale. And this is particularly driven by the category of Clients, Products and Business Practices.

In this category losses accelerate even faster with the size of the bank.

This could be the result of increased complexity in large financial institutions, making risk management more difficult rather than less. As firms grow in size and complexity, it apparently becomes increasingly challenging for senior executives and directors to provide adequate oversight.

This would support the argument that some financial institutions are simply “too big to manage” as well as “too big to fail”. If bigger financial institutions produce worse outcomes for customers, there is an argument for breaking up larger institutions or intensifying regulatory scrutiny.

Is the same thing happening in Australia as in the United States? The case studies presented by the royal commission suggest it could be, but it’s difficult for researchers to know exactly.

Australian banks are not required to publicly disclose comprehensive data on operational losses. APRA may have access to such information, but any analysis the regulator may have done of it is not in the public domain.

Perhaps this issue is something Commissioner Hayne should explore.

Author: Elizabeth Sheedy Associate Professor – Financial Risk Management, Macquarie University

AMP super governance under scrutiny

AMP’s superannuation funds are permitted to underperform for five years before the investment committee is obliged to inform the relevant fund’s board, the royal commission has heard, via InvestorDaily.

The royal commission has been told that a consistently underperforming AMP fund could be underperforming for five years before the board of directors becomes notified.

The royal commission hearings into superannuation continued on Thursday, with AMP Superannuation Limited chairman Richard Allert in the witness box.

Mr Allert faced questioning by counsel assisting Michael Hodge about how AMP management and board addresses poorly performing investment funds.

The royal commission was told that ‘quarterly investment management reports’, which contain information about the performance of AMP’s funds in a given quarter, are put together by AMP’s Group Investment Committee.

However, the board of AMP Superannuation does not receive this report. Instead, it goes to AMP trustee services.

Mr Hodge confirmed with Mr Allert that the report would only be raised with the board if trustee services found an issue with the report, or if there was an “exception”.

“Unless an exception was triggered, then you wouldn’t expect this report to be provided to the board?” Mr Hodge asked.

“Correct,” Mr Allert said.

The royal commission heard that such an ‘exception’ would have three criteria: the first was the ‘identification’ criteria, which meant pinpointing “significant under-performance against peers/benchmarks over rolling 36 month period”.

The second criteria was a period of ‘further investigation’, and the third and final criteria was an exceptions report that was issued “if an investigation remains under investigation … for a period of eight or more quarters”.

“So it would seem as if it would be necessary for an investment to underperform for five years before it would be reported to the board,” Mr Hodge put to Mr Allert.

“No, I couldn’t accept that,” he responded.

After a protest from AMP legal counsel Robert Hollo, who called the question “a little unfair”, Royal Commissioner Kenneth Hayne AC QC interceded and Mr Hodge rearticulated his question.

“Is it possible for an exceptions report to come to the board about investment performance any earlier than where the underperformance has occurred over a five-year period?”

Mr Allert said it was possible. “If there was something that was really bothering the Group Investment Committee and relaying it to the Trustee Services or was bothering our trustee services representative on the GIC, they would alert the board to that fact.”

But this would occur outside of the exceptions framework, the royal commission was told.

One instance where Mr Allert could recall AMP trustee services raising an issue with the board this year was “in relation to products that had a cash element”.