Category: Banking Culture

UK Banks Not Doing Enough To Combat Online Fraud

The UK House of Commons Committee of Public Accounts has published an important report on The growing threat of online fraud (Sixth Report of Session 2017–19).The key observation is that Banks  do not accept enough responsibility for preventing and reducing online fraud and there is no data available to assess how well individual banks are performing. Unless all banks start working together, including making better use of technology, there will be little progress on tackling card fraud and returning money to customers.

  • One key issue is that unlike credit cards, where transactions are automatically refunded in case of dispute, payments made by customers via online banking on their instruction (“authorised push payments”), to a fraudulent destination is not.  It has been estimated that between 40% and 70% of people who are victims of scams do not get any money back. Banks are reported to be holding at least £130 million of funds that cannot accurately be traced back and returned to fraud victims, an amount that UK Finance said was probably a conservative estimate.
  • As the proportion of payments made by digital means continues to rise, stronger safeguards, and clearer account abilities should be placed on the banks.  This is not a topic the banks want to discuss.  Indeed, in evidence, individual banks know how they compare with others, but told the committee that banks did not publish individual numbers because then the fraudsters would target the ‘weakest’ of the banks. Of course, it might be in the banks’ own interest not to be transparent and publish individual data, as it could deter customers.
  • They found card not present fraud was significant, and needed to be reduced.
  • Finally, there was a need for better consumer awareness.

We suspect the situation in Australia is somewhat similar.

In summary, Online fraud is now the most prevalent crime in England and Wales, impacting victims not only financially but also causing untold distress to those affected. The cost of the crime is estimated at £10 billion, with around 2 million cyber-related fraud incidents last year, however the true extent of the problem remains unknown. Only around 20% of fraud is actually reported to police, with the emotional impact of the crime leaving many victims reluctant to come forward. The crime is indiscriminate, is growing rapidly and shows no signs of slowing down. Urgent action from government is needed, yet the Home Office’s response has been too slow and the banks are unwilling to share information about the extent of fraud with customers. The balance needs to be tipped in favour of the customer.

Online fraud is now too vast a problem for the Home Office to solve on its own, and it must work with a long list of other organisations including banks and retailers, however it remains the only body that can provide strategic national leadership. Setting up the Joint Fraud Task in 2016 was a positive step, but there is much still to do. The Department and its partners on the Joint Fraud Taskforce need to set clear objectives for what they plan to do, and by when, and need to be more transparent about their activities including putting information on the Home Office’s website.

The response from local police to fraud is inconsistent across England and Wales. The police must prioritise online fraud alongside efforts to tackle other sorts of crime. But it is vital that local forces get all the support they need to do this, including on identifying, developing and sharing good practice.

Banks are not doing enough to tackle online fraud and their response has not been proportionate to the scale of the problem. Banks need to take more responsibility and work together to tackle this problem head on. Banks now need to work on information sharing so that customers are offered more protection from scams. Campaigns to educate people and keep them safe online have so far been ineffective, supported by insufficient funds and resources. The Department must also ensure that banks are committed to developing more effective ways of tackling card not present fraud and that they are held to account for this and for returning money to customers who have been the victims of scams.

Commonwealth Bank files response to AUSTRAC claims

Commonwealth Bank (CBA) today filed a response to the civil proceedings commenced by AUSTRAC on 3 August 2017.

CBA contests a number of allegations but admit others, including the allegations relating to the late submission of 53,506 threshold transaction reports (TTRs), which were all caused by the same single systems-related error.

The Defence focuses on key factual and legal matters in the claim. CBA confirms that in our Defence we:

  • agree that we were late in filing 53,506 TTRs, which all resulted from the same systems-related error, representing 2.3% of TTRs reported by CBA to AUSTRAC between 2012 and 2015;
  • agree that we did not adequately adhere to risk assessment requirements for Intelligent Deposit Machines (IDMs) – but do not accept that this amounted to eight separate contraventions – and agree we did not adhere to all our transaction monitoring requirements in relation to certain affected accounts;
  • admit 91 (in whole or in part) but deny a further 83 of the allegations concerning suspicious matter reports (SMRs);
  • admit 52 (in whole or in part) but deny a further 19 allegations concerning ongoing customer due diligence requirements.

Further detail can be found in CBA’s Concise Statement in Response.

