Banking Culture – Page 87 – Digital Finance Analytics (DFA) Blog

New ASIC funding model a “tax” on brokers, MFAA warns

From Australian Broker.

The Mortgage & Finance Association of Australia (MFAA) has expressed concern about a new industry funding model proposed by the Australian Securities & Investments Commission (ASIC).

The model, which is set to commence in the second half of 2017, hopes to draw funds for ASIC from parties within the finance industry.

“ASIC has long believed that those who generate the need for ASIC’s regulation should pay for it, rather than the Australian public,” said ASIC chairman Greg Medcraft.

“An industry funding model for ASIC is about establishing price signals to drive economic efficiencies in the way resources are allocated within ASIC. Industry funding will also improve ASIC’s transparency and accountability. That means business will better understand the job we do by having greater visibility of the cost of doing that job.”

However, Cynthia Grisbrook, chairman for the MFAA, has warned that proposed changes would see licensed mortgage brokers and broker groups paying “up to seven times” the amount for each dollar of credit facilitated compared to lenders.

“We believe that this equates to a ‘tax’ on brokers. Unlike lenders, brokers are – in most cases – unable to pass this additional cost on down the value chain,” she said.

Under the current proposal, licenced brokers and broker groups would face a levy rate of $1,000 plus $1.14 per $10,000 on credit intermediated greater than $100 million. This was compared to $2,000 plus $0.15 per $10,000 facilitated for lenders on credit provided greater than $100 million.

“On ASIC’s current calculations this could leave licensed brokers and aggregators (where applicable) each out of pocket in the amount of $39.90 on an average $350k mortgage given that the levy is charged at multiple points in the value chain. Lenders would be levied $5.25 on the same average $350k transaction,” Grisbrook said.

While these amounts would only be payable once the relevant party has reached the threshold of $100 million – which Grisbrook admitted may not affect brokers directly – she warned that this could impact aggregators who may then expect brokers to carry a portion of the cost.

“Overall, the MFAA believes that the model currently under consideration is inequitable, anticompetitive and unnecessarily complex to administer,” she said.

The proposed changes could also lead to the consolidation of licensing with many individually-licensed brokers handing back their licences and joining broker groups instead. This would reduce industry competition, Grisbrook warned.

“The MFAA is currently working with members and other industry participants to develop an alternative model based on the following four principles: simplicity, equity, achievability and neutrality.”

To get a feel for any unintended consequences, the MFAA is talking with aggregator and member groups, Grisbrook told Australian Broker.

“We have a lobbyist panel that’s made up of a lot of aggregators, and we’re sharing information and data to look at different angles.”

The MFAA also has a select group of brokers that it is working with on this. “We’ve sent something out for their input,” she said.

ASIC is currently taking submissions on the proposed funding model through the Treasury website. The submission process will close on 16 December.

In light of this short deadline, the MFAA has spoken to ASIC and is seeking an extension so that all industry players are on board and are working towards a common goal, Grisbrook said.

“We want everybody who’s involved in this to have a say in it and ensure that we’re all on the same page.”

US Regulators Say Wells Fargo Has More To Do

The Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve Board on Tuesday announced that Bank of America, Bank of New York Mellon, JP Morgan Chase, and State Street adequately remediated deficiencies in their 2015 resolution plans. The agencies also announced that Wells Fargo did not adequately remedy all of its deficiencies and will be subject to restrictions on certain activities until the deficiencies are remedied.

Resolution plans, required by the Dodd-Frank Act and commonly known as living wills, must describe the company’s strategy for rapid and orderly resolution under bankruptcy in the event of material financial distress or failure of the company.

In April 2016, the agencies jointly determined that each of the 2015 resolution plans of the five institutions was not credible or would not facilitate an orderly resolution under the U.S. Bankruptcy Code, the statutory standard established in the Dodd-Frank Act. The agencies issued joint notices of deficiencies to the five firms detailing the deficiencies in their plans and the actions the firms must take to address them. Each firm was required to remedy its deficiencies by October 1, 2016, or risk being subject to more stringent prudential requirements or to restrictions on activities, growth, or operations. The review and the findings announced today relate only to the joint deficiencies identified in April 2016.

