Category: Banking Culture

Update on Banking Royal Commission

The royal commission into the banking, superannuation and financial services industry official web site is operational, and you can subscribe for alerts there. The letters patient can also be found there which officially establishes the commission and it’s scope of inquiry. Intermediaries, such as mortgage brokers and financial advisers are included in the broad scope. The interim report is due no later than 30 September 2018.  The final report is due no later than 1 February 2019. The commission will be based in Melbourne.

A notice requiring banks, insurance companies and superannuation funds to detail all cases of misconduct from 2008 onwards has also been issued.

Investor Daily, says:

The Governor-General has issued the letters patent to former High Court judge Kenneth Madison Hayne AC QC formally establishing the royal commission into the banking, superannuation and financial services industry.

The letters patent requires the royal commission to inquire into the conduct of financial services entities, including “banks, insurers, superannuation trustees, holders of Australian financial services licences and intermediaries, such as mortgage brokers”.

In a joint statement, Treasurer Scott Morrison and outgoing Attorney-General George Brandis said commissioner Hayne has been authorised to submit an interim report to the Governor-General “no later than 30 September 2018”.

The final report of the royal commission must be submitted by commissioner Hayne “no later than 1 February 2019”.

“The financial system plays an important role in the lives of all Australians and we encourage all interested parties to engage with the royal commission,” the joint statement said.

NAB refunds $1.7 million for overcharging interest on home loans

ASIC says National Australia Bank Limited (NAB) has refunded $1.7 million to 966 home loan customers after it failed to properly set up mortgage offset accounts.

Following customer complaints, NAB conducted an internal review which found that between April 2010 and August 2017 it had not linked some offset accounts to broker originated loans. This resulted in those customers overpaying interest on their home loan.

NAB has refunded affected customers so that they are only charged interest that would have been payable had the mortgage offset account been properly linked from the commencement of the home loan.

‘Consumers should be confident that when they sign up for a home loan they are receiving all of the benefits that are being promoted,’ Acting ASIC Chair Peter Kell said.

‘Where there are errors there should be timely and appropriate action to ensure that consumers are not any worse off as a result of the mistake.’

NAB reported the issue to ASIC. NAB has also engaged PwC to review the remediation approach and to ensure NAB’s compliance systems will prevent a similar error from occurring in future.

NAB has commenced contacting and refunding affected customers.

Background

An offset account is a savings or transaction account that is linked to a home loan account. Any money in the offset account reduces the amount of interest payable on the linked home loan. For example, if the outstanding balance on the home loan is $300,000 and there are savings of $50,000 in the offset account, then interest is only payable on the difference ($250,000).

In this case, NAB failed to link some offset accounts to home loan accounts, which meant that money held in those offset accounts did not reduce the interest payable on the home loan accounts. As a result, consumers paid more in interest than was required.

NAB also conducted a broader investigation which found that the issue only applies to broker originated loans.

NAB will also remediate customers who had an offset account during the relevant period but had repaid their home loan before 2017.

NAB said:

In February 2017, NAB commenced a review into how it processes offset account requests for customers who apply for a home loan through a Broker, looking back to 2010.

This review found that some customers may not have had their offset account correctly linked to their home loan, and that these customers may have consequently paid additional interest.

We sincerely apologise to our customers for this, which was due to administration errors.

All of the customers identified through this review with an open account have been contacted and received refunds. They represent 0.73% of the total number of offset accounts established through our Broker channel since 2010 (approximately 178,000).

NAB advised ASIC about this matter earlier this year, and, over the past 12 months, has implemented a number of measures to improve offset origination processes, and enhanced the ability for customers to review their offset arrangements themselves.

AFG Highlights The Number Of Mortgage Broker Related Investigations

AFG has today called on the banking Royal Commission to recognise the significant inquiries that have already been conducted into the mortgage broking sector and the important role mortgage brokers play in the Australian lending market, as the government outlines the inclusion of mortgage brokers in the scope of the banking Royal Commission.

“The mortgage broking channel accounts for more than 53% of the Australian lending market so it is unsurprising that we are in the mix, however 2017 has also been marked by significant regulatory scrutiny of our industry,” said AFG CEO David Bailey.

