Banking Culture – Page 89 – Digital Finance Analytics (DFA) Blog

NAB Financial Planners Restructured

NAB Financial Planning has announced changes “to deliver better customer outcomes, provide greater support to advisers, and position the business for future growth”.

In September this year, NAB reaffirmed its commitment to financial advice through the creation of its Consumer & Wealth division, and the announcement of a $300 million investment in its Wealth business.

Following from this, NAB Financial Planning (NAB FP) is proposing to realign its business from 1 February 2017.

“The changes we’re making demonstrate our commitment to face-to-face advice, and ensure we have a customer-focused business that’s positioned for growth,” General Manager of NAB FP, Tim Steele, said.

Under the changes, NAB FP will offer enhanced support to its financial advice practitioners from both their leaders and support staff, and the leadership team will be aligned geographically.

“These changes will enable our business to build deeper local relationships with our customers,” Mr Steele said.

As it realigns its business, NAB FP has had to make some difficult decisions that affect its people, including the decision to reduce the number of entry-level advisor roles from 90 to 35. However, 30 new roles will also be created within NAB FP, and the business will continue to grow its Senior Financial Planner ranks, including supporting eligible advisers to successfully transition into our self-employed franchise business.

“Decisions that affect our people are always the most difficult to make, but we expect that these 30 new roles and other available roles across the wider NAB Group will be attractive to many of the affected advisers, and will present opportunities for career progression and development,” Mr Steele said.

“We’re making these changes so that we can deliver better outcomes to more customers, and position our advisers – and, through it, NAB FP – to succeed,” Mr Steele said.

Federal Reserve Board orders JPMorgan Chase & Co. to pay $61.9 million civil money penalty

The US Federal Reserve Board on Thursday ordered JPMorgan Chase & Co. to pay a $61.9 million civil money penalty for unsafe and unsound practices related to the firm’s practice of hiring individuals referred by foreign officials and other clients in order to obtain improper business advantages for the firm.

In levying the fine on JPMorgan Chase, the Federal Reserve Board found that the firm’s Asia-Pacific investment bank operated an improper referral hiring program. The firm offered internships, trainings, and other employment opportunities to candidates who were referred by foreign government officials and existing or prospective commercial clients to obtain improper business advantages.

The Federal Reserve found that the firm did not have adequate enterprise-wide controls to ensure that referred candidates were appropriately vetted and hired in accordance with applicable anti-bribery laws and firm policies.

The Federal Reserve’s order requires JP Morgan Chase to enhance the effectiveness of senior management oversight and controls relating to the firm’s referral hiring practices and anti-bribery policies. The Federal Reserve is also requiring the firm to cooperate in its investigation of the individuals involved in the conduct underlying these enforcement actions and is prohibiting the organizations from re-employing or otherwise engaging individuals who were involved in unsafe and unsound conduct.

The Federal Reserve is imposing the fine and requiring the firm to modify its practices concurrently with actions by the U.S. Department of Justice and the Securities and Exchange Commission.

CommSec pays $200,000 in infringement notice penalty

ASIC says Commonwealth Securities Limited (“CommSec”) has paid a penalty of $200,000 to comply with an infringement notice given to it by the Markets Disciplinary Panel (“MDP”).

The MDP had reasonable grounds to believe that CommSec contravened subsection 798H(1) of the Corporations Act by reason of contravening rules 2.1.3 and 3.3.1 of the ASIC Market Integrity Rules (ASX Market) 2010.

Rule 2.1.3 generally requires a market participant to have appropriate supervisory policies and procedures to ensure compliance with the market integrity rules.

Rule 3.3.1 generally prohibits a market participant from entering into a market transaction for a client, and from allocating a market transaction to a client’s account, except in accordance with the instructions of the client or of a person authorised by the client.

No instructions from client

On 25 March 2014, CommSec received formal notification of the death of one of its clients, who held two accounts with CommSec — an equities account and a margin loan account. At that time, CommSec failed to apply a holder record lock to either of the accounts.

Between 25 March 2014 and 14 October 2014, CommSec entered into 59 market transactions on behalf of the deceased client on the instructions of a family member of the deceased client through CommSec’s online trading portal. Although the family member was authorised in relation to trading on the margin loan account in the event of a margin call, the family member was not authorised to provide instructions to enter into any of the market transactions. CommSec allocated the market transactions to the deceased client’s accounts.

The MDP was satisfied that CommSec entered into the market transactions for the deceased client, and allocated them to the deceased client’s accounts, without the instructions of the deceased client or of a person authorised by the deceased client.