The agencies jointly determined that Wells Fargo did not adequately remedy two of the firm’s three deficiencies, specifically in the categories of “legal entity rationalization” and “shared services.” The agencies also jointly determined that the firm did adequately remedy its deficiency in the “governance” category. In light of the nature of the deficiencies and the resolvability risks posed by Wells Fargo’s failure to remedy them, the agencies have jointly determined to impose restrictions on the growth of international and non-bank activities of Wells Fargo and its subsidiaries. In particular, Wells Fargo is prohibited from establishing international bank entities or acquiring any non-bank subsidiary.

The firm is expected to file a revised submission addressing the remaining deficiencies by March 31, 2017. If after reviewing the March submission the agencies jointly determine that the deficiencies have not been adequately remedied, the agencies will limit the size of the firm’s non-bank and broker-dealer assets to levels in place on September 30, 2016. If Wells Fargo has not adequately remedied the deficiencies within two years, the statute provides that the agencies, in consultation with the Financial Stability Oversight Council, may jointly require the firm to divest certain assets or operations to facilitate an orderly resolution of the firm in bankruptcy.

The Federal Reserve Board is releasing the feedback letters issued to each of the five firms. The letters describe the steps the firms have taken to address the deficiencies outlined in the April 2016 letters. The feedback letter issued to Wells Fargo discusses the steps the firm has taken to address its deficiencies and those needed to adequately remedy the two remaining deficiencies.

The determinations made by the agencies today pertain solely to the 2015 plans and not to the 2017 or any other future resolution plans. In addition to requiring that the firms address their deficiencies, in April the agencies also identified institution-specific shortcomings, which are weaknesses identified by both agencies, but are not considered deficiencies.

The agencies in April also provided guidance to be incorporated into the next full plan submission due by July 1, 2017, to the five firms, as well as Goldman Sachs, Morgan Stanley, and Citigroup, and will review those plans under the statutory standard. If the agencies jointly decide that the shortcomings or the guidance are not satisfactorily addressed in a firm’s 2017 plan, the agencies may determine jointly that the plan is not credible or would not facilitate an orderly resolution under the U.S. Bankruptcy Code.

The decisions announced today received unanimous support from the FDIC and Federal Reserve boards.

Feedback letters:
Bank of America (PDF)
Bank of New York Mellon (PDF)
JP Morgan Chase (PDF)
State Street (PDF)
Wells Fargo (PDF)

Report on the Code of Banking Practice Delayed

The Australian Bankers’ Association has today acknowledged the one month delay of the report of the Code of Banking Practice review.

ABA Executive Director – Retail Policy Diane Tate said the independent reviewer, Mr Phil Khoury, had requested more time to adequately deal with the breadth and complexity of issues.

The ABA recognises that the process to review the Code is extensive and requires thorough consultation and engagement,” she said.

We acknowledge that Mr Khoury needs more time to be able to produce the best outcome – a report which clearly identifies the pathway to improve the Code.

“We look forward to receiving the report by the end of January next year with recommendations on how banks can strengthen their commitments to customers and improve standards of behaviour,” Ms Tate said.

New Draft Financial Product Design Obligations Tabled

The Treasury has released its proposals today.

“The measures outlined in this paper are aimed at improving accountability for financial products in our system throughout the whole product lifecycle. Importantly, product issuers will be required to target the distribution of their products to the consumers that are most likely to have their needs addressed by the product. In addition, ASIC will be empowered to take direct action to address problems where they identify the risk of significant consumer detriment”.

The proposals relating to product design and distribution obligations will apply to financial products made available to retail clients except ordinary shares. This would include insurance products, investment products, margin loans and derivatives. The obligations would not apply to credit products (other than margin loans). ‘Issuers’ and ‘distributors’ of financial products must comply with the obligations.