“The ASIC Review of mortgage broker remuneration and the ongoing Productivity Commission inquiry into competition in the financial system have both looked at the structure of the mortgage broking sector.

“We are confident Justice Hayne will recognise the unprecedented data collection process conducted by ASIC in their Review of mortgage broker remuneration has thoroughly examined our industry.

“The ASIC report recognised the important role that mortgage brokers can play in promoting good consumer outcomes and strong competition in the home loan market and we are confident any other examination of our sector would find the same,” said Mr Bailey.

The Combined Industry Forum (CIF), made up of representatives from across the mortgage industry, has submitted a report to government that outlines a package of reforms to address the proposals made in the ASIC review.

“The Productivity Commission is also undertaking a significant examination of the competitive landscape and mortgage brokers are a key lynchpin in providing that competition.

“The Royal Commission, and the industry as a whole, needs to focus on how competition can be further improved and this should include the impact the government guarantee has on competition.

“Ultimately, the findings of this inquiry should assist the government to promote a competitive and stable financial industry that contributes to Australia’s productivity,” said Mr Bailey.

“The mortgage broking sector provides vital competition to deliver on that aim.

“AFG has 45 lenders on its panel with more than 37% of borrowings going to lenders other than the four major banks, and we remain committed to ensuring choice and competition remains for Australian consumers.

“This competitive tension ensures consumers continue to have choice and most importantly benefit in terms of home loan price and service because of the service brokers deliver on a daily basis across the Australian lending market,” he concluded.

CommInsure pays $300,000 following ASIC concerns over misleading life insurance advertising

ASIC says CommInsure will pay $300,000 towards a consumer advice service and have its advertising sign-off processes independently reviewed after ASIC raised concerns about certain instances of its life insurance advertising.

ASIC commenced investigating CommInsure in April 2016, which included a review of CommInsure’s advertising of two life insurance policies:

  • Total Care Plan, sold through financial advisers
  • Simple Life Insurance, sold directly to consumers

The review looked at advertising from mid-2013 to March 2016 and found that misleading and deceptive statements are likely to have been made on some of CommInsure’s websites about the extent to which customers would be entitled to cover for trauma if they suffered a heart attack.

The statements may have led a policyholder to believe they would be entitled to a lump sum payment if they suffered a heart attack in general, when in fact only certain types of heart attacks, which met certain medical criteria as defined in the policy, were covered.

In response to ASIC’s concerns, CommInsure will commission an external firm to conduct a compliance review of its advertising sign-off processes and procedures. The review will look at whether CommInsure’s processes and procedures ensure compliance with the ASIC Act, and make recommendations to improve compliance if required.

CommInsure will report to ASIC by 30 June 2018 on the results of the review and the changes implemented.

As previously announced, CommInsure updated the definition of heart attack in its trauma life insurance products in March 2016 and is reassessing past claims under the updated definition back to October 2012. To date, CommInsure has paid additional benefits for 32 claims, totalling approximately $4 million as a result of the reassessed claims.

ASIC has now concluded its investigation into the life insurance business of CommInsure.

Background

CommInsure will make a $300,000 payment to the Financial Rights Legal Centre which will be used for the Insurance Law Service, a national specialist consumer insurance advice service operated for the benefit of vulnerable, low income and disadvantaged consumers.

ASIC released a public report on its investigation in March 2017 [17-076MR]

Following concerns raised by ASIC, CommInsure applied its updated heart attack definition back to October 2012, which was the date at which international cardiology bodies published an updated consensus on the appropriate clinical marker for heart attack.

Brokers to be included in royal commission

From The Adviser.

The Governor-General has now issued the Letters Patent to the Honourable Kenneth Madison Hayne AC QC, formerly a judge of the High Court, establishing the royal commission.

Notably, the Treasury outlined that the Letters Patent require the Royal Commission to inquire into the conduct of financial services entities, “including banks, insurers, superannuation trustees, holders of Australian financial services licenses and intermediaries, such as mortgage brokers”.

