Category: Banking Culture

Update on financial advice institutions’ fees for no service refund programs

ASIC says AMP, ANZ, CBA, NAB and Westpac have now paid or offered customers $222.3 million in refunds and interest for failing to provide advice to customers while charging them ongoing advice fees. This represents a further $6.4m in payments and offers from these institutions since the last ASIC media release (17-438MR) on the fees for no service (FFNS) project, which provided compensation figures as at 31 October 2017.

In addition, ASIC is overseeing FFNS remediation programs by other Australian financial services (AFS) licensees that have identified potential FFNS failings, including Bendigo Financial Planning Ltd, Police Financial Services Ltd (trading as BankVic), State Super Financial Services Australia Limited (trading as StatePlus), and Yellow Brick Road Wealth Management Pty Ltd. The total amount now paid or offered to customers across both groups of licensees is $259.6m.

ASIC is also aware that five AFS licensees or institutions have provisioned for future remediation payments, with four of these to date providing to ASIC amounts for future remediation (see below in notes). If all of these provisions are paid in full, FFNS remediation may exceed $850m.

The table provides compensation payments and estimates reported to ASIC as at 30 June 2018. Some institutions’ total estimates have changed since ASIC’s previous media release as they have further investigated the compensation required and, in some cases, identified additional failures needing remediation.

Group Compensation paid or offered (1) Estimated future compensation (2) Total estimate
AMP $5,010,637 $370,000 (3) $5,380,637
ANZ $50,793,257 $8,443,300 (4) $59,236,557
CBA $118,040,178 $25,274,717 $143,314,895
NAB $5,690,797 $1,019,623 (5) $6,710,420
Westpac $6,896,237 Not yet available (6) $6,896,237
Bendigo $0 $2,500,000 $2,500,000
StatePlus $37,223,999 Not yet available (7) $37,223,999
Yellow Brick Road $0 $101,477 $101,477
Total (personal advice failures) $223,655,105 $37,709,117 $261,364,222
NULIS Nominees (Australia) Ltd $35,900,408 (8) 67,000,000 (9) $102,900,408
Total (personal and general advice failures) $259,555,513 $104,709,117 $364,264,630

Source: Data reported by the AFS licensees to ASIC as at 30 June 2018.

Removal of trail would reduce competition, warns AFG

From The Adviser.

Abolishing trailing commissions for mortgage brokers would reduce competition, drive up home loan rates and make banks the “unintended beneficiaries”, the Australian Finance Group has warned.

Speaking after the release of the Productivity Commission’s final report on competition in the Australian financial system, which recommended that the government remove trail commissions, the aggregator warned that such a move could be counterproductive and potentially lead to reduced competition in the financial system.

AFG CEO David Bailey cautioned that any move to ban trailing commissions for mortgage brokers would have the impact of consolidating the lending base of the banks, stating: “This is ironic given the tone of the majority of the final report. Consumers have been voting with their feet in greater numbers for over 20 years and increasingly use brokers for better service and less costly, better-suited home loans.

“Mortgage brokers are encouraged through trailing commission to stay with customers for the life of their loan, to review products and add value. It is in the business interest of brokers to work for their clients through the years to help them continue to gain better finance outcomes as circumstances change.

“Banning the incentive to work with customers for longer durations would have a detrimental impact on the very services that brokers help provide — greater competition.”

Mr Bailey echoed the thoughts of several other heads of industry by highlighting that ASIC’s review of broker remuneration ultimately found no reason to remove trail commissions, adding: “The current structure is not broken. The removal of trail will simply hand more power to the major banks and non-major lenders and consumers will pay the price.

“Since the ASIC broker remuneration review, our industry has come together to address the recommendations from the data-driven ASIC report.

“Excellent progress has been made and a good consumer outcome has been defined. All members of the Combined Industry Forum are actively engaged in addressing the proposals raised by the regulator.

“In light of this progress, momentum-based decisions which ignore the full ramifications of such a move need to be carefully considered.”

The head of AFG went on to say that brokers are filling vital roles in areas that the banks had vacated, and particularly help vulnerable customers, first home buyers and those with complex borrowing needs.