However, the product intervention power would apply to all financial products made available to retail clients (securities, insurance products, investment products and margin loans) and credit products regulated by the National Consumer Credit Protection Act 2009 (the Credit Act) (credit cards, mortgages and personal loans).

So combined they may have significant impact on the industry.

As part of the Government’s response to the Financial System Inquiry (FSI), Improving Australia’s Financial System 2015, the Government accepted the FSI’s recommendations to introduce:

design and distribution obligations for financial products to ensure that products are targeted at the right people (FSI recommendation 21); and

a temporary product intervention power for the Australian Securities and Investments Commission when there is a risk of significant consumer detriment (FSI recommendation 22).

This paper seeks feedback on the implementation of these measures. In order to assist interested parties in providing feedback, the Paper outlines proposals to illustrate how the measures could operate in practice. This approach recognises that many of the elements of the measures are interrelated and so to provide feedback people need to be able to view the measures holistically.

The proposals outlined in this paper are intended to elicit specific and focused feedback, and should not be viewed as a statement of the Government’s final policy position.

The Government invites all interested parties to make a submission on the proposals outlined in this paper. Closing date for submissions: Wednesday, 15 March 2017 . The responses received will inform the development of draft legislation which will be subject to public consultation.

Outlined below are the proposed positions on the nine key implementation issues for the measures.

Design and distribution obligations

Issue 1: What products will attract the design and distribution obligations?

Summary of proposal: The obligations will apply to financial products made available to retail clients except ordinary shares. This would include insurance products, investment products, margin loans and derivatives. The obligations would not apply to credit products (other than margin loans).

Issue 2: Who will be subject to the obligations?

Summary of proposal: ‘Issuers’ and ‘distributors’ of financial products must comply with the obligations. ‘Issuers’ are the entities responsible for the obligations under the product. Examples of issuers include insurance companies and fund managers.

‘Distributors’ are entities that either arrange for the issue of the product to a consumer or engage in conduct likely to influence a consumer to acquire a product for benefit from the issuer (for example, through advertising or making disclosure documents available). Distributors that provide personal advice will be excluded from the distributor obligations. Examples of a distributor include a credit provider that offers its customers consumer credit insurance or a fund manager that distributes its products using a general advice model.

Issue 3: What will be expected of issuers?

Summary of proposal: Issuers must: (i) identify appropriate target and non-target markets for their products; (ii) select distribution channels that are likely to result in products being marketed to the identified target market; and (iii) review arrangements with reasonable frequency to ensure arrangements continue to be appropriate.

Issue 4: What will be expected of distributors?

Summary of proposal: Distributors must: (i) put in place reasonable controls to ensure products are distributed in accordance with the issuer’s expectations; and (ii) comply with reasonable requests for information from the issuer related to the product review.

Product intervention power

Issue 5: What products will attract the product intervention power?

Summary of proposal: The power would apply to all financial products made available to retail clients (securities, insurance products, investment products and margin loans) and credit products regulated by the National Consumer Credit Protection Act 2009 (the Credit Act) (credit cards, mortgages and personal loans).

Issue 6: What types of interventions will the Australian Securities and Investment Commission (ASIC) be able to make using the power?

Summary of proposal: ASIC can make interventions in relation to the product (or product feature) or the types of consumers that can access the product or the circumstances in which consumers access it. Examples of possible interventions include imposing additional disclosure obligations, mandating warning statements, requiring amendments to advertising documents, restricting or banning the distribution of the product.

Issue 7: When will ASIC be able to make an intervention?

Summary of proposal: In order to use the power, ASIC must identify a risk of significant consumer detriment, undertake appropriate consultation and consider the use of alternative powers. ASIC must determine whether there is a significant consumer detriment by having regard to the potential scale of the detriment in the market, the potential impact on individual consumers and the class of consumers likely to be impacted.