We continue to fully cooperate with AUSTRAC in relation to our obligations under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (AML/CTF Act) and respect its role as a regulator.  The nature of the regime involves continuous liaison and collaboration with the regulator as risks are identified.  As such we are in an ongoing process of sharing information with the regulator.

AUSTRAC has indicated that it proposes to file an amended statement of claim containing additional alleged contraventions.  If an amended claim is served on us, we expect the court would set a timetable for CBA to file an amended defence. We will provide market updates as appropriate.

We take our anti-money laundering and counter-terrorism financing (AML/CTF) obligations extremely seriously. We deeply regret any failure to comply with these obligations. CBA is accountable for those deficiencies.

We understand that as a bank we play a key role in law enforcement. AUSTRAC’s former CEO has publicly acknowledged our contribution in this regard. We have invested heavily in seeking to fulfil the crucial role we play. CBA has spent more than $400 million on AML/CTF compliance over the past eight years. We will continue to invest heavily in our systems relating to financial crimes thereby supporting law enforcement in detecting and disrupting financial crime.

During the period of the claim, CBA submitted more than 36,000 SMRs, including 140 in relation to the syndicates and individuals referred to in AUSTRAC’s claim.

In the same period we submitted more than 17 million reports in aggregate, including SMRs, TTRs and in respect of international funds transfer instructions. CBA will submit over 4 million reports to AUSTRAC in this year alone.

CBA also responds to large numbers of law enforcement requests for assistance each year, including approximately 20,000 requests this year. Some of the information provided directly resulted in disrupting money laundering and terrorism financing activity and prosecuting individuals.

Any penalty imposed by the Court as a result of the mistakes we have made will be determined in accordance with established penalty principles. For example, the Court may consider whether any contraventions arise out of the same course of conduct and will assess the appropriate penalty for that conduct accordingly, as it recently did in the Tabcorp decision.

CBA’s submissions at trial will also highlight steps that we have taken since 2015 as part of our Program of Action to strengthen and improve our financial crimes compliance.

 

Program of Action

CBA has made significant progress in strengthening our policies, processes and systems relating to its obligations under the AML/CTF Act through our Program of Action.  While this is a continuing process of improvement, progress achieved since the issues concerning TTRs associated with IDMs were first identified and rectified in late 2015, includes:

  • Boosting AML/CTF capability and reporting by hiring additional financial crime operations, compliance and risk professionals. As at 30 June 2017, before the claim was filed, CBA employed over 260 professionals dedicated to financial crimes operations, compliance and risk.
  • Strengthening our Know Your Customer processes with the establishment in 2016 of a specialist hub providing consistent and high-quality on-boarding of customers, at a cost of more than $85 million.
  • Launching an upgraded financial crime technology platform used to monitor accounts and transactions for suspicious activity.
  • Adding new controls such as using enhanced digital electronic customer verification processes to supplement face-to-face identification to reduce the risk of document fraud.

The Program of Action has also addressed issues that AUSTRAC alleges were ongoing contraventions in its claim. For example, CBA recently introduced daily limits for IDMs deposits for CBA cards associated with a personal account. We understand CBA is the first major Australian bank to implement a control of this type.

CBA is committed to continuing to strengthen our financial crimes compliance and to working closely with regulators across all jurisdictions in which we operate to fight financial crime.

CHOICE ‘Welcomes’ Broker Commission Changes But…

Consumer group CHOICE says the proposed CIF mortgage broker reforms are positive, but do not address their key concerns of ensuring brokers act in the best interests of their customers (currently they are not obliged too), and potential conflicts about poorly disclosed trail commissions.

This from Mortgage Professional Australia.

Consumer advocate CHOICE and other consumer groups have welcomed changes to broker commissions proposed by the Combined Industry Forum.

“This announcement from the mortgage brokers, aggregators and lenders is a positive first step towards ensuring that mortgage brokers act in customer interests,” said CHOICE’s director of campaigns and communications, Erin Turner.

CHOICE, which was harshly critical of brokers in their submission to ASIC earlier this year, said CIF’s proposals “shows that all parties in the home lending industry have taken ASIC’s report into mortgage broker remuneration seriously.”

It adds that the changes could increase transparency by informing consumers about the number of lenders brokers used.

CHOICE became part of the CIF after complaining to the Treasury in July that “reform must be focused on what’s best for consumers, not what works for brokers, aggregators or lenders.”