“Providing assistance in these areas takes a lot of time — time that the bigger lenders are often not prepared to give.”

Mr Bailey highlighted that AFG had provided the Productivity Commission with evidence of the savings brokers make for their customers through ongoing contact over the life of a loan, stating that it was “disappointing” the commission “did not give sufficient weight to this evidence”.

“We invite them again to spend time with some AFG brokers to understand the value a demonstrated level of contact with a customer can deliver,” Mr Bailey said.

He concluded: “The last thing Australian consumers deserve is higher prices for lending products and less competition where banks can drive up costs for existing customers.

“We can’t afford to jettison 20 years of competitive experience without giving regard to the findings of other reviews and ensuring a stable, dynamic, customer-focused lending environment remains.”

MLC kept super members in the dark on fees

MLC and its trustee, NULIS, failed to tell superannuation members they could dial back their “plan service fees” to zero, the royal commission has heard, via InvestorDaily.

 

The royal commission’s public hearings into the superannuation sector began yesterday, with NAB executive Paul Carter standing in the witness box.

Counsel assisting Michael Hodge pursued a line of questioning about MLC MasterKey’s plan service fee (PSF), which the company announced it would be “turning off” on 27 July.

Mr Hodge established that once a member was transferred from MasterKey Business Super (MKBS) to MasterKey Personal Super (MKPS), they could call up their adviser to agree on a different fee.

“The member has the ability to negotiate that fee directly with their linked adviser in the personal plan,” Mr Carter said.

After establishing that the agreed-upon fee could be “zero”, Mr Hodge asked what happened if the adviser didn’t agree.

“The member is in control, and so the member if they deem that they would like the fee to be zero, the fee will be zero,” Mr Carter said.

However, Mr Hodge said there was an “issue” with the product disclosure statements (PDSs) produced by NAB/MLC — namely, that they failed to explain to members the fee could be reduced to zero.

“One of the issues that we identified was that the disclosure to members about their ability to dial that fee all the way to zero should have been clearer,” Mr Carter said.

“It had language along the lines of this fee can be negotiated between the member and the adviser.”

To which Mr Hodge responded: “You’ve used the word ‘negotiated’, but there’s no negotiation, is there? The member can just say, ‘I don’t want to pay this any more.’”

NULIS, the trustee for MLC/NAB, announced on 27 July that it would stop charging PSFs from September 2018.

“Do you know why it can’t stop charging those fees until September of this year?” Mr Hodge asked.

“No, I don’t,” Mr Carter replied.

Final Productivity Commission Financial System Report Is Out

The final report [674 pages !] has been released earlier than expect, and contains a series of recommendations which will have significant impact on the industry. It also passes the weight test… A best interests test is recommended in the home loan market (a change from not unsuitable).

They call out regulatory failure and conflicts of interest across the sector, referring to opaque pricing, unsuitable products, no reward for customer loyalty as well as product complexity and faux competition.  Major players have too much market power, and have fingers in multiple segments of the market. Customers lose out as a result.

“It is a fundamentally important fact that no Australian financial system regulator has the responsibility of putting competition first. Indeed, ASIC does not yet even have competition in its objectives. Nor, until this Inquiry, did other members of the Council of Financial Regulators emphasise that interest in a discernible fashion”.

Some of the key recommendations:

  • The Commission recommends the introduction of a best interest obligation for all providers in the home loans market — whether as a lender or mortgage broker — who interact directly with consumers seeking a home loan.
  • Mortgage Brokers trail commissions should be phased out (but not replaced by a fee for service). “At its simplest, brokers have a strong incentive — regardless of what may be in their customer’s best interest — to give preference in their loan recommendations to lenders that pay higher commissions. This may be uncommon, but there is no obligation for transparency of the payment to prove it.”
  • ASIC to ensure that the interests of borrowers are adequately safeguarded in the LMI market.
  • use of the term ‘advice’ should be limited to effort that is undertaken on a client’s behalf by a professional adviser.
  • APRA is singled out for myopic regulation. “Interest rates increased on both new and existing investment loans, boosting lenders’ profit on home loans. Up to half of the increase in lenders’ profit was in effect paid for by taxpayers, as interest on investment loans is tax deductible. We estimated that the cost borne by taxpayers as a result of changes in home loan investor rates following APRA’s intervention on interest-only loans in 2017, was up to $500 million per year (which may be partly offset by increased tax paid by the lending institutions on their profits)”.
  • ACCC should focus on encouraging competition across the industry and safeguarding the interests of consumers.
  • The new payments system needs a proper access regime.
  • The Payments System Board of the RBA should ban, by end-2019, all card interchange fees as a way to reduce distortions in payment choices and the flow-on costs of these distortions to merchants.