Inadequate supervisory policies and procedures

During the relevant period, CommSec’s deceased estate area were in the process of undergoing an internal restructure. In October 2014, CommSec became aware that the restructure had resulted in a backlog of deceased estate work involving failures to apply holder record locks to a number of accounts of deceased clients, including the deceased client.

The MDP was satisfied that, although CommSec had written deceased estate policies and procedures designed to prevent unauthorised trading on deceased client accounts, they were not properly implemented and integrated into the business or appropriately monitored.

The compliance with the infringement notice is not an admission of guilt or liability, and CommSec is not taken to have contravened subsection 798H(1) of the Corporations Act.

80% Of Main Retail Banks’ Profits – $25.6 billion – Returned to the Community – ABA

According to a release from the Australian Bankers Association, eighty per cent of the main retail banks’ profits – $25.6 billion – were returned to the community, primarily through dividend payments to everyday Australians who own bank shares directly and indirectly through their superannuation savings.

Banks again paid more tax than any other industry – $12.8 billion in 2016 – providing a valuable revenue stream to help fund the Federal Government’s provision of essential infrastructure such as schools and hospitals.

Banks continued to invest in initiatives to improve customer service, including a $6.9 billion spend on technology. This included a $1 billion investment in a new payments platform launching in 2017 that will allow customers to transfer money online between accounts in real time.

Australian Bankers’ Association Chief Executive Steven Münchenberg said banks needed to continue to perform well for Australia to have a strong and well-functioning economy.

“Given ongoing economic uncertainty here in Australia and overseas, it is as important as ever that our banks remain strong, stable and profitable,” Mr Münchenberg said.

“Bank profits provide an income stream for Australians through dividends, superannuation payments and interest on bank deposits and bonds; as well as to the Federal Government. Profitable banks also help fund economic growth through lending to business customers and homeowners, and in their role as significant employers.”

In 2016, $25 billion in wages was paid to the 140,000 people employed by the main retail banks. Households earned $66 billion in interest on bank deposits and bonds.

$600 million was provided in donations and ‘in-kind’ support to the not-for-profit sector and other community initiatives.

Mr Münchenberg said, like most industries, banks were facing tougher operating conditions in a low interest rate, low growth environment.

“In addition to finding growth in a challenging market, banks are also responding to increasing regulation and the challenges associated with rapid advances in technology and new market entrants,” he said.

“In this environment, it will be more important than ever that banks work hard to get the balance right between looking after their customers, shareholders, employees and the community.”

The profitability of the main retail banks declined in the 2016 reporting year.

Return on equity for the major banks dropped from 15.6 per cent in 2015 to 13.6 per cent, while net interest margins for the major banks fell to a record low of 202 basis points

Cash Converters to pay over $12M following ASIC probe

Following an ASIC investigation, payday lender Cash Converters will refund $10.8 million to consumers who received small amount loans under approximately 118,000 small amount credit contracts. Cash Converters has paid a $1.35 million penalty following the issuing of infringement notices by ASIC.

ASIC has agreed to accept an enforceable undertaking from Cash Converters following concerns that, in respect of small amount loans processed via its online website at www.cashconverters.com.au, Cash Converters failed to make reasonable inquiries into consumers’ income and expenses, particularly in situations where the small amount loan was presumed by the credit legislation to be unsuitable.

In addition, ASIC had concerns that Cash Converters did not take reasonable steps to verify consumers’ expenses in accordance with its responsible lending obligations. Instead of assessing the actual expenses recorded in a consumer’s bank statements, Cash Converters applied an internally-generated assumed benchmark that had no relationship to the real expenses of the individual consumer.

For the small amount loans that were likely to be unsuitable because of the consumer’s circumstances, ASIC was concerned that Cash Converters failed to assess the loans as unsuitable for the particular consumers and subsequently entered into them in breach of the credit legislation.

Cash Converters has paid penalties totalling $1.35 million following the issue of 30 infringement notices by ASIC, under the National Consumer Credit Protection Act 2009 (National Credit Act), where ASIC had reasonable grounds to believe that Cash Converters failed to assess small amount loans as unsuitable, and entering into those unsuitable loans, when the loans were presumed to be unsuitable under the credit legislation.