Broker heads hopeful

Both following ASIC’s review, an ongoing Productivity Commission review and in an earlier ‘shadow-shopping’ report, CHOICE have been critical of brokers in the past two years.

However, broking industry associations are hopeful that CHOICE’s involvement in and endorsement of the Combined Industry Forum’s recommendations could lead to a more cooperative relationship.

“I would hope so,” FBAA executive director Peter White told MPA. “it has turned out to be a good result, they have been involved. It’s no ‘roll over, we’ll do this because I say so’; there’s been debate and meaningful discussion about things.”

MFAA CEO Mike Felton said he looked forward to working with consumer advocates going forward: “we the MFAA and the Combined Industry Forum recognise that the consumer is a key stakeholder and that it was critical that the consumer be represented throughout this process. I think that gives credibility to the reforms that have produced.”

Still concerned about trail commissions

Consumer advocates did not entirely welcome the recommendations of the Combined Industry Forum, however.

CHOICE noted that “we are disappointed that brokers aren’t required to act in the best interests of consumers and that there are few changes to overall commission structures. In particular, there is little clarity about the consumer benefit of trail commissions.”

“Consumer groups will continue to discuss these reforms with industry and look forward to their implementation.”

CHOICE has complained about trail commissions to an ongoing review by the Productivity Commission into competition in the financial system. The review, which reports in July 2018, could lead to changes by the Government, depending on its recommendations.

Brokers to have new code and unique identifier numbers

From The Adviser.

By the end of 2020, brokers will be given a “unique identifier number” and be subjected to a new code of conduct, following changes that are to be instituted by the Combined Industry Forum.

The newly released reform package from the Combined Industry Forum has outlined changes to remuneration structures (including changes to upfront and trail commissions) and recommended that the sector would be subject to new code and identifier numbers “to allow for more complete reference checking and identification of poor performers”.

New industry code

While the industry code is yet to be developed, the CIF outlined that it would begin working on a new code by “mid 2018”.

The report read: “The proposed reforms will be industry-led, and individual industry participants have committed to taking immediate steps (having regard to competition law requirements) to implement the reform package. However, to ensure the ongoing viability of the reforms and equal consumer protections, the reforms will need to be captured in an industry code that enables enforcement, applies across the industry and includes new participants over time.

“The CIF is considering a number of approaches, including working with ASIC on establishing an ASIC-approved code for all participants in the mortgage industry, and/or repurposing current industry codes to include these reforms, and to house the appropriate monitoring and compliance functions.”

The code will reportedly take into account the outcomes of the ASIC Enforcement Review’s assessment of ASIC’s code approval powers, and any new obligation for industry participants to subscribe to an approved industry code.

The report continued: “A ‘mortgage broking industry code’ would apply to mortgage brokers, lenders, aggregators and, where appropriate, referral businesses and would be subject[ed] to all applicable regulatory and competition law approvals.”

Speaking to The Adviser about the code, Combined Industry Forum chairman Anthony Waldron said: “It’s really important that we work with ASIC and the government on this to get it right. So that’s whether we repurpose one of the existing codes (for example, there are codes with the industry bodies) or whether it is another ASIC-led code.

“We are still working through exactly how that works, but we think codifying these changes is important to ensure that the industry absolutely implements them. This is a coded, directional piece to say, [and] we want to make sure that the industry takes it seriously and that the government and all players can be ensuring that they are comfortable the industry is moving forward. The code will provide that ongoing monitoring to ensure that it will happen in the future.”

The CEO of the Mortgage & Finance Association of Australia (MFAA), Mike Felton, said: “This ‘mortgage broking industry code’ would apply to all players across the value chain. It may be a new standalone code or an addition to existing codes, and adherence to it could even become a future licence condition of relevant ACL holders.

“We are completely confident in brokers’ ability to create consistently good consumer outcomes, but we’re equally confident in the industry’s ability to do more to show transparency and ensure the trust we’ve earned from consumers is maintained in the long term. I am looking forward to continuing our work with the CIF and ASIC and implementing these reforms.”

Likewise, Peter White, the executive director of the Finance Brokers Association of Australia (FBAA), said: “Both associations already have a code of conduct, so this is a serious work in progress that is more of a headline statement with a desire as much as anything.

“It could be that we take the best of breed of everything and turn it into one. That is a decision that would have to be made by the MFAA and FBAA boards to see if we are prepared to replace the code or have it as an additional code on top of the ones we already have.”

