Category: Banking Culture

Fintech’s May Be The SME’s Champion

As the Royal Commission’s third round of public hearings casts the spotlight on Big Four banks and SME lending, Fintech Moula says another spotlight is cast on fintechs who have stepped up to address the gap in market left by banks and traditional lenders.

Moula CEO Aris Allegos said: “SMEs make up over 97% of Australian businesses, but have been neglected for so long. The big banks haven’t been able to cater to this market, which is why we’ve tailored our product to the specific needs of business owners. Our process focuses on eliminating the hurdles and lengthy application processes, delivering decisioning within 24 hours.”

“Moula has listened to the unique needs of a business providing funding relevant to their specific needs and circumstances.”

Banks’ underwriting still hasn’t adapted to the new lending landscape: applications involve cumbersome submissions, and documentation requirements are often prohibitive. The bulk of applications are reviewed manually, which take 6-8 weeks on average to process.

Notwithstanding, the cumbersome application process doesn’t mean banks are better able to approve a business loan. According to Digital Finance Analytics’ 2017 SME Survey, unsecured business loan applicants now face a 74% rejection rate, up from last year, where businesses had a 67% likelihood of being rejected by traditional lenders.

Responsible lending plays a huge part in Moula’s business model, which focuses on sustainable underwriting.

“At Moula, we’re backing good businesses to help them achieve their ambitions, and the only way to achieve this is through honest, transparent, and responsible lending.

“Transparency is at the core of our business model and a key value at Moula. We’re proud to be leading the market in defining best-practice transparency and disclosure.”

Financial system under ‘great threat’: ASIC

From Investor Daily.

The failures within the banking sector uncovered by the royal commission constitute a “great threat” to the financial system, says ASIC chairman James Shipton.

Speaking at the Australian Council of Superannuation Investors conference in Sydney yesterday, Mr Shipton was asked how seriously he was taking the threat to the financial system given the failures aired at the royal commission.

“I think the threat is great. As a former member of the finance profession – as a person who is proud to be a financier – I find it jarring and disappointing that this is [sic] circumstances in which we find ourselves,” he said.

“As a proud Australian who is returning from nearly 25 years overseas, it is very confronting that we find ourselves in this situation,” Mr Shipton said.

The misconduct discussed at the royal commission “must not stand, [it] must be addressed”, he said.

Mr Shipton also highlighted the “proliferation” of conflicts of interest in parts of the financial industry.

“It is clear to me that a number of institutions have not taken the management of conflicts of interest to heart,” he said.

“This is verging on a systemic issue. Indeed, it is the source of much of the misconduct ASIC has been responding to and which is being highlighted by the royal commission hearings.”

Mr Shipton expressed his “surprise” that many Australian firms have “turned a blind eye” to conflicts of interest as their businesses have grown.

“Too often, unacceptable conflicts were justified by firms on the basis that ‘everyone else is doing it’, even though it’s the right thing to do to end them.

“A business culture that is blind to conflicts of interest is a business culture that does not have the best interests of its customer in mind. Moreover, it is one that is not observing the spirit as well as the letter of the law,” he said.

‘Conflicted’ remuneration should go: ASIC Chair

From The Adviser.

The new chairman of the ASIC has said that he has been “surprised” that there has been “reluctance, and often resistance, to addressing conflicts, especially those embedded in remuneration” – highlighting the broker remuneration report.

Speaking at the Australian Council of Superannuation Investors Annual Conference on Thursday (17 May), the chairman of the Australian Securities and Investments Commission (ASIC) told delegates that he had been “surprised” by several themes and issues in the financial services sector since taking up the helm of the regulator three months ago.

In his speech, ASIC chair James Shipton said: “My concern is that many people in finance have lost sight of the ultimate purpose of the financial system; they have forgotten that this system is about managing other people’s money…

“I worry that many financial services companies have become insular by focusing only on how they can maximise earnings.

“Accordingly, the first job of the sector is to refocus on these core purposes, instead of exploiting opportunities to make money from its customers often to the consumer’s considerable detriment. This is exemplified by the proliferation of conflicts of interest in parts of the financial sector.”