Issue 8: What will be the duration and review arrangements for an ASIC intervention?

Summary of proposal: An intervention by ASIC can last for up to 18 months. During this time, the Government will consider whether the intervention should be permanent. The intervention will lapse after 18 months (if the Government has not made it permanent). ASIC interventions cannot be extended beyond 18 months. ASIC market wide interventions are subject to Parliamentary disallowance. ASIC individual interventions are subject to administrative review.

Issue 9: What oversight will apply to ASIC’s use of the power?

Summary of proposal: Interventions made by ASIC in relation to an individual product or how a specific entity is distributing a product will be subject to administrative and judicial review. Market-wide interventions subject to Parliamentary oversight including a 15-day Parliamentary disallowance period. The Government will review ASIC’s use of the power after it has been in operation for five years.

ASIC bans former ANZ Financial Planning adviser from financial services

ASIC says they have banned a former employee of ANZ Financial Planning, from providing financial services for a period of five years.

He was a financial planner with ANZ Financial Planning at Hurstville between 19 January 2006 and 30 July 2014.

He was banned from providing financial services as ASIC found that he engaged in misleading and deceptive conduct by creating false documents and falsely amending documents contained on client files. The conduct included:

writing clients’ names and initials on documents in the places designated for their signatures and initials;

changing the dates recorded on a number of documents; and

creating false investor profile forms for two clients by photocopying forms they had signed in previous years and changing the dates on the copied documents.

Deputy Chairman, Peter Kell said, ‘Financial advisers are important gatekeepers who must act honestly to increase broader public confidence in the financial services industry.

‘This banning should serve as a deterrent to any financial adviser tempted to act dishonestly.’

He has the right to seek a review of ASIC’s decision to the Administrative Appeals Tribunal.

Background

ASIC’s work in the Wealth Management Project covers a number of areas including:

Working with the largest financial advice firms to address the identification and remediation of non-compliant advice; and

Seeking regulatory outcomes, when appropriate, against licensees and advisers.

ABC 7:30 Does Banking Sales Driven Culture

ABC 7:30 ran a segment on the commission and sales driven sales culture resident within our retail banking sector.

NAB released a statement last night.

CBA said:

“Commonwealth Bank is very supportive of the industry-wide review of sales commissions and product-based payments. This review is underway and we have already provided details of our staff bonus structures and remuneration polices to independent reviewer Stephen Sedgwick AO.

“We don’t encourage the use of league ladders to measure product sales, however we do have regular performance discussions with teams and individuals to track how well we are meeting customer needs with a particular focus on customer satisfaction.

“Bonuses paid to our call centre staff take into account several factors and our reward structures are 50 per cent weighted toward meeting customer satisfaction measures. To be eligible for a bonus payment, all our staff must satisfy risk frameworks and show a commitment to the bank’s values.

“This bonus structure does not vary throughout the year.

“Ms Johnston worked with us from 2010 to earlier this year but we don’t have a record of her raising concerns with us about remuneration structures or how performance is tracked in our call centres during this time. We always encourage our people to raise any concerns and we are committed to ensuring these are investigated and resolved.

“Our employees can speak up in many different ways; they can approach their leader or any member of the management team, contact human resources or place an anonymous call to our employee SpeakUp hotline.”

NAB Responds to 7:30 Segment On Commission Driven Product Sales

Bob Melrose, Executive General Manager, NAB Retail, provided this statement on behalf of NAB to the ABC’s 7.30 program:

“At NAB we aim to become Australia and New Zealand’s most respected bank. We will get there by putting the customer at the heart of everything we do, and holding all of our people to high standards for ethical conduct.

We are unable to comment in detail on our former NAB employee – however we can confirm that she ultimately resigned from NAB.

We stand by our fair performance management processes.

Regarding NAB’s approach to product based sales and commissions, customer-facing employees in our branches provide help and guidance to identify ways in which we can help our customers meet their goals. Our people are trained on our product features and benefits, to help identify which products can help meet our customers’ individual needs.