Intermediaries between borrowers and lenders have been added following the government’s consultation with the appointed Commissioner on the draft Terms of Reference, which were released earlier this month.

The royal commission will examine allegations of misconduct or conduct which falls below community expectations. The commission will be focused on identifying ways to ensure that Australia’s financial system continues to work efficiently, effectively and in the interests of consumers.

Commissioner Hayne is authorised to submit an interim report to the Governor-General no later than 30 September 2018, and required to submit a final report no later than 1 February 2019.

“The financial system plays an important role in the lives of all Australians and we encourage all interested parties to engage with the royal commission,” the Treasurer Scott Morisson said.

“The Government has already taken comprehensive action to deliver better outcomes and protections for banking and financial services customers.

“This includes moving to establish a new one-stop shop to resolve customer complaints; significantly bolstering the powers and resources of the Australian Securities and Investments Commission; creating a framework to hold banking executives accountable for their actions; and boosting banking and financial services competition.”

CBA admissions will make class action easier but shareholders still have a lot to prove

From The Conversation.

The Commonwealth Bank of Australia recently admitted it breached Australia’s anti-money laundering and counter-terrorism financing laws. The admissions in its response to allegations from the Australian Transaction Reports and Analysis Centre (AUSTRAC) will make it easier for shareholders to prove their claims of misleading and deceptive conduct in a class action launched against the bank in October.

CBA’s willingness to admit what it has done also signals a possibility the bank might resolve the class action through a settlement. In the meantime shareholders still need to prove their claims, even if some are on stronger footing thanks to the CBA.

AUSTRAC’s first lot of allegations noted CBA failed to comply with its obligations under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 with respect to more than 778,000 accounts. The bank is obliged to assess the risk of, monitor and report suspicious deposit activity that was being conducted through intelligent deposit machines (IDMs). These machines are ATMs that accept cash deposits that are immediately available in the depositor’s account.

AUSTRAC then amended its complaint on December 14, 2017, to add a further 100 alleged contraventions.

CBA’s response to the original allegations admits that it did fail to comply with the Act in certain respects and accepts that these contraventions do subject it to a civil penalty. But the bank denies other alleged contraventions.

Law firm Maurice Blackburn filed a class action on behalf of shareholders with CBA shares between July 1, 2015 and August 3, 2017. The shareholders allege that CBA – and over a dozen of its officers and directors – knew or should have known about the non-compliance. They argue this failure to disclose or rectify the situation caused loss once the share price fell after AUSTRAC made CBA’s non-compliance public.

None of this is proved solely by the fact that CBA admitted committing some breaches of the Act. The additional claims brought by AUSTRAC this week do not alter the existing shareholder claims, but they may see the scope of the class action increased.

What CBA admits and what shareholders need to prove

CBA’s admissions may impact the efficiency and conduct of the class action, but they are unlikely to affect what shareholders need to prove. CBA’s response admits much of the conduct that contravenes the Act, but that’s not the same as an admission of liability in relation to the quite different legal claims made by the shareholders.

CBA admits that it did not conduct a proper risk assessment of its IDMs until more than three years after the machines had been put into operation. The bank also admits that it did not conduct adequate monitoring of IDM deposits, for example by introducing daily deposit limits. This is despite having assessed the risk of IDMs being used for money laundering or terrorism financing as high.

CBA further admits that in over 53,500 separate instances, it did not file reports whenever a deposit of more than A$10,000 was made, as required by the Act. It also failed to file either complete or timely reports of suspicious account activity in nearly 100 instances.

But the shareholders’ claims are based on something different: CBA’s non-compliance with securities disclosure rules and on misleading and deceptive conduct by CBA.

In order to win in the class action, the shareholders will have to prove the elements of the claims they allege, including that the lack of AUSTRAC compliance was the cause of the drop in CBA share price and that the plaintiffs suffered loss as a result of that drop.

The test for the link between non-disclosure and loss, and the way to calculate the amount of that loss, has not been determined in the class action cases so far. However, courts have heard similar shareholder arguments to those raised by the CBA shareholders in other cases, so the issues raised aren’t new.