Here is their release:

  • The Australian economy has generally benefited from having a financial system that is strong, innovative and profitable.
  • There have been past periods of strong price competition, for example when the advent of mortgage brokers upset industry pricing cohesion. And technological innovation has given consumers speed and convenience in many financial services, and a range of other non-price benefits.
  • But the larger financial institutions, particularly but not only in banking, have the ability to exercise market power over their competitors and consumers.
    • Many of the highly profitable financial institutions have achieved that state with persistently opaque pricing; conflicted advice and remuneration arrangements; layers of public policy and regulatory requirements that support larger incumbents; and a lack of easily accessible information, inducing unaware customers to maintain loyalty to unsuitable products.
  • Poor advice and complex information supports persistent attachment to high margin products that boost institutional profits, with product features that may well be of no benefit.
    • What often is passed off as competition is more accurately described as persistent marketing and brand activity designed to promote a blizzard of barely differentiated products and ‘white labels’.
  • For this situation to persist as it has over a decade, channels for the provision of information and advice (including regulator information flow, adviser effort and broker activity) must be failing.
  • In home loan markets, the mortgage brokers who once revitalised price competition and revolutionised product delivery have become part of the banking establishment. Fees and trail commissions have no evident link to customer best interests. Conflicts of interest created by ownership are obvious but unaddressed.
  • Trail commissions should be banned and clawback of commissions from brokers restricted. All brokers, advisers and lender employees who deliver home loans to customers should have a clear legally-backed best interest obligation to their clients.
  • Complementing this obligation, and recognising that reward structures may still at times conflict with customer best interest, all banks should appoint a Principal Integrity Officer (PIO) obliged by law to report directly to their board on the alignment of any payments made by the institution with the new customer best interest duty. The PIO would also have an obligation to report independently to ASIC in instances in which its board is not responsive.
  • In general insurance, there is a proliferation of brands but far fewer actual insurers, poor quality information provided to consumers, and sharp practices adopted by some sellers of add-on insurance products. A Treasury working group should examine the introduction of a deferred sales model to all sales of add-on insurance.
  • Australia’s payment system is at a crucial turning point. Merchants should be given the capacity to select the default route that is to be used for payments by dual network cards — as is already possible in a number of other countries. The New Payments Platform requires a formal access regime. This is an opportunity — before incumbency becomes cemented — to set up regulatory arrangements that will support substantial competition in services that all Australians use every day.
  • More nuance in the design of APRA’s prudential measures — both in risk weightings and in directions to authorised deposit-taking institutions — is essential to lessen market power and address an imbalance that has emerged in lending between businesses and housing.
  • Given the size and importance of Australia’s financial system, and the increasing emphasis on stability since the global financial crisis, the lack of an advocate for competition when financial system regulatory interventions are being determined is a mistake that should now be corrected. The ACCC should be tasked with promoting competition inside regulator forums, to ensure the interests of consumers and costs imposed on them are being considered.

 

ASIC approves the Banking Code of Practice

ASIC has approved the Australian Banking Association’s (ABA’s) new Banking Code of Practice (the Code).

ASIC’s approval of the Code follows extensive engagement with the ABA, following a comprehensive independent review and extensive stakeholder consultation. The ABA made additional significant changes to the Code in order to satisfy ASIC that it met our criteria for approval.

This is the first comprehensive broad-based industry code ASIC has approved under its relevant powers.

The Code will commence operation from 1 July 2019.