Noting that conflicts are a “perennial challenge for business”, he added that it was “clear” to him that a number of institutions “have not taken the management of conflicts of interest to heart”.

Mr Shipton said: “This is verging on a systemic issue. Indeed, it is the source of much of the misconduct ASIC has been responding to and which is being highlighted by the Royal Commission hearings.

“The inappropriate sale of financial products in caryards by a commission-driven salesforce is but one example that ASIC has tackled in recent times. And yet conflicts of interests are not new.

So, what has surprised me is that:

  • many Australian financial firms have turned a blind eye to the risks that conflicts pose to customer outcomes as their businesses evolved or grew;
  • they didn’t have a management system, a management culture, or codes that were attuned to identifying and resolving conflicts; and
  • there has been reluctance, and often resistance, to addressing conflicts, especially those embedded in remuneration – even when ASIC pointed them out.”

According to Mr Shipton, this “resistance has, at times, extended to a reluctance to make good any harms caused by conflicts”.

He continued: “Too often, unacceptable conflicts were justified by firms on the basis that ‘everyone else is doing it’, even though it’s the right thing to do to end them.

“A business culture that is blind to conflicts of interest is a business culture that does not have the best interests of its customer in mind. Moreover, it is one that is not observing the spirit as well as the letter of the law.

“And so, it is time for Australia’s financial services sector to remember its purpose – and remember always that they are dealing with other people’s money; it must focus on the outcomes it delivers to its customers.”

Mr Shipton therefore called for a “wholesale review by firms to identify, manage and, if appropriate, remove every conflict.

“Only when this is done can the journey of rebuilding trust with our communities begin,” he said.

Looking back at removing ‘conflicted’ broker commissions

While he said that ASIC favours this option in relation to conflicted payments in advice, he highlighted how the ASIC review of broker remuneration highlighted the “desirability of removing at least some of the remuneration-related conflicts in this sector”.

The new ASIC chair said: “In recent years, the Australian Parliament has banned commissions and other conflicted payments in financial advice. This was a recognition that the best way to deal with some conflicts was not to manage or disclose them, but to remove them altogether.

“This is an option that ASIC favours in relation to conflicted payments in advice. There can be no ambiguity in this area. So, I would strongly suggest that all financial firms keep this in mind when considering how to deal with conflicts of interest arising from remuneration structures.

“We have, for example, in our report on mortgage broker remuneration, highlighted the desirability of removing at least some of the remuneration-related conflicts in this sector.”

While the ASIC report suggested that volume-based and bonus commissions could create conflicts, and should be removed (a suggestion that the industry has largely accepted and is working on implementing, via the Combined Industry Forum), the report did also conclude that the standard model of upfront and trail commissions “creates conflicts of interest”.

ASIC’s report 516: “This standard model of upfront and trail commissions creates conflicts of interest. There are two primary ways in which these conflicts may become evident.

“Firstly, a broker could recommend a loan that is larger than the consumer needs or can afford to maximise their commission payment. This may also involve recommending a particular product or strategy to maximise the amount that the consumer can borrow (e.g. through the choice of an interest-only loan)…

“Alternatively, a broker could be incentivised to recommend a loan from a particular lender because the broker will receive a higher commission, even though that loan may not be the best loan for the consumer. We refer to this as a ‘lender choice conflict’,” the report read.

The ASIC remuneration review did not, however, suggest radically changing the commission structure.

It put forward six proposals to improve consumer outcomes and competition in the home loan market, including:
(a) changing the standard commission model to reduce the risk of poor consumer outcomes;
(b) moving away from bonus commissions and bonus payments, which increase the risk of poor consumer outcomes;
(c) moving away from soft dollar benefits, which increase the risk of poor consumer outcomes and can undermine competition;
(d) clearer disclosure of ownership structures within the home loan market to improve competition;
(e) establishing a new public reporting regime of consumer outcomes and competition in the home loan market; and
(f) improving the oversight of brokers by lenders and aggregators.

While no response from government has yet been made regarding what changes, if any, should be made to broker remuneration, it is largely expected that no such response will be made public until the royal commission and Productivity Commission conclude their work on the financial services sector.