He added: “Bankers already have their code of conduct, and I can’t see anyone replacing that — so they would have that and this newly proposed code as well. So, it could be that we have two as well, but these discussions are yet to be had on what the code would look like.”

Unique identifier numbers

Another aspect of the CIF’s “landmark reform package” that aims to “improve consumer outcomes and confidence in mortgage broking” is the introduction of a new unique identifier number for brokers.

First suggested by the MFAA to help provide ASIC with “the complete and accurate broker picture it desires”, the association suggested the industry bring in a “single broker identifier number” that would be mandatory for use on each home loan sold.

“Such a unique identifier of the broker that has intermediated any loan must be provided to the lender with the application and stored by the lender throughout the life of the loan and for a period of seven years after the last interaction with a customer in line with other NCCP Act requirements,” the MFAA stated in its response to Treasury.

The MFAA noted earlier this year that while there were existing identifiers in use, such as credit licence numbers or credit representative numbers, it is not “clear whether these numbers cover all brokers and staff”.

As such, the association proposed that it could therefore require a “different number” to be used by those who operate directly under their employer’s ACL number.

“This solution may initially be a lender-specific unique identifier, but in time, ideally each broker should receive a single identifier across all lenders,” the submission read.

This suggestion has been taken up by the CIF, whose report stated: “In response to Sedgwick’s recommendation that ‘the industry needs to improve the governance and oversight of brokers, lenders and aggregators, the CIF has proposed that it bring in new unique identifier numbers for brokers.

“The industry intends to work with the government to implement a unique identifier for each broker and introducer/referrer to lender, noting that there is investigation required around how this can be implemented.

The unique identifier should be held on a register of brokers maintained as a reference checking protocol for credit professionals moving between aggregators or moving from working with a lender to an aggregator.

The CIF elaborated: “Ideally, this identifier would be maintained throughout a person’s career across financial services industries, such as financial planning, mortgage broking, referring/introducing and as a lender-employed banker, and be managed centrally by ASIC. Once fully implemented, this identifier would be used by aggregators, lenders, associations and ASIC, and be held against all loans lodged at the lender level to assist with data analytics.”

Mr Waldron told The Adviser: “There is a lot of work still do with this one and we will need to work with ASIC closely on that. This [number] is designed to be portable, so you take it with you no matter where you are working. We think that will improve a whole range of things, but ensuring that the governance that we talk about can be implemented — and that if people change aggregator, for example — that reporting can continue.

“Down the track, we think that efficiencies can be created out of it for the industry as well. But we still have a bit of fair work to do to implement this one and we will need ASIC to implement this.”

The FBAA’s Peter White said that he could “see the value in a unique number that carries across everything and that helps manage the industry”, particularly as bankers who write home loans aren’t captured by ASIC’s current register of those operating with ACLs and ACRs.

He said: “So, I see this new number — if it’s set out in a desirable way — not changing anything else but enhancing what is already in place.”

The CIF outlined that it expects the unique identifier numbers to be implemented by the “end of 2020”.

Third Report On Banks Recommends Focus on IO Loan Pricing

Last Thursday, the House of Representatives Standing Committee on Economics released their third report on their Review of the Four Major Banks.  They highlight issues relating to IO Mortgage Pricing, Tap and Go Debt Payments, Comprehensive Credit and AUSTRAC Thresholds.

Looking back at the issues The Committee raised since inception in 2016, they have had a significant impact on the banks and again shows how the landscape is changing, outside of a Banking Royal Commission.  It also suggests The Commission will not necessarily deflect scrutiny!

Here are the key points from their report:

Since the House of Representatives Standing Committee on Economics commenced its inquiry into Australia’s four major banks in October 2016, the Government has announced significant reforms to the banking and financial sector to implement the committee’s recommendations.

The Treasurer requested that the House of Representatives Standing Committee on Economics undertake – as a permanent part of the
committee’s business – an inquiry into:

  • the performance and strength of Australia’s banking and financial system;
  • how broader economic, financial, and regulatory developments are affecting that system; and
  • how the major banks balance the needs of borrowers, savers, shareholders, and the wider community.

In November 2016, the committee published its first report, which followed the first round of hearings a year ago in October 2016. The report contained 10 recommendations to reform the banking sector, including calling for new legislation and other regulatory changes to improve the operation of the banking sector for Australian consumers. In a second report in April 2017, following hearings in March, the committee reaffirmed the 10 recommendations of its first report and made an additional recommendation in relation to non-monetary default clauses.