Significant new protections for small businesses

The new Code provides for improved protections for small business borrowers and expands the reach and impact of legal protections against unfair contract terms. For small businesses who borrow up to $3 million, the Code provides that lending contracts should not contain a range of potentially unfair and one-sided terms. Unfair contract terms protections in the law apply to businesses who borrow up to $1 million.

At its current setting of applying to small businesses who borrow up to $3 million, the Code will cover the considerable majority – between 92-97% – of businesses in Australia.

To ensure the settings in the Code provide a high level of coverage of the small business sector, ASIC’s approval is conditional on an independent review of the definition of small business within 18 months of the Code’s commencement. This targeted review will test the adequacy and application of the Code’s small business coverage in practice, and will occur well before the Code’s comprehensive review, due three years after its commencement.

At the same time, ASIC will collect quarterly data from banks and the Australian Financial Complaints Authority to monitor the extent of the Code’s coverage of small business. ASIC will ensure that this data is made public every six months. This will provide the public with ongoing transparency about the coverage of the Code.

Expanded protections for consumers

The Code has built on and enhanced the existing protections for consumers in the 2013 Code.

The new Code includes:

  • provisions for inclusive and accessible banking, including for vulnerable customers, customers on low incomes and Indigenous customers;
  • protections relating to the sale of consumer credit insurance (CCI) including a deferred sales period of four days for CCI for credit cards and personal loans sold in branches and over the phone;
  • protections for guarantors of loans, for instance, giving prospective guarantors generally three days to consider information about a guarantee and requiring banks to only enforce a guarantee once they have taken action against the borrower;
  • rules requiring credit card customers to receive reminders about balance transfer promotional periods ending, as well as more consistent treatment about how repayments are applied; and
  • enhanced processes for assisting customers in financial difficulty and processes for resolving complaints.

Monitoring and enforceability

All ABA member banks will be required to subscribe to the Code as a condition of their ABA membership and the relevant protections in the Code will form part of the banks’ contractual relationships with their banking customers.

The Code will be administered and enforced by an independent monitoring body, the Banking Code Compliance Committee (BCCC). Any person will be able to report a breach of the Code to the BCCC, and consumers and small businesses with disputes about the Code protections will be able to have those disputes heard by the new Australian Financial Complaints Authority.

ASIC notes the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry may make findings relevant to the Code. ASIC may review its approval of the Code in light of the Royal Commission findings.

Background

ASIC has provided guidance on its approach to approving codes, including how to obtain and retain approval in Regulatory Guide 183 Approval of financial services sector codes of conduct (RG 183).

In approving the Code, ASIC considered that:

  • the rules in the Code are binding on the ABA’s members and form part of the contracts between banks and their customers;
  • the Code was developed and reviewed in a transparent way, which involved significant consultation with relevant stakeholders including consumer and small business groups; and
  • the Code is supported by effective administration and compliance mechanisms. The BCCC will have oversight on banks’ Code compliance, tools to require banks’ cooperation with their monitoring and investigations, and a range of sanctions for non-compliance with Code provisions.

IOOF warned for failing to produce documents

From Investor Daily.

Kenneth Hayne has delivered a sharp rebuke to IOOF for failing to produce documents ahead of the royal commission’s public hearings into superannuation, which commence next week.

In a ruling published by the royal commission yesterday, commissioner Kenneth Hayne laid out a timeline of correspondence with IOOF subsidiary Questor Financial Services.

Questor was issued with Notice to Produce NP-962 on Wednesday 11 July 2018, which required the company to produce documents prepared for Questor board meetings (‘board packs’) for each meeting of the board held since 1 July 2011.

The notice required the production of the documents by 4pm Tuesday 17 July.

At 3:30pm on Tuesday 17 July, IOOF solicitors King and Wood Mallesons produced documents in response to the notice, stating: “IOOF believes that the documents being produced constitute complete production in response to the Notice to Produce.”

On examining the documents, solicitors assisting the commission noted that while complete board packs had been produced for the years between 2011 and 2014, for subsequent years only agendas had been produced.

In response to an urgent request from solicitors assisting, Questor’s solicitors said the absence of the files was “inadvertent” and “a result of a technical error”.