Under the Enforceable Undertaking accepted by ASIC, Cash Converters is required to:

refund eligible consumers $10.8 million in fees through a consumer remediation program overseen by an independent expert who will report to ASIC; and

engage that same independent expert to review its current business operations and compliance with the consumer credit regime and report to ASIC

‘ASIC is seeking to protect financially vulnerable consumers, many of whom are recipients of welfare payments, from falling victim to unsuitable payday loans.” said ASIC Deputy Chairman Peter Kell. “Payday lending is a high priority area for ASIC, and we will continue to pursue lenders who do not follow their responsible lending obligations.’

Consumers who had two or more small amount loans in the 90 days before taking out another small amount loan through Cash Converters’ website during the period 1 July 2013 to 1 June 2016 should expect to be contacted in due course with information about their refund.

ASIC report highlights a deep culture problem in Australia’s banks

From The Conversation.

In it’s latest report, the Australian Securities & Investments Commission (ASIC) found the big four banks sold products to some customers through their adviser network, with a fee for ongoing advice, but the advice was never given.

None of this came to light until the banks were asked by ASIC to look at adviser compensation, following the introduction of the Future of Financial Advice (FOFA) legislation in 2013.

No wonder the banks were wary of their practices being investigated. Not only has it come to light that many customers (176,000 at the last count) were being charged for services they were not receiving but, in many cases, the banks didn’t have the data they needed to find out whether customers had been dudded or not.

And ASIC is pretty sure why such systemic issues emerge at regular intervals, stating:

Cultural factors in the banking and financial services institutions covered by this report may have contributed to the systemic failures we observed.

The ASIC report details the reason for the cultural failings it observed in the wealth management businesses of the major banks:

Some advice licensees prioritised advice revenue and fee generation over ensuring that they delivered the required services.

ASIC found that the IT systems in wealth management in the major banks were stone-aged at best. The banks appear to have no idea what they don’t know, but are all working to identify how many more customers need to be compensated.

ASIC also found that some banks failed to keep complete or accurate records to enable compliance to be analysed. And in some cases, authorised representatives had taken customers’ files with them when they left the firms, making it impossible to check whether or not advice was given.

It appears that every time a question is asked of the big banks, another example of bad behaviour is unearthed.
Australia’s big four banks (CEOs pictured) are facing further criticism from regulatory bodies. Lukas Coch/AAP
In the recent questioning of bank CEOs by the House Economics Committee, questions were raised with all CEOs about systemic issues. The answers were generally evasive and short on specifics.

For example, when talking about a different but related, financial planning scandal, Andrew Thorburn, NAB CEO, said:

“We did a review and we had an independent party come and do that review with us, and we concluded and we stand by that, that it was not a systemic issue.”

What Mr Thorburn and other CEOs neglected to mention was that the banks had, as revealed in ASIC’s report, all already been in the middle of deep discussions about so-called “fee-for-services failures” . The regulator wrote:

Of particular concern is that many of the banking and financial services institutions covered by this review publicly state that their core values include being customer focused, “doing what is right” for customers, and acting with integrity. We encourage the institutions reviewed in this report to consider how their culture may have supported these systemic failures, and why their stated commitment to providing excellent service to customers is not translating into good outcomes for customers in the many instances we identified in this report.

At long last, ASIC has highlighted cultural issues across the industry that the boards and management of the largest banks have long refused to acknowledge.

The regulator has done its job and found compelling evidence that the culture of the banks is rotten.

It’s over to the politicians now.

Author: Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie University

ASIC Says Up To $178m In Fees For No Service May Be Refunded To Major Bank Customers

ASIC has released Report 499 Financial advice: Fees for no service (REP 499). They say to date, approximately $23.7 million of fee refunds and compensation has been paid, or agreed to be paid, to over 27,000 customers of ANZ, NAB, CBA, Westpac and AMP. But further reviews are being conducted and based on estimates, compensation may increase by approximately $154 million, plus interest, to over 175,000 further customers, meaning that total compensation for related failures could be over $178 million, plus interest.

The report provides an update on ASIC’s work to address financial institutions’ and advisers’ systemic failures, over a number of years, to provide ongoing advice services to customers who paid fees to receive those services. The report summarises ASIC’s work to ensure customers are fairly compensated. The report is part of ASIC’s Wealth Management Project which is focusing on the conduct of the largest financial advice firms, including the advice arms of AMP, ANZ, CBA, NAB and Westpac groups (refer: 15-081MR).

The failures set out in the report relate to instances where customers were charged a fee to receive an ongoing advice services, but had not been provided with this service because:

The customer did not have an adviser allocated to them, but was charged a fee for ongoing advice – usually by deduction from the customer’s investment products; or

The adviser allocated to the customer failed to deliver on their obligation to provide the ongoing advice service and the licensee failed to ensure that the service was provided.