Mortgage Brokers Heyday Over?

From The Adviser.

Slower credit growth and reduced borrowing capacity are expected to wipe 10 per cent off volumes this year, but brokers may find a silver lining in their trail commissions.

Investor lending has fallen by 16.1 per cent over the year to March, while owner-occupied lending is off by 2.2 per cent, according to the Australian Bureau of Statistics.

The latest housing finance statistics show that lending to owner-occupiers fell by 1.9 per cent in March, the highest rate of decline in over two years; investor lending fell by 9 per cent over the month.

However, these figures are yet to reflect the latest round of credit tightening by the major banks, who face increased scrutiny amid damning evidence of irresponsible lending during the first round of the royal commission.

Both the major banks and the RBA expect credit growth to slow.

Digital Finance Analytics principal Martin North believes that we are now entering a “credit crunch”, which will reduce total mortgage volumes by around 10 per cent over the next year.

Mr North said that the changing credit landscape paints “a complex picture” for brokers.

“The chances are that people will not be moving as swiftly as they had previously, so you might find that, in fact, the trail commissions go on for longer, which is a good piece of news,” Mr North said.

“But in terms of new business volumes, not only is there lower demand now, particularly for property investors, but tighter lending criteria means that brokers will have to work a lot harder to get the information from clients and go through more hoops to get an application processed. Overall volumes will be down.

“My own feeling is that we haven’t yet seen the full impact of the tightening that is happening as we speak. I’m predicting about a 10 per cent fall in volumes over the next year.”

Mr North told The Adviser that cooling property prices may force some property owners in Sydney and Melbourne to capitalise on years of growth, sell up and downsize.

However, he believes that first home buyers are unlikely to fill the gap and that any government incentives are now failing to encourage new mortgage sales. The latest ABS figures show that the percentage of FHBs fell to 17.4 per cent over March.

In addition to tighter credit conditions, mortgage brokers also face increased compliance in response to a slew of inquiries.

“This may mark the point in the cycle where some brokers decide to quit the industry,” Mr North said. “You may end up with a smaller number of brokers. I think there will be a bit of a shake-out.”

Greater scrutiny and increased regulation is the primary driver of tighter lending conditions. However, with the RBA signalling that the next cash rate movement will be up, Mr North sees little indication that the situation will change.

“I don’t think there is anything that will reverse that any time soon,” the principal said. “If anything, rates will go up, further tightening credit. I don’t think this is a temporary shift; it’s a realignment of the market. People need to start planning their businesses on a different trajectory.

More Regulation Wont Solve Banking’s Ethical Issues

From The Conversation.

The Financial Services Royal Commission hearings are illustrating both the weaknesses of human nature and of the culture and structure of the financial sector – regulated and regulator. The response to this has been more regulation and codes of conduct.

But we should also be considering our own ethics.

The time-honoured approach to removing ethical temptations to greed is to prohibit conflicts of interest. This goes way back beyond 1896, when the argument was made in a famous court judgment that “human nature being what it is, there is danger … of the person holding a fiduciary position being swayed by interest rather than by duty”.

Both superannuation and corporate law assume that conflicts of interest will persist, and that simple disclosure is enough to manage the problem.

But simple disclosure hasn’t been enough. The royal commission has unearthed many examples of banks and financial services companies both making and selling financial products to their customers, with the latter frequently suffering in the aftermath.

We are already moving away from the payment of commissions for personal financial advice, in favour of fees. But we need to go further. Europe is leading the way as it now forces banks and brokers to explicitly charge for the investment research they produce. We need to remove all conflicts of interests.

Flattening hierarchies and reducing temptations to arrogance

There are other time-honoured approaches to overcoming the temptation to arrogance. The power of leaders needs to be limited.

One organisational principle is subsidiarity, which calls for devolving power to the lowest level where it can be effective. The steep hierarchies of organisations in English-speaking countries create huge jumps in power at higher levels.

Boards need to act on this problem, but regulation could help by ensuring that independent directors have independent power bases and are less beholden to CEOs. If the CEO invites someone to sit on the board, for instance, it is extraordinarily difficult for that person to turn around and tell the CEO: “You are paid too much.”