Questor continued to fail to produce the documents until 9:48pm Sunday 22 July, with its solicitors noting that Questor “makes privilege claims in relation to parts of the documents produced”.

An affidavit in support of the claims for privilege was eventually supplied by Questor’s solicitors at 1:11am on Wednesday 25 July.

Commissioner Hayne has examined un-redacted versions of the documents, noting that “the claims for privilege appeared large”.

“I reject many of the claims that were made. Many of the documents in respect of which privilege is claimed are not documents that record or refer to communications made for the dominant purpose of IOOF or Questor obtaining legal advice; they do not record or refer to communications of that kind; and, they are not documents created for the dominant purpose of obtaining legal advice,” Mr Hayne said.

He noted that the claims made in respect of board packs dated after 2015 were in “sharp contrast” with the fact that no claims were made about the board packs for 2011–2014.

“Prompt and proper compliance with Notices to Produce is required by law and is essential to the proper execution of the commission’s work. Delays of the kind that have occurred in this case impede the proper work of the commission. Ill-based claims for privilege further impede its work,” Mr Hayne said.

Questor was the subject of parliamentary and senate committee scrutiny in mid-2015 after a number of allegations were aired in the Fairfax press against then IOOF head of research Peter Hilton.

IOOF will be one of the topics discussed at the royal commission public hearings into superannuation which commence on Monday 6 August.

Broker Review May Be Delayed Further – FBAA

From The Adviser.

The head of the FBAA has suggested that the government response to ASIC’s 2017 review of broker remuneration could be delayed until the second half of 2019 if formal conclusions aren’t made before the end of the year.

Speaking at the 2018 Industry Commercial Masterclass in Sydney on Thursday (26 July), the executive director of the Finance Brokers Association of Australia (FBAA) told delegates that he had been meeting with the Minister for Revenue and Financial Services, Kelly O’Dwyer, members of the Productivity Commission (PC) and other government officials to discuss the value of the broking industry.

Peter White revealed that he had asked Minister O’Dwyer when a government response was due on ASIC’s comprehensive report on broker remuneration, given that the consultation on the report had closed more than a year ago.

According to Mr White, the government has decided to wait until it has considered both the PC’s final report into competition in the Australian financial system and the first report from the financial services royal commission.

Noting that the PC’s final report had now been handed to the government, Mr White highlighted that the government had to table the report within 25 sitting days of receipt. Given that Parliament is not back until 13 August, he said that this could mean that the report may not be tabled until October.

He also reiterated that the interim royal commission report is not due until 30 September and that the final report is expected by 1 February 2019.

The head of the FBAA suggested that a government response may therefore not come “until the end of this year”, if not longer, given the country is expecting a federal election next year.

Recalling a situation in 2012 when Treasury was consulting on the second phase of the National Consumer Credit Protection Act (NCCP II) and delayed its response until after a federal election had taken place, Mr White warned that such a scenario could impact the industry once again, given that a federal election will be held next year.

Mr White said: “We may, or may not, get a decision on all this [review of broker remuneration] this year.

“[Minister O’Dwyer] said that, at the end of the day, there will be no determinations made on the ASIC remuneration paper until such time as the royal commission is finished, and those reports are out and the discussion has been had.”

Mr White added: “Bear in mind where we are heading this year, if we do not get decisions on these things before the end of this year, it won’t happen until the second half of the year after the federal election. That is the bottom line, and we’d just have to deal with that and roll with it as we go.”

ASIC permanently bans former Westpac banker from engaging in credit activities

ASIC says it has permanently banned former Westpac banker, Marten Pudun of Glenwood, NSW from engaging in credit activities.

An ASIC investigation found that, while employed as a relationship manager in Westpac’s premium banking section, Mr Pudun knowingly or recklessly gave false documents and information to Westpac to help his clients obtain home loans. In relation to 24 loan applications Mr Pudun:

  • helped create false supporting documents including payslips, employment letters and rental estimate letters; or
  • accepted documents he knew were false; or
  • was reckless in not investigating whether they were false.