For example, in the case surrounding the liquidation of HIH Insurance Limited, Justice Brereton of the Supreme Court of New South Wales held that shareholders rely on the share price as an accurate reflection of share value. Accordingly, when corporate misconduct inflates the share price, the corporation indirectly causes shareholders to suffer loss.

A key issue the CBA class action will be whether CBA’s non-compliance with the Anti-Money Laundering and Counter-Terrorism Financing Act, and the subsequent AUSTRAC civil penalty proceedings, impacted the share price and to what extent.

Authors: Michael Legg, Professor of Law, UNSW; James D Metzger, Scholarly Teaching Fellow in Civil Procedure, University of Sydney

Commonwealth Bank receives an amended statement of claim from AUSTRAC

Commonwealth Bank (CBA) says it has today been served with an amended statement of claim from AUSTRAC, alleging further contraventions of Australia’s anti-money laundering and counter-terrorism financing legislation. The new allegations, among other things, increase the total number of alleged contraventions from approximately 53,700 to approximately 53,800.

In our ASX Announcement of 13 December 2017 we noted that AUSTRAC had indicated that it proposed to file an amended claim and we are updating the market as this has now occurred.

CBA will review the amended statement of claim and update the market as appropriate. We will file an amended defence in due course.

CBA re-states its position that we take our anti-money laundering and counter-terrorism financing (AML/CTF) obligations extremely seriously, and deeply regret any failure on our part to comply with these obligations.

CBA commenced a Program of Action in 2015 to significantly upgrade and expand its operations to ensure compliance with the AML/CTF Act. During 2017 we have stepped up the rigour and intensity of the program and extended it across all aspects of financial crime obligations and all business units to further strengthen regulatory compliance.

Through its Program of Action, CBA has made significant progress in strengthening its policies, systems and processes relating to its obligations under the AML/CTF Act, and recognises that having increased the scope of work and resources being deployed we may come across additional matters. As CBA continues to strengthen our financial crimes compliance we will continue to work closely with regulators across those jurisdictions in which it operates to fight financial crime.

Suncorp opens the doors of its Sydney Discovery Store

Suncorp has opened their Discovery Store in Sydney’s CBD. It is designed as a flexible, customer centric space, including third party brands and will be open 7 days a weeks. It will be interesting to see how this move fairs against the strong drift to digital based banking which we are observing, but some might draw parallels with the tech-sector retail flagships; we will see.

You can read more about customer channel preference in our recently published The Quiet Revolution Report, available for free, on request.

Customers will be treated to a unique retail experience, a first of its kind for financial services in Australia, with Suncorp opening the doors to its new Discovery Store in Sydney’s Pitt Street Mall today.

The Suncorp Discovery Store is designed to be a destination for customers, where they can access end-to-end solutions tailored to their life events. It draws on all of Suncorp’s brands as well as our innovative third-party providers. Discovery Store delivers an immersive retail journey, where visitors can attend events, interactive workshops and explore solutions tailored to their life goals.

Suncorp CEO Customer Marketplace Pip Marlow said it will be a new experience, which is designed to make financial solutions simpler and more accessible.

“We’re shifting the focus from products and services, to having  conversations that are more about our customers’ aspirations, whether it’s home ownership, saving for a holiday or buying a car, so we can create value for them,” Ms Marlow said.

The store lay-out has been designed with a range of flexible spaces and interactive digital tools, built around a central amphitheatre.

Each month the entire space will be transformed to deliver a brand-new customer experience, with innovative product showcases, guest speakers and workshops focused on improving financial wellbeing.

“We want visitors to really take advantage of the space, drop in, have a coffee and wander around to see what’s on offer. Pitt Street Mall is one of Australia’s busiest retail precincts. It’s not just a place to shop, but also where people socialise and immerse themselves in new brands and experiences,” Ms Marlow said.

The Discovery Store will be open 7 days, including late trading. The upper level of the store is dedicated to customer conversations, learning and interactive workshops, while downstairs provides transactional banking services and access to other financial services specialists.