In the 2017 Budget, the Treasurer announced the Government would be broadly adopting nine of the committee’s 10 recommendations for banking sector reform. These recommendations include putting in place a one-stop shop for consumer complaints, the Australian Financial Complaints Authority (AFCA); a regulated Banking Executive Accountability Regime (BEAR); and, new powers and resources for the Australian Competition and Consumer Commission (ACCC) to investigate competition issues in the setting of interest rates. The government also adopted the committee’s recommendations in relation to establishing an open data regime and changing the regulatory requirement for bank start-ups in order to
encourage more competition in the sector.

The Committee’s Third Report makes the following recommendations to Government:

  • The committee is concerned by the increase in transaction costs merchants
    now face as a result of the shift to tap-and-go payments. These costs are
    ultimately borne by customers. If the banks do not act by 1 April 2018, regulatory action should be taken to ensure that merchants have the choice of how to process “tap and go” payments on dual network cards. At present merchants are forced to process these transactions through schemes such as Visa and MasterCard rather than eftpos. It is estimated that this forced processing costs merchants hundreds of millions of dollars in additional annual fees at present;
  • The Australian Competition and Consumer Commission, as a part of its inquiry into residential mortgage products, should assess the repricing of interest‐only mortgages that occurred in June 2017;
  • Despite many commitments by banks in the past to implement CCR, little
    progress has been made. The Government should introduce legislation to mandate the banks’ participation in Comprehensive Credit Reporting as soon as possible; and
  • The Attorney‐General should review the major banks’ threshold transaction reporting obligations in light of the issues identified in the Australian Transaction Reports and Analysis Centre’s (AUSTRAC) case against the Commonwealth Bank of Australia.

Interest Only Mortgage Loans

Specifically on the IO loan situation, while the banks’ media releases at the time indicated that the rate increases were primarily, or exclusively, due to APRA’s regulatory requirements, the banks stated under scrutiny that other factors contributed to the decision. In particular,banks acknowledged that the increased interest rates would improve their profitability. A key reason for such an improvement is that the major banks increased rates on both new and existing interest-only loans in June 2017. This is despite APRA’s interest-only measure only targeting new lending. As of 6 October 2017, analysts at CLSA estimated that the banks’ net interest margins increased by up to 12 bps following the rate increases announced in June and March.

The improvement in net interest margins is forecast to be so beneficial for Westpac that several analysts upgraded their outlook following the price announcements in June 2017.

The ACCC is currently conducting an inquiry into residential mortgage products. This inquiry was established to monitor price decisions following the introduction of the Major Bank Levy. As a part of this inquiry, the ACCC can compel the banks affected by the Major Bank Levy to explain any changes to interest rates in relation to residential mortgage products. The inquiry relates to prices charged until 30 June 2018.

The committee recommends that the ACCC analyse the banks’ internal documents to assess whether or not they are consistent with their statements in their June 2017 media releases and subsequent public commentary. In particular, the ACCC should analyse the banks’ decisions to increase interest rates on existing borrowers despite APRA’s measure only targeting new borrowers. Further, the ACCC should consider whether the banks’ public statements adequately distinguish between new and existing borrowers. The ACCC should consider whether the media statements suggest rates on existing interest-only mortgages rose as a direct consequence of APRA’s regulatory requirement. It will be important that the ACCC conducts granular analysis of the financial modelling of the banks. The ACCC will need to understand the true financial impact on the banks of APRA’s regulatory changes, and assess that impact against the public statements of the banks.

Will The Royal Commission Restore Trust, Certainty and Confidence in our Banking System?

That was the hope expressed during Westpac’s AGM held last Friday. It was interesting to hear from both Chairman and CEO on the upcoming Royal Commission.

Westpac chairman Lindsay Maxsted said

it is our hope that, ultimately, the newly announced royal commission will play a role in restoring trust, respect and confidence in Australia’s already strong financial system.

But, given the multiple inquiries which have run over recent months,  Westpac consistently argued that further inquiries into the sector, including a royal commission, were unwarranted.

He did concede that there had been some instances where the banking sector had failed to meet customer expectations and banks had underestimated the subsequent backlash from customers, regulators and the government.

CEO Brian Hartzer said

We are embracing the royal commission as a way to finally draw a line in the sand on calls for inquiries.

and asserted that the banks have “been a political football for too long”.