But we know more needs to be done on the critical area of product sales commissions and product-based payments. NAB fully supports the review of product based payments and product sales commissions being conducted by Stephen Sedgwick on behalf of the ABA, and we intend to implement the findings of this review.

This year we have also moved away from performance-based, fixed pay increases for customer service and support staff. They will now receive a standard pay rise of 3% per year, under our 2016 NAB Enterprise Agreement – negotiated with the Finance Sector Union.

Safeguards are also in place to ensure we all meet rigorous conduct and compliance standards.

At NAB everyone has a balanced scorecard which includes both financial and non-financial objectives. Performance at NAB is equally balanced against what is achieved based on the scorecard as well as how our people demonstrate NAB’s values and their behaviour.

At NAB we are committed to providing our customers with the right products, the right services and the right advice.”

Review into Dispute Resolution and Complaints Framework – Interim Report

The Treasury released the interim report today, containing a number of recommendations for consideration. Interested parties are invited to lodge written submissions on the issues raised in this Interim Report by 27 January 2017. The expert panel led by Professor Ian Ramsay has recommended a review of the existing financial ombudsmen system but says there is no need for a specialised tribunal to resolve financial disputes.

By way of background, on 5 May 2016, the Minister for Small Business and Assistant Treasurer, the Hon Kelly O’Dwyer MP, announced the establishment of an independent expert panel to lead the review into the financial system’s external dispute resolution and complaints framework.

The expert panel is be chaired by Professor Ian Ramsay, with Mr Alan Kirkland and Ms Julie Abramson as members. A final report is to be provided to the Minister for Revenue and Financial Services by the end of March 2017.

The purpose of this Interim Report is to make draft recommendations for changes to the EDR framework and seek further submissions and information on those draft recommendations prior to providing a final report to government. Submissions received in response to the Issues Paper have informed the draft recommendations.

The Panel has found that the existing industry ombudsman schemes are a cornerstone of the EDR framework and perform well against the Review’s core principles. However, there is scope to improve outcomes for consumers, in particular by addressing problems caused by the existence of two industry ombudsman schemes with overlapping jurisdictions.

The Panel’s draft recommendation is that there should be a single industry ombudsman scheme for financial, credit and investment disputes (other than superannuation disputes) to replace FOS and CIO.SCT has strengths, including its unlimited monetary jurisdiction, but the rigidity of the statutory model makes it more difficult to match the industry ombudsman schemes in terms of flexibility and innovation. This is a significant problem as existing pressures on SCT will continue to grow as the superannuation system matures and an ever increasing number of Australians enter the drawdown (retirement) phase.

The Panel’s draft recommendation is that SCT should transition into an industry ombudsman scheme for superannuation disputes.
The Panel considered the merits of moving immediately to a single industry ombudsman scheme to cover all disputes in the financial system, including superannuation disputes. On balance, the Panel’s view is that it is preferable to initially introduce an industry ombudsman scheme focused exclusively on superannuation disputes, given the significance of the change relative to the status quo. Once both of the new ombudsman schemes are fully operational and have garnered strong consumer and industry support, consideration should be given to further integrating the schemes to create a single scheme covering all disputes in the financial system.

The Panel also made other draft recommendations to address gaps in the EDR framework. These include:

that the monetary limits and compensation caps for the new scheme for financial, credit and investment disputes be increased (relative to the existing limits and caps imposed by FOS and CIO), including for small business disputes; and

that there be enhanced accountability and oversight over the two new schemes, including through strengthening the Australian Securities and Investments Commission’s powers.

The Panel’s view is that these draft recommendations represent an integrated package of reforms to address shortcomings in the current EDR framework and ensure that the framework is well-placed to address both current problems and withstand future challenges.

In its Issues Paper, the Panel sought views on an additional statutory body for dispute resolution. The majority of submissions did not support this proposal. Having considered the views expressed in submissions and for reasons outlined in the body of its Interim Report, the Panel is of the view that an additional statutory dispute resolution body is not required.