Key features:

  • First of its kind financial services offering to open in Pitt Street Mall.
  • Access to the breadth of Suncorp’s brands, products and services, and third-party partner solutions.
  • Suncorp’s Australian brands: Suncorp (Insurance and Banking), AAMI, GIO, Bingle, Apia, Shannons, Terri Sheer, CIL, Vero, Asteron Life and Resilium.
  • Convenient trading hours: open 7 days and open for late trading. Spans 446 square metres.
  • A community hub with free wi-fi and coffee.

CBA to introduce major accreditation changes next year

From The Adviser.

Commonwealth Bank has announced that, from next year, it will no longer accept accreditations from new mortgage brokers with less than two years of experience or from those that only hold a Cert IV in Finance & Mortgage Broking.

Speaking to The Adviser on Thursday (14 December), CBA’s general manager for third party banking, Sam Boer, and executive general manager home buying, Dan Huggins, explained that the bank would be bringing new benchmarks for mortgage brokers “designed to lift standards and ensure the bank is working with high-quality brokers who are meeting customers’ home lending needs”.
As part of the reforms, from “the first quarter of 2018”, new mortgage brokers will be required to meet new minimum education standards to be able to write Commonwealth Bank loans and demonstrate a commitment to professional development and on-the-job experience.

For CBA accreditation, all new brokers will soon be required to meet the following standards:

– Hold at least a Diploma of Finance and Mortgage Broking Management

– Have at least two years’ experience writing regulated residential loans

– Be a current member of either the Mortgage & Finance Association of Australia (MFAA) or the Finance Brokers Association of Australia (FBAA)

– Be a Direct Credit Representative or employee of an approved Aggregator/Head Group or Australian Credit License (ACL) holder

Cert IV has ‘served its purpose’

Speaking of the changes, Mr Boer told The Adviser: “I actually sat down and reviewed a Cert IV for a friend of mine and looked at the process, and I think that while the Cert IV has served its purpose, with the new standards and expectations that are on us (which have been highlighted through the [ASIC and Sedgwick] reviews and through the Combined Industry Forum reform package), it’s time that we need to look at and set new benchmarks.

“So, that is what we feel is appropriate for the brokers that we want to partner with, to ensure that we are delivering those great customer outcomes.”

Mr Huggins added: “We want to ensure that customers feel confident that mortgage brokers have achieved that minimum standard of education and they can be confident in the advice or the guidance that they are seeing — because home loans are complex products and we want to make sure that customers get good outcomes.”

The executive general manager for home buying continued: “Brokers have done a fantastic job of supporting the industry and supporting great customer outcomes and we want to make sure that that continues for new entrants to the market.”

Two-year requirement

When asked why the decision has been made to only accredit new brokers with more than two years of residential loan writing experience, Mr Huggins said that the decision came down to the quality of loans written.

He told The Adviser: “The data that we have seen on the back book shows that there is a clear correlation that those that are more experienced (and those that are writing more loans) provide better customer outcomes, be they either the ongoing performance of the loan, the ongoing performance of the customer, and adherence to responsible lending as well.”

Mr Boer highlighted that there is a “huge amount of turnover” with new brokers, which he said was a “clear indication that these people need support”.

The general manager for third party banking continued: “They need more training, they need more investment to ensure that they are successful and, of course, with the increased complexity now and expectations on meeting responsible lending, we need to make sure that our brokers are meeting those standards and doing it right.

“So, it is very difficult for somebody without any financial experience, we believe, to be able to meet those standards. And therefore, we need to support, embed and ensure that they have that minimum level of capability.”

When asked whether new brokers coming from financial backgrounds (such as ex-bankers) would also be subject to the two-year requirement, Mr Boer said: “This is really about experience in sitting in front of customers and actually discussing mortgage products. But it’s not the only requirement that we have focused on. There is the education standard as well, which is also a very important part of the requirement.”

Aussie brokers to be held to same standards

Mr Boer emphasised that the new accreditation process holds “the same rules for everyone”, and that CBA-owned brokerage Aussie would also be subject to the same accreditation changes.

He told The Adviser: “It’s the same rules for everyone. We are investing with all our strategic business partners to ensure they meet the new standards.”

“We believe that [the changes] are in the best interest of consumers and the industry alike.”