That’s why we have now accepted the need for a royal commission to create certainty and confidence in our banking system.

So, it is worth noting that the scope is still being wrangled, and the process will take at least a year. It is also has a broad set of terms, spanning not just the banks. Yes, the  announcement may ease the political debate, but that is not the end of the matter.

If past inquiries are any measure, there will be steady coverage as it progresses, and depending on the findings, it may, or may not rebuild confidence.

It seems to me that there can be no guarantees – and we still await the outcomes of the Productivity Commission on vertical integration, and ACCC on mortgage pricing.

So we think the outlook for the banks remains, at least, cloudy!

 

 

Banking royal commission: The questions commissioner Kenneth Hayne needs to ask and the banks must answer

From ABC News.

The Government and major banks were staunchly against a royal commission until it became all but inevitable that an inquiry would happen with or without their imprimatur.
That has led many to question whether the terms of reference have been designed to reduce the scope of the commission in a way that limits the amount of wrongdoing that might be uncovered.

“It is carefully crafted to avoid a lot of the potential bear traps,” said banking analyst Martin North from Digital Finance Analytics.

“It’s probably the one you have to have, I’m not sure it’s really going to add much to the real debate and I’m not sure the outcomes will be really significant.”

CLSA banking analyst Brian Johnson concurs the terms of reference are weaker than what Labor, the Greens and some dissident Nationals had in mind.

But he also noted the extensive and compulsive investigative powers of royal commissions tend to mean they turn up surprising findings — the “unknown unknowns” as former US defence secretary Donald Rumsfeld famously put it.

“If it doesn’t actually turn up anything that we don’t know already then it is really a waste of time,” Mr Johnson said.

“This does provide a mechanism for aggrieved parties to basically purge themselves, so that’s where the risk basically lies [for the banks].”

What skeletons remain in the cupboard?

The Government’s main argument against a royal commission is that it has already held a range of inquiries and undertaken a number of reforms to improve financial sector regulation and accountability.

Martin North agrees a lot of progress has been made.

“Over the last 18 months or so, there have been a whole series of improvements in the regulatory framework in and around banks,” he said.

“A lot of the things that should have been done have been done already.”

Mr North cited the Productivity Commission review of so-called vertical integration (where banks cross-sell a wide range of products and services to their customers), the ACCC’s investigation into bank price setting and the Banking Executive Accountability Regime as examples.

However, Mr North said the biggest elephant in the room remains largely ignored.

“The critical question for me is about lending, and about lending standards,” he said.

“I have a view that we are at a very early stage of understanding just how far from where we should have been have the lending standards been … that is the real black hole at the moment.”

Mr North said there may be a ticking time bomb of bad loans that could turn into rising defaults over the next three to five years.

“If you look at the lending standards today and you compare them to two or three years ago, there are many people holding mortgages today who would not now have got those mortgages,” he said.

“But I also believe that even today, the lending standards are still too loose and there are households today who are able to get mortgages and committing to mortgages that they shouldn’t be getting.”

Mr North said there was also a lot more to be discovered in the areas of financial planning and mortgage broking.

“I also think that we’ve still got some questions around the conflicts of interest, for example, from mortgage brokers and financial advisers and how they back-end into the overall financial services sector,” he said.

“Those are the two things that I think are the critical issues but I don’t think either of them will get touched very hard in this review.”

Mr Johnson said another key issue that may not be examined in the royal commission is the economic fallout of having such large, super-profitable major banks.

“The 10-year bond rate is something like 2.6 per cent and we’ve got banks doing an ROE [return on equity] of about 15 per cent, which is amongst the highest in the world,” he said.

“That high level of profitability, perhaps that is a tax on the rest of the economy.”

Time more limited than terms of reference

While the terms of reference give relatively broad scope for Kenneth Hayne to take a wide looks across the financial sector, he has only been given a year to do so.

This is slightly less than the Northern Territory royal commission investigating youth detention.

It is almost a full year less than the Trade Union Royal Commission, which was extended from nine months to nearly two years at the request of commissioner Dyson Heydon who found there was insufficient time to complete his inquiry into half a dozen trade unions.

This inquiry is intended to look at hundreds of financial companies, many of which are worth well over $1 billion and each sell hundreds of individual products.