Many European countries give seats on their boards to union representatives. This may go some way to explaining why executive remuneration is not nearly as steep in those countries.

Some companies in the United States have experimented with proportional representation of shareholders. This would mean that different directors can rely on support from different groups of shareholders.

The new Banking Executive Accountability Regime links pay to performance, but fails to address excessive levels of remuneration in the financial sector.

Codes of ethics and less regulation

We cannot remove all temptations, so we also have to try to provide people with more ways to resist them. One of these is an appropriate code of conduct: actively subscribing to a code of conduct has been shown to make people more likely to behave virtuously.

The Bankers’ Oath should be encouraged; maybe even made compulsory like the proposed financial advisers’ code.

While codes of conduct may help, the tsunami of financial regulation over the past few decades has swept aside much of the sense of personal accountability.

We would surely be better off without the half-million words that make up the Superannuation Industry Supervision Act and Regulations and the 2001 financial sector changes to the Corporations Act.

The royal commission has produced a paper on the latter legislation that illustrates its complexity and goes some way to explain why it has been a failure.

Reducing complex regulation would also free regulators to focus on enforcement. It may be that punishments comfort victims as much as they create incentives not to offend, but both are important. Successful prosecutions are important, so we need to deal with the Australian Securities and Investments Commission’s failures to prosecute, and its cosiness with the businesses it regulates.

Reduce the temptations, strengthen the principles of conduct and punish offenders. All good, but not enough for a financial sector that plays its proper role in a flourishing democratic society.

The role of the financial sector is to implement payments, allocate capital and provide financial security. In doing so it can make money for itself. But if making money is all it can think about, it should continue to be subject to ongoing and stringent scrutiny.

As with all ethical questions, we need to end with ourselves. In whatever way we make our living, can we reinvigorate our resolve, and the institutions in which we serve, to build a flourishing society?

Author: Anthony Asher, Associate Professor, UNSW

Ethical Investor Quits AMP

Australian Ethical has announced it will completely divest from AMP following revelations of “systemic prudential and cultural issues” at the royal commission. They will not reinvest until AMP demonstrates they have addressed their underlying issues. And they are watching the two of the four major banks they have holdings in, in the light of the findings from the royal commission too.

Explaining the rationale behind Australian Ethical’s decision, the fund manager’s head of ethics research Dr Stuart Palmer pointed to “systemic prudential and cultural issues” revealed at the royal commission.

“There have been serious breaches of AMP’s duty to clients, including ‘fees for no service’, failure to reprimand dishonest advisers and remediate clients, and keeping clients in expensive, inappropriate, legacy products and platforms,” Dr Palmer said.

“AMP knowingly and deliberately misled regulators and there is sufficient evidence to show that these breaches are not isolated incidents.

“Senior AMP leaders consciously chose to prioritise AMP’s short-term profit at the expense of clients’ best interests and compliance with the law. Evidence revealed during the royal commission demonstrates that senior executives were involved in the misconduct, despite staff voicing concerns and knowledge that their actions were in breach of their licensee duties.

“The information released by AMP since the conclusion of the most recent royal commission hearings (including at its AGM today) doesn’t give Australian Ethical reason to change the above assessment of the evidence presented to the royal commission,” Dr Palmer said.

Ultimately, Dr Palmer said, AMP’s actions are in breach of Australian Ethical’s ethical charter – leading to the decision to divest.

I followed up this announcement with a couple of broader questions to Dr Palmer.

Q:  The ethical behaviour of the other big banks are also shown to be found wanting in the RC – so is it likely that AE to do the same elsewhere, or is the fund not invested there?

Australian Ethical is underweight in the financial services sector due to its ethical charter.  However, it is selectively invested in some financial services organisations, for example, we invest in two of the ‘big four’ Australian banks: Westpac and NAB, but not CBA and ANZ.  We are closely monitoring the Royal Commission hearings and may revisit other investments depending on the evidence presented or findings of the Royal Commission.

Q: Is this a temporary or permanent decision, in that if AMP proved a change of behaviour, would the decision be reversed?