In one instance, Mr Pudun requested that the employment positions on customers’ employment letters and payslips be changed from Director to Marketing Manager and IT programmer. Mr Pudun said in an email that he did not want the “deal to stuff up” and if the customers were referred to as directors, Westpac may ask for tax returns.

Mr Pudun also asked third parties to create false letters in support of loan applications, which contained weekly rental estimates for various properties. In other instances, Mr Pudun provided example documents to customers so that they could create false documents to support their loan applications.

Mr Pudun also breached Westpac policy in sharing personal client information including internet and telephone banking passwords, customer account opening forms, transaction histories and identification documents with external third parties.

ASIC found that Mr Pudun was repeatedly dishonest in his dealings with his customers, Westpac and external third parties. Therefore, he is not a fit and proper person to engage in credit activities.

ASIC’s investigation is continuing.

Mr Pudun has the right to lodge an application for review of ASIC’s decision with the Administrative Appeals Tribunal.

Background

Mr Pudun’s permanent banning is effective from 24 July 2018.

ASIC commenced its investigation following a notification of misconduct by Westpac.

Westpac has undertaken the following action with respect to those customers whose personal information had been shared:

  • contacted 161 affected customers and had their banking passwords reset; and
  • reviewed the customers’ files and accounts to determine if there had been any instances of fraud. The review did not show any evidence of identity takeover or unauthorised transactions linked to Mr Pudun’s conduct.

Westpac has also reviewed its policies and controls and implemented new systems, processes and employee training to minimise the misuse of customer information.

Finance Sector Must Address Trust Deficit

The banking royal commission has caused a massive erosion of consumer trust in financial services – and it’s up to the industry to stop it, according to a new survey, via InvestorDaily.

New findings from a survey by financial services marketing agency Yell and research firm Ipsos, conducted in June during the royal commission, has revealed that consumer trust in banks dropped by 8 per cent from 2017.

Similarly, trust in financial advisers also dipped by six per cent.

When asked to rank financial services organisations according to trust, banks slipped to third place from second place in 2017 and financial advisers fell from third place to fifth place.

“This year’s results showed an acceleration in the gradual erosion of consumer trust that’s still not being recognised by the industry as a whole,” said Yell founding partner Nigel Roberts.

The financial services industry would need to take responsibility for the declining trust and reorient its offerings to better serve the customer, he suggested.

“The challenge for all of financial services and especially the banking sector, is to halt the slide in trust or face real consequences.

“This can be achieved, but will involve much greater empathy and delivering solutions that truly meet customer needs, rather than meeting sales targets,” Mr Roberts said.

“The shift away from pushing product requires more than just having a view on the vast quantities of data currently being collected; it needs a human-centred approach as well.”

He also posed the question of whether incumbents would see a “significant commercial impact” as new market entrants entering the industry did not “carry the stigma of some of the established players”.

“We’ve seen the big four shifting away from wealth services ahead of and during the royal commission, maybe in anticipation of any potential findings, but the question is: will it be enough to protect them from the emergence of neo-banks and other viable alternatives in Australia?”

Bank customer satisfaction drops: Roy Morgan

Recent statistics from research house Roy Morgan have also pointed to declines in customer satisfaction as a result of the royal commission.

Bank customer satisfaction was at 82.3 per cent in January at the beginning of the year, but then fell to 78.5 per cent in May and then even lower to 78.3 per cent in June.

“This represents a decline of 4.0% points since January and is now at the lowest monthly satisfaction level since April 2012,” according to a Roy Morgan statement.

Furthermore, figures also demonstrated that dissatisfaction levels were increasing — and this represented a threat to retention, the statement said.

“The following chart shows that the level of dissatisfaction with banks has increased to 6.2 per cent from 4.6 per cent in January, just prior to the royal commission and is now at the highest level since April 2012.

“The combination of the 15.5 per cent of bank customers who are indifferent to their relationship with their bank (neither satisfied or dissatisfied) and those who are dissatisfied (6.2 per cent) means that more than one in five (21.7 per cent) bank customers pose a potential threat to customer retention, particularly considering that this has increased from 17.7 per cent in January 2018.”