Given the number of victims of the financial scandals the public have been made aware of, the royal commission looking at institutional responses to child sexual abuse may provide a better guide of how much time is needed for a genuinely thorough inquiry.

It was originally intended to take two years, however it was extended to four years due to the sheer volume of victims’ stories that needed to be told.

Will the royal commission raise mortgage rates?

As for bank claims the bad publicity and possibility of new scandals arising from the royal commission would push up overseas funding costs and therefore mortgage interest rates, Mr Johnson is sceptical.

“The cost of three-year and five-year money is back down at the low points of the cycle,” he said.

“It certainly would be more driven by what we see happening in credit markets generally than this idea that suddenly investors would desert the Australian banks.

“I just think that’s over-hyping it and it’s a somewhat convenient argument.”

Mr Johnson said where Australians choose to park their savings is a much more important factor for lending interest rates than whether international investors are investing.

“The funding costs for the Australian banks are far more sensitive to deposit pricing than they actually are to wholesale funding,” he added.

Ironic in light of the latest scandal, exposed by Ben Butler in The Australian, where the major banks rolled term-deposit customers over into much lower interest rate products after their initial deposit matured without adequate warning that this would happen.

Misconduct Inquiry Adds to Challenges at Australian Banks

From Fitch Ratings.

The Royal Commission into alleged misconduct in Australia’s financial sector announced on 30 November 2017 adds to the challenges for the system, says Fitch Ratings. It could potentially weaken the reputation of the system or individual entities, and exert further pressure on profitability, even if it does not identify broad or significant failings.

We continue to believe the system is well regulated and that the major banks are among the strongest that we rate globally. However, momentum for an inquiry has increased following a number of conduct issues across wealth management, life insurance and banking that have been identified in recent years. These incidents appear to be isolated, and we have not changed our view that the risk-management frameworks and policies of Australian banks are fundamentally sound. Any commission findings to the contrary are likely to result in Fitch reviewing ratings of affected banks.

Public perception of Australian banking has been weakened by the debate leading up to this inquiry, and may be further undermined by the Royal Commission, regardless of whether it exposes significant shortcomings. The reputation of the system is particularly important as the Australian banking sector is heavily reliant on foreign investors for funding. Any loss of trust may lead to higher wholesale funding costs, which in turn could intensify competition for deposits and push up funding costs for the entire system.

Profitability would be pressured by a rise in funding costs, while interest rates and fees on banks’ products would also be most likely to come under additional scrutiny. We already expect profitability to be squeezed in 2018, with margins likely to narrow as a result of low local interest rates, competition for assets and deposits, and upward pressure on funding costs from rising global interest rates. Slower asset growth and a rise in loan-impairment charges could also drag on profits.

Banks may seek to offset any sustained impact on profit by taking on additional risk, although we would expect the regulator to ensure this is adequately managed, meaning any increase in risk appetite should be limited.

The major banks have a strong competitive advantage in the Australian market, and there is a danger that the commission ultimately leads to some erosion of this position at smaller Australian banks and other competitors, such that the banks’ ability to set prices is weakened. The commission may also move the focus of bank management away from the day-to-day running of the bank, which could give an advantage to competitors.

The inquiry is to submit its final report within 12 months of its establishment, with an interim report to be provided by September 2018.

What will the banking Royal Commission mean for real estate?

The Royal Commission into the banking sector is likely to further tighten mortgage liquidity.

From The Real Estate Conversation.

The Royal Commission into the banking sector is likely to further tighten mortgage liquidity, said Malcolm Gunning, president of the REIA, to SCHWARTZWILLIAMS.​

“The banks have been tightening their lending in anticipation of the enquiry [with APRA’s regulations]. In Sydney and Melbourne, property is coming off the boil,” he said.

The Royal Commission is likely to cause the banks to take an even more “cautious” approach, said Gunning.

Yesterday, after months of speculation, the federal government announced it will establish a Royal Commission into the “alleged misconduct” of the Australian banking and financial services sectors.

“The enquiry is important; we need a robust banking system to underpin Australia’s growth. But it shouldn’t be a witch hunt,” said Gunning.

Gunning is keen to see the enquiry address perceived conflicts of interest within the financial services industry, particularly in the superannuation sector, and applauded the government’s move to impose broader-than-expected terms of reference, covering conduct in the insurance, financial services, and banking sectors.

“I think the banks have a lot of policy where they’re providing advice on the one hand and lending on the others, and there is a blurring of lines between the businesses,” he said.