To date, approximately $23.7 million of fee refunds and compensation has been paid, or agreed to be paid, to over 27,000 customers of ANZ, NAB, CBA, Westpac and AMP under various Australian Financial Services (AFS) licensees that are owned by these businesses. Further reviews are being conducted by the licensees to determine the extent of their ongoing service fee failures. Refunds and compensation are expected to increase substantially as the licensees’ investigations and reviews continue. Based on estimates provided by the licensees to ASIC, compensation may increase by approximately $154 million, plus interest, to over 175,000 further customers, meaning that total compensation for related failures could be over $178 million, plus interest.

ASIC has commenced several enforcement investigations in relation to this conduct.

Most of the failures outlined in this report occurred before the commencement of the Future of Financial Advice (FOFA) reforms. The changes made by those reforms were a significant factor in the identification of the failures, and also substantially reduce the likelihood that the type of systemic failures described in this report will occur in the future. In particular, the requirement to now provide an annual Fee Disclosure Statement to the client, and the requirement for the client to ‘opt-in’ to the advice relationship every two years, will significantly reduce the risk of fees being charged without any advice service provided.

‘Changes introduced through the FOFA reforms have shone a light on the advice fees that customers are paying and the services they should be receiving in return,’ said ASIC Deputy Chair Peter Kell. ‘Our report identifies the institutions’ systemic failures in this area, which we are putting right by ensuring that customers are fairly compensated.’

ASIC’s MoneySmart website has updated information on how much financial advice costs and what to expect from a financial adviser. Customers should check they are receiving the services they are paying for. Customers who are paying ongoing advice fees for services they do not need can ask for those fees to be switched off. Customers who have paid fees for services they did not receive may be entitled to refunds and compensation, and should lodge a complaint through the bank or licensee’s internal dispute resolution system or the Financial Ombudsman Service.

Westpac Group Customer Advocate Announced

Westpac has announced the appointment of Adrian Ahern as the Westpac Group Customer Advocate, a new position, which will provide an avenue of independent review for Westpac Group retail and small business customers outside of standard internal review processes.

Westpac Group CEO, Brian Hartzer, said the Customer Advocate, part of our commitment under the ABA’s Six Point Plan, supported Westpac Group’s commitment to becoming one of the world’s great service companies.

“The appointment of Mr Ahern enhances Westpac Group’s dispute resolution framework, and provides an additional level of confidence for customers in ensuring the process is fair and transparent.

“The Customer Advocate will have the power to review and make independent, binding decisions about individual retail or small business customer complaints where customers are not satisfied with the internal dispute resolution process.

“An important part of Mr Ahern’s role will be to recommend, where necessary, changes to policies and procedures across the Westpac Group to ensure the best outcomes for customers,” Mr Hartzer said.

“Mr Ahern is an extremely well regarded professional with a diverse range of experience across corporate and non-profit organisations.

“Mr Ahern’s long-term involvement in community activities, as well as his experience as Global Chairman of an international law firm, reflects both his integrity and empathic leadership style and underscores the respect he has earned both professionally and personally,” Mr Hartzer said.

Mr Ahern has over 30 years’ experience in corporate law and governance and is currently a partner at Norton Rose Fulbright. During 2013-14 Mr Ahern was Global Chairman of Norton Rose Fulbright. He began his legal career at Ashurst. Mr Ahern has served on the boards of a number of non-government organisations, and continues to contribute to various community organisations.

Mr Ahern will report to Westpac Group Deputy CEO, Phil Coffey. He will be supported by the Office of the Customer Advocate, a dedicated team of specialists with experience from across Westpac Group.

The call for an ‘ethical lift’ across finance

The call for improved culture in financial services is gaining momentum, and not just in Australia. For example, Bank of England Deputy Governor Minouche Shafik and Executive Director James Proudman spoke at the New York Federal Reserve’s conference ‘Reforming Culture and Behaviour in the Financial Services Industry: Expanding the Dialogue’. They stress it is more about culture and behaviour within firms than regulation. The right remuneration mechanisms are important.

Minouche, the Bank’s Deputy Governor for Markets and Banking, discusses the challenge of reform from a market-wide perspective, while James, who is Executive Director for UK Deposit Takers Supervision, discusses firm-level implementation. Minouche explores the wide-ranging actions of the UK authorities after the Fair and Effective Markets Review (FEMR) to help reverse the tide of misconduct that had emerged across markets since the financial crisis. Within this broad theme, James explains how the Prudential Regulation Authority (PRA) is implementing a regulatory framework around accountability and how this is applied to individual firms.