AMP, both before and after the most recent Royal Commission hearings, has taken significant steps to begin to remedy past wrongs and to safeguard against their recurrence. We hope that this and the further action planned by AMP will be effective over time to entrench a robust ethical culture right across the organisation. But we will remain divested until we are satisfied that this work has been fully and successfully implemented.

AMP Q18 Update – Tough Times Ahead

AMP gave a brief updated today on the Q118. They said the cashflows were subdued in Australian wealth management (AWM); but there was continued strength in AMP Capital and AMP Bank. AMP Bank’s total loan book up 2 per cent to A$19.8 billion during the quarter. The portfolio review of manage for value businesses continues.

In response to ASIC industry reports 499 and 515, AMP continues to review adviser conduct, customer fees, the quality of advice, and the monitoring and supervision of its advisers. They anticipate that this review will lead to further customer remediation costs and associated expenses and they will provide a further update at or before the 1H 18 results.

A summary by business segment:

Australian wealth management

  • Net cash outflows of A$200 million in Q1 18 in line with Q1 17. Inflows and outflows in Q1 18 were subdued due to reduced activity in superannuation following 2017 non-concessional contribution cap changes and volatile investment markets in the quarter.
  • AMP’s wrap platform, North, continued to perform strongly with cashflows growing 14 per cent to A$1,181 million in Q1 18.
  • Total Australian wealth management AUM at the end of Q1 18 was A$128.3 billion, down 2 per cent from Q4 17 reflecting negative investment markets during the quarter.
  • AMP’s SMSF business, SuperConcepts, added approximately 5,500 funds across administration and software services during Q1 18, supported by the acquisition of MORE Superannuation. The business now supports more than 64,600 SMSFs.

AMP Capital

  • AMP Capital external net cashflows were A$1.6 billion in Q1 18, an increase from A$228 million in Q1 17, driven by flows into real assets (real estate and infrastructure investments), and strong performance by China Life AMP Asset Management (CLAMP).
  • AUM increased from A$187.7 billion at the end of Q4 17 to A$188.1 billion in Q1 18. AUM now includes AMP Capital’s 24.9 per cent share of US-based real estate investment manager PCCP’s AUM.
  • AMP’s partnership with China Life continues to grow; AMP Capital’s share of CLAMP contributed net cashflows of A$462 million in Q1 18.
  • AMP Capital has A$4.5 billion of committed real asset capital available for investment.

AMP Bank

  • Total loan book grew to A$19.8 billion during Q1 18, up 2 per cent on Q4 17, supported by continued growth in loan books for both aligned adviser and mortgage broker channels.
  • Retail deposit book increased by A$321 million in Q1 18 relative to Q4 17.
    Australian wealth protection
  • Australian wealth protection annual premium in-force (API) was down 1 per cent in Q1 18 to A$1,890 million. The small decline was primarily driven by a 1 per cent fall in API for individual lump sum.

New Zealand financial services

  • AMP New Zealand financial services’ net cashflows were A$54 million in Q1 18, up from A$23 million in Q1 17. The increase was mainly driven by lower cash outflows in retail investments.
  • AMP remains one of New Zealand’s largest KiwiSaver providers with net cashflows of A$47 million in Q1 18.

Australian mature

  • Australian mature net cash outflows in Q1 18 were A$323 million, compared to A$335 million in Q1 17, reflecting the run-off nature of the book. AUM declined 2 per cent to A$20.4 billion during the quarter.

Update on industry and regulatory compliance investigations

  • There are a number of reviews being undertaking by ASIC. These include industry reports 499 and 515 on financial advice. AMP is continuing its program of work to review the nature of ongoing service arrangements between its advisers and customers, and the incidence of inappropriate fees and advice, since 1 July 2008.
  • This program is ongoing, and the outcomes will lead to higher customer remediation costs and related expenses and enhancements to AMP’s control frameworks, governance and systems will be required.

AMP to defend shareholder class actions

AMP has been served with two class action proceedings: a claim filed in the Supreme Court of New South Wales by Quinn Emanuel Urquhart & Sullivan; and a claim filed in the Federal Court of Australia (Victorian Registry) by Phi Finney McDonald.