“What we should see is a clear delineation in conflicting areas of the bank, particularly for superannuation,” said Gunning.

Gunning said the Australian mortgage lending market is already facing tighter regulation and red tape.

“We’ve had about seven real estate regulations bought in over the last year, with stamp duty, first-home buyer incentives and so on, and next year there could be new money laundering regulations. Now the banking enquiry,” he said.

“That will mean our open lending market will start to tighten,” said Gunning.

Gunning said banks could get around this with greater emphases on “back door” lending.

“I think we’ll see very strong growth in the second-tier lenders,” he said.

The Commission is scheduled to run for 12 months, with its finding due to be released in February 2019. It is expected to cost $75 million.

Bank shares were weaker yesterday, but at the time of writing were staging a modest recovery.

Broad mandate for financial services royal commission takes the heat off banks

From The Conversation.

It does seem anomalous that the major banks have now become supporters of the royal commission into financial services, given they have been the principal targets. But the alternatives are probably less palatable, particularly if the banks think that all past major issues of misconduct and immoral behaviour have already been brought to light. And the broadening of the terms of reference beyond banking may dilute the focus on the banks themselves.

The banks argue that ongoing speculation and uncertainty are creating unnecessary costs and distractions for them, and that is most likely the case. Even if the major banks were to spend A$100 million in dealing with the royal commission that is less than 0.3% of the annual profits of the majors – so it has little impact on shareholder returns.

And with annual interest expenses in the order of A$65 billion, a cost of A$100 million or so could be quickly offset by improvements in bank borrowing costs from resolution of uncertainty. Whether the government spending a similar sum of taxpayer money on a royal commission is worthwhile is another matter.

Terms of reference too broad

The draft terms of reference of the royal commission ask it to focus primarily on three issues involving financial service entities. One is the essentially legal issue of identifying past cases of misconduct in violation of regulations and laws, as well as what might be termed “misbehaviour” (legal but immoral or unethical or unfair activities).

One apparent omission in the draft terms of reference relates to credit – and lending has been a major problem area in the past. While bank lending is covered, the definition of financial services entities to be considered does not appear to include those (such as mortgage brokers and some lenders) who only require an Australian Credit Licence and not an Australian Financial Services Licence (AFSL). Likewise, some financial services entities are exempt from the AFSL requirement and that may prove problematic if the draft terms of reference are not amended.

The boards and senior management of the banks (and other entities) no doubt hope there are no hidden skeletons in the closets which may be uncovered to shock them, and that revisiting the known past problems will be a case of yesterday’s news.

Although the term “misbehaviour” strays into grey areas of defining consistency with “community standards and expectations”, identifying past misconduct is a task suitable for a royal commission. But it shouldn’t be needed. ASIC and other regulators have adequate powers (if not adequate resources) to identify and prosecute misconduct. The adequacy of those powers is also a topic for the commission.

The second major task of the royal commission is to identify whether misconduct and misbehaviour can be attributed to poor culture and governance practices. This is particularly problematic.

What evidence is to be used to show, beyond reasonable doubt, that there is a causal relationship from the amorphous, non-quantifiable, concepts of culture and governance to specific instances of, or general proclivity towards, misconduct? There’s also undoubtedly many positive behaviours and outcomes occurring within these institutions they could point to, which may imply that, on balance, the arrangements are not bad.

So, the third question the commission then faces, is what changes might be made to reduce these problems. Here, the danger is that it involves a step into the unknown – what would be the likely outcomes under any proposed changes.

In its task of making recommendations, the commission faces a number of other difficulties. There is a raft of regulatory changes in progress following on from the 2014 Financial Services Inquiry and other government policy initiatives.

Also relevant is the financial technology or “fintech” revolution creating new business models, products and services, and methods of customer interaction with financial services entities. These create potential for new types of misconduct and misbehaviour. How relevant lessons the royal commission draws from history will be for this new world is unclear.

The banks will no doubt be pleased that the scope of the royal commission encompasses most of the financial services sector rather than focusing primarily upon them. In particular, the reference to superannuation fund trustees and use of member funds would seem to bring the controversial issue of fund governance right to the fore and will partly distract attention from the banks.

Author: Kevin Davis, Research Director of Australian Centre for FInancial Studies and Professor of Finance at Melbourne and Monash Universities, Australian Centre for Financial Studies