Highlighting the progress described in the FEMR implementation report published in July, Minouche explains that while ‘regulators must introduce rules and regulations to enforce minimum standards of conduct, hold individuals to account for their actions, and put in place incentives to promote good conduct, hard law is not enough…market participants must come together to create soft law: aspirational standards that are higher than the regulatory minimum and encourage ongoing behavioural change’.

Minouche emphasises the importance of the official sector not only implementing rules and regulations but also playing ‘a broader role by promoting good behaviour’. In particular she praises the work of senior market participants in establishing the Fixed Income, Currencies and Commodities (FICC) Markets Standards Board and notes the progress being made towards a single Global FX code, which is being developed through a partnership between 16 central banks and market participants.

Minouche also notes that ‘conduct risks will evolve over time and the official sector needs to stay on the front foot’. In response, the UK authorities have announced a work programme to scan the horizon for potential market or private sector coordination failures that may be damaging the fairness or effectiveness of FICC markets. The authorities will seek to catalyse reforms to insure that market structures that are vulnerable to manipulation and misconduct do not develop over time.

Read the full text of Minouche’s speech

Turning to the supervision of UK banks, James outlines the PRA’s approach to culture and accountability, and how we apply this to firms – including through the new Senior Managers Regime and remuneration rules (individual accountability) and guidance on governance for boards (collective accountability).

James stresses that both individual and collective responsibility are crucial to promoting a healthy culture within the sector. He says: ‘taken together, the reforms that we have put in place with respect to both individual and collective responsibility are aimed at creating a regime in which the senior management of firms are now ‘on the hook’ for the decisions taken within the firm: both the key strategic decisions taken at senior management level, and the framework of delegations and decision-taking that cascades through the organisation.’

James adds: ‘Ensuring there is a clear and transparent answer to the question ‘who’s in charge?’ has been a priority of the prudential reform agenda in the UK.’

Read the full text of James’s speech

Both Minouche and James reinforce the Bank’s commitment to improving standards and ethics in financial markets.

Minouche concludes: ‘It will take time to move from ‘ethical drift’ to ‘ethical lift’. Better regulation is part of the solution, but so is a more effective partnership between the official and private sectors to improve market practices and conduct norms.’

ASIC permanently bans Aussie Home Loans mortgage broker

Another former Aussie Home Loans mortgage broker has been permanently banned from engaging in credit activities by ASIC, the fourth AHL mortgage broker who has been banned and/or convicted over the past 18 months for submitting false or misleading documents in loan applications. ASIC says the latest is Mr Bernard Meehan, a former mortgage broker for AHL Investments Pty Ltd (trading as Aussie Home Loans).

ASIC’s investigation found that Mr Meehan had submitted payslips, document checklists and loan serviceability forms in nine home loan applications to Westpac Banking Group (Westpac) over a twelve month period from January 2014 to January 2015, that were false or materially misleading. Among the false documents were payslips that had not been issued by the purported employer.

ASIC found that Mr Meehan’s actions were wrong, inconsistent with a compliance mentality and showed a lacked of insight into what was required of a broker. Mr Meehan failed to adhere to proper procedures and did not accept wrongdoing or show appreciation of the fact that what he did involved failure to comply with credit legislation.

Aussie Home Loans reported the misconduct to ASIC.

ASIC’s Deputy Chairman Peter Kell said, ‘Gatekeepers, such as banks, aggregators and franchise groups have an important role to play in regulating the mortgage broking industry and act as a first line of defence to detect inappropriate practices and behaviour.’

Mr Meehan 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 74 individuals or companies from providing credit services (including 32 permanent bans).

Through 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.

Mr Meehan is the fourth Aussie Home Loans mortgage broker who has been permanently banned and/or convicted over the past 18 months for submitting false or misleading documents in loan applications. The other three mortgage brokers were:

Mr Madhvan Nair – convicted on eighteen charges involving the submission of false or misleading information to Westpac, National Australia Bank, and ANZ, see 16-219MR and 16-293MR.

Ms Emma Feduniw – convicted and permanently banned for providing false documents in eight loan applications to Westpac, see 16-108MR, 16-186MR and 16-242MR.

Mr Shiv Prakash Sahay – convicted and permanently banned for providing false documents in loan applications for seventeen of his clients to Bankwest and Suncorp Metway Limited, see 15-176MR and 15-128MR.