The proceeding filed by Quinn Emanuel Urquhart & Sullivan is on behalf of shareholders who acquired an interest in AMP’s shares between 10 May 2012 and 15 April 2018.

The proceeding filed by Phi Finney McDonald is on behalf of shareholders who acquired an interest in AMP’s shares between 6 May 2013 and 13 April 2018.

Both proceedings relate to matters referred to during the hearings of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry in April 2018.

AMP intends to vigorously defend the proceedings.

CBA and ASIC agree in-principle settlement over BBSW

Commonwealth Bank (CBA) announces it has reached an in-principle agreement with the Australian Securities and Investments Commission (ASIC) to settle the legal proceedings in relation to claims of manipulation of the Bank Bill Swap Rate (BBSW).

As part of the in-principle settlement, CBA will acknowledge that, in the course of trading on the BBSW market in Australia on five occasions between February and June 2012, CBA attempted to engage in unconscionable conduct in breach of the ASIC Act. CBA will also acknowledge it did not have adequate policies and systems in place to monitor the trading and communications of its staff in order to prevent that conduct from occurring.

Subject to Federal Court approval of the settlement, CBA has agreed to pay a $5 million penalty, a payment of $15 million to a financial consumer protection fund and a $5 million payment towards ASIC’s costs of the litigation and its investigation. The impact of this settlement will be reflected in CBA’s 2018 Financial Year results.

CBA has also agreed to enter into an enforceable undertaking with ASIC, under which an independent expert will be appointed to review controls, policies, training and monitoring in relation to its BBSW business.

CBA and ASIC will make an application to the Federal Court for approval of the settlement

MEBank Apologises for Failing to Adequately Warn of Rate Change

From The Adviser.

MEBank has apologised to customers and said that it is working to reimburse around 2,500 mortgagors affected by a “system error” that led to some borrowers being charged a higher interest rate without adequate notice.

On 17 April 2018, Members Equity Bank (ME) announced that it would be increasing its variable home loan interest rates.

Under the changes, ME’s standard variable rate for existing owner-occupier principal and interest (P&I) borrowers with an loan-to-value ratio (LVR) of 80 per cent or less increased by 6 basis points to 5.09 per cent p.a. (comparison rate of 5.11 per cent p.a.).

Variable rates for existing investor principal and interest borrowers increased by 11 basis points, while rates for existing interest-only borrowers increased by 16 basis points.

According to ME CEO Jamie McPhee, the changes were brought in as a result of increasing funding and compliance costs.

Speaking last month, Mr McPhee said: “Funding costs have been steadily increasing over the last few months primarily due to rising US interest rates that have flowed through to higher short-term interest rates in Australia.

“In addition, ME continues to transition its funding mix to ensure the requirements of the Net Stable Funding Ratio will be met, and this is also increasing our funding costs.

“At the same time, industry reforms and increasing regulatory obligations are increasing our compliance costs.”

He continued: “This was not an easy decision, but rising costs have forced us to reset prices to maintain a balance between borrowers, depositors and our industry super fund shareholders and their members, all while ensuring we continue to grow and provide a genuine long-term banking alternative.

“We will continue to assess market conditions and make changes to prices to maintain this balance if necessary.”

While the bank did publicise the rate change two days before it was due to take effect, usual practice is for a mortgagor to be notified 20 days in advance of an interest rate change.

According to the bank, however, a “system error” led to customers being charged the new rates on 19 April without the adequate time warning.

A ME spokesperson said that the “proper process” is for ME to write to customers to notify them their repayments are going up “but not to increase their repayments until at least 20 days after they get that notification”.

“Unfortunately on this occasion, due to a system error, we increased the home loan repayments immediately for about 2,500 owner-occupier and investor customers — about 1 per cent of our home loan accounts.”

The bank reportedly detected the “error” the following day (20 April) and “immediately intervened to ensure no additional customers were affected”, the spokesperson said.

“We are now working on reimbursing and communicating with those impacted customers as a matter of urgency. We are clearly very sorry for the error and the impact it has had on customers,” the CEO said.

The way banks have been disclosing interest rate changes and remediating customers for bank errors has been thrown into the spotlight recently, thanks to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.