ASIC permanently bans Perth mortgage broker

ASIC says it has permanently banned a former Perth-based finance broker from engaging in credit activities.

ASIC found that the broker engaged in misleading conduct by providing false income supporting documents to Westpac Banking Corporation Limited in support of home loan applications for three of his clients in 2015. Only one of the three loan applications was approved.

At the time, the broker was operating his own finance broking business through his own credit licence under the trading name Active Approvals. His credit licence was cancelled in April 2016 at his request.

ASIC Deputy Chairman Peter Kell said the banning reinforces the strong message to any broker considering engaging in misleading conduct.

‘ASIC will not hesitate to permanently remove those who engage in misleading conduct from the industry,’ Mr Kell said.

The broker has the right to appeal to the Administrative Appeals Tribunal for a review of ASIC’s decision.

Background

Since becoming the national regulator of consumer credit on 1 July 2010, ASIC has investigated in excess of 100 matters relating to loan fraud and has achieved many enforcement outcomes against the offenders.

The outcomes range from undertakings by persons to voluntarily leave the industry, to bans and prosecutions. To date, ASIC has banned, suspended or placed conditions of the licence of 77 individuals or companies from providing credit services (including 33 permanent bans).

Through the Office of the Commonwealth Director of Public Prosecutions, ASIC has also brought criminal prosecutions against 14 credit service providers; with 12 having been convicted of fraud or dishonesty offences relating to the provision of false and misleading information/documents to lenders in client loan applications.

ASIC action sees BMW Finance pay $77 million in Australia’s largest consumer credit remediation program

ASIC says it has accepted an Enforceable Undertaking (EU) from car financier, BMW Australia Finance Limited (BMW Finance), which will see BMW Finance implement Australia’s largest consumer credit remediation program to compensate customers for its responsible lending failures.

BMW Finance provides motor vehicle finance to consumers, directly and through a network of motor vehicle dealers. The affected consumers have car loans for a wide range and variety of vehicles and car brands, both new and second hand.

The program which is open to all of its customers under the BMW Financial Services, Mini Financial Services and Alphera Financial Services brands, will provide at least $72 million in redress for consumers made up of:

$14.6 million in remediation payments;

$7.6 million in interest rate reductions on current contracts; and

$50 million in loan write offs.

BMW Finance has also agreed to pay a $5 million community benefit to contribute to consumer advocacy and financial literary initiatives.

The remediation program will identify at least 15,000 customers, who between January 2011 and August 2016 may have suffered hardship as a result of BMW Finance’s compliance failures, and will ensure appropriate remediation. BMW Finance will also remove default listings and buy back all debt sold to third parties to ensure that the written-off loans are not subject to further collections activities.

The program will be overseen by an independent remediation consultant, who will periodically report to ASIC on its progress and BMW Finance’s compliance with the program.

‘BMW Finance had a sales-driven culture that failed to comply with the requirements of the credit laws and resulted in poor outcomes for many consumers. We are encouraged that BMW Finance has recognised these shortcomings and agreed to a remediation program that will see thousands of consumers compensated,’ said ASIC Deputy Chairman, Peter Kell.

‘This is an example of the staggering cost of poor business practices and should act as a warning to other car financiers to get their houses in order’ Mr Kell said.

While more than 15,000 customers will be invited by BMW Finance to participate in the program, customers who think they might have experienced hardship as a result of entering into their loan are encouraged to immediately register for the program by calling 1800 448 225 or emailing BMW using the details below.

ASIC has also amended BMW Finance’s Australian Credit Licence to extend an external consultant’s oversight of BMW Finance until the end of 2017 and introduce ‘live review’ testing of credit applications.

Consumers can also find out if they are due any compensation from BMW Finance by visiting ASIC’s MoneySmart website. The website also has useful information on car loans and the new MoneySmart Cars app that helps you work out the real cost of buying a car.