Accreditation changes form aim to support Combined Industry Forum reform package

The accreditation changes for new brokers come off the back of the Combined Industry Forum’s reform package, which was released this week (and to which Commonwealth Bank was a contributor).

According to Mr Huggins, the new changes form part of CBA’s new mortgage broking model and “long-term commitment” to the industry.

“As a leading home lender we recognise mortgage brokers as a key channel for customers who are looking to purchase a home, and we have been working with the industry forum to find the right balance to ensure the best customer outcomes,” Mr Huggins said.

“Our new standards follow extensive consultation with the brokers, and are another example of our commitment to delivering the recommendations of the Sedgwick Report and ASIC review well before the 2020 deadline.”

Mr Boer added: “We’re committed to the process around the industry reform package – it is significant amount of change with quite a bit of challenge and a lot of investment required by industry. At CBA, we are making a huge investment to support the industry and ensure we are delivering on those standards.”

All new accreditations on hold

CBA said it would work closely with brokers who meet these requirements during the accreditation process, including conducting interviews and providing support with professional development plans.

The bank expects to launch the new process in the first quarter of 2018, with all new accreditations on hold until then to ensure the new process is implemented effectively.

In addition to the updated accreditation standards, CBA is also reviewing non-monetary benefits provided to brokers to ensure they support good customer outcomes; improving the value proposition for accredited brokers; and rolling out the industry’s proposed changes to commissions and KPIs. These changes will be in line with the principles announced in the CIF package, and further details will be released in the new year.

Mortgage Brokers To Be Assessed On “Good Customer Outcomes”

An excellent piece from Sam Richardson at MPA.

For the first time in mortgage broking history, a ‘good customer outcome’ has been defined by the industry.

The Combined Industry Forum created the definition as part of wider governance reforms, in response to ASIC’s Review of Mortgage Broker Remuneration.

The CIF defines a good customer outcome as when “the customer has obtained a loan which is appropriate (in terms of size and structure), is affordable, applied for in a compliant manner and meets the customer’s set of objectives at the time of seeking the loan.”

Additionally, lenders will report back to aggregators on ‘key risk indicators’ of individual brokers. These include the percentage of the portfolio in interest only, 60+ day arrears, switching in the first 12 months of settlements, an elevated level of customer complaints or poor post-settlement survey results.

MFAA CEO Mike Felton, who took part in the CIF, told MPA that the definition “it does hold the industry to a higher standard in terms of saying appropriate versus ‘not unsuitable’, but in reality there has been so much change in responsible lending I don’t think it’s going to make that much difference to their current behaviours.

“The regulator has done a lot of research in this area, we are just articulating it…the first time it’s been articulated.”

Not legally binding…yet

According to Felton, the good customer outcome definition will not be applied retrospectively to loans and is not currently legally binding, but will be subjected to an industry code which gives teeth to the reforms.

This has come as a disappointment to consumer advocates, such as CHOICE, which wanted brokers to be legally required to act in the best interests of consumers, in common with financial planners.

The intention of the Combined Industry Forum, however, is for the definition to form the basis for a new system of governance, and become part of licensing conditions. This process of governance will not be in place until 2020.

The first step is for every individual broker to be issued with a unique identifier number, that stays with them throughout their career. MFAA boss Felton told MPA that the being able to track individual brokers would help make governance ‘data-driven’.

Insights from tracking could “provide direction to your monitoring; file monitoring, surveys, mystery shopping. That in turn drives remedial training, education and outcomes, and then reports back to continually improve.”

Felton describes the governance framework as “the centrepiece, the absolute glue, in the reform package.”

Disclosure to customers

Not only will the industry collect far more information about itself, it will also make that information public.

By the end of 2018, brokers will be required to publish to customers the numbers of lenders used in the previous financial year, in addition to the top six years and the proportion of business going to them.

Aggregators will need to provide to ASIC on the spread of lenders being used by brokers, such as brokers using less than 3 lenders or more than eight.

The Combined Industry Forum also calls for lenders to provide ASIC information on the “weighted average pricing of home loans in the previous financial year across their different distribution channels using various standard scenarios.”