Banking Culture – Page 93 – Digital Finance Analytics (DFA) Blog

CBA pays $180,000 in penalties and will write off $2.5 million in loan balances

ASIC says Commonwealth Bank of Australia (CBA) has paid four infringement notices totalling $180,000 in relation to breaches of responsible lending laws when providing personal overdraft facilities.

CBA reported this matter to ASIC following an ASIC surveillance. CBA conducted an internal review which identified a programming error in the automated serviceability calculator used to assess certain applications for personal overdrafts.

As a result of the error, between July 2011 and September 2015, CBA failed to take into consideration the declared housing and living expenses of some consumers.

Instead, CBA’s serviceability calculator substituted $0 housing expenses, and living expenses based on a benchmark which in some instances was substantially less than the living expenses declared by the consumer. As a result, this led to an over-estimation of the consumer’s capacity to service the overdraft facility.

CBA informed ASIC that between July 2011 and September 2015, as a result of the error, CBA approved:

9,577 consumers for overdrafts which would have otherwise been declined; and

1,152 consumers for higher overdraft limits than would have otherwise been provided.

Some consumers were approved for a personal overdraft, or an increased limit on their personal overdraft, even though their declared expenses were greater than their declared income.

ASIC was concerned that this conduct breached responsible lending laws and that affected consumers would have been unable to comply, or could only comply with substantial hardship, with their obligation to repay their personal overdraft on demand.

CBA has informed ASIC that it will write off a total of approximately $2.5 million in personal overdraft balances.

ASIC Deputy Chairman Peter Kell said, ‘Credit licensees should continuously monitor their internal processes to ensure compliance with the law. This is especially the case with automated decision-making systems where ongoing monitoring is needed to ensure that information is correctly inputted into systems.’

Background

The responsible lending obligations that prohibit lenders from entering into credit contracts which are unsuitable for the consumer are found in the National Consumer Credit Protection Act 2009 (Cth). The laws aim to ensure that credit contracts are not unsuitable for consumers (see s133(1)), and consumers are likely able to afford the credit contract (see s133(2)).

ASIC issued four infringement notices in August 2016 totalling $180,000 for the breaches outlined above.

CBA self-reported the breaches to ASIC, and has co-operated with ASIC’s investigation.

The payment of an infringement notice is not an admission of guilt in respect of the alleged contravention. ASIC can issue an infringement notice where it has reasonable grounds to believe a person has committed particular contraventions of the National Credit Act.

ASIC on mortgage brokers’ interest only loans

ASIC says the volume of interest only loan approvals rose significantly in the June 2016 quarter. But Australia’s home loans industry has improved its performance over the past year, adopting better ‘responsible lending’ practices, though there is still room for improvement.

ASIC has released its report (REP 493) ‘Review of interest-only home loans: Mortgage brokers’ inquiries into consumers’ requirements and objectives’ on the responsible lending practices of 11 large mortgage brokers with a particular focus on how they inquire into and record consumers’ requirements and objectives.

It also examined how the changes implemented by lenders in response to the findings from ASIC’s report into interest-only home loans from 12 months ago last year (refer: Report 445) have flowed through to mortgage brokers.

Since the release of Report 445 in August 2015,

the percentage of new home loans approved by lenders which are interest-only has decreased by 12%; and

the amount that can be borrowed by an individual consumer through an interest-only home loan has decreased, as lenders have adjusted their assessment of consumers’ ability to repay, in line with ASIC’s recommendation in Report 445.

Information provided by the mortgage brokers showed that for the six months from July 2015 to December 2015,

the number of new interest-only home loans fell by 16.3%, with total value of these loans reducing by 15.6%; and

the percentage of interest-only loans with a term greater than five years reduced by more than half, from 11.2% to 5.1%.

Almost 80% of applications reviewed included a statement summarising how the interest-only feature specifically met the consumer’s requirements and objectives. This compared favourably with Report 445’s finding that more than 30% of applications reviewed showed no evidence the lender had considered whether the interest-only loan met the consumer’s requirements.

‘It is vital that mortgage brokers understand consumers’ requirements and objectives to ensure they are not placed in unsuitable credit contracts,’ said ASIC deputy chairman Peter Kell.

‘ASIC is pleased that our concerns about interest-only loans and responsible lending are being acted on by the home lending industry, but there is still room for improvement.’

ASIC identified practices that place brokers at increased risk of non-compliance with their responsible lending obligations, and identified opportunities for brokers to improve their practices. Key compliance risks identified included:

Policies and procedures—Mortgage broker policies and procedures provided only general information, rather than tailored information on specific products and loan features that may impose increased financial obligations or restrict repayment flexibility (such as interest-only home loans);

Recording of inquiries—Record keeping was inconsistent and in some cases records were fragmented and incomplete;

Explaining the loan choice—More than 20% of applications reviewed did not include a statement explaining how the interest-only feature of the loan specifically met the consumer’s underlying requirements and objectives. The level of detail in these statements varied considerably and in some cases, where an interest-only loan was specifically sought by a consumer (including where this option was recommended by a third party, such as an accountant), the reason for this was not clear;

Consumer understanding of risks and costs—In some cases, where the potential benefit of the interest-only loan depended on the consumer taking specific action (for example, allocating additional funds to higher interest debt), it was unclear whether the consumer understood the potential risks/additional costs if the specific action was not taken.

The report details steps that mortgage brokers should take to improve their current practices, including:

Ensuring they understand the consumer’s underlying objectives for requesting specific loan products and features;

Recording concise summaries of consumers’ requirements and objectives and the reason why a particular product, features and lender was chosen;

Providing a statement summarising the broker’s understanding of the consumer’s requirements and objectives, which could also include the reason a particular loan is suggested, for the consumer to confirm before obtaining a loan.

Where the potential benefits of a loan feature might require the consumer to undertake specific behaviour, ensuring consumers were aware of the action they needed to take to obtain the potential benefit, as well as the potential costs should this action not be taken.

Westpac refunds $9.2 million after failing to waive bank account fees for eligible customers

ASIC says Westpac Banking Corporation (Westpac) has refunded approximately $9.2 million to 161,414 customers after it failed to waive fees on Westpac and St. George branded savings and transaction accounts over six years.

For customers aged under 21 years, Westpac previously relied on staff to manually apply the following fee waiver benefits:

a monthly service fee waiver for customers with a Westpac Choice transaction account; and

a withdrawal fee waiver for customers with a Westpac Reward Saver account.

However, between May 2007 and April 2013, 133,045 Westpac Choice and Westpac Reward Saver accounts were opened for some eligible customers without the relevant fee waivers being applied.

Westpac also discovered that there were 28,369 customers under the age of 18 who were eligible for a St. George Complete Freedom Student transaction account (which has no monthly service fee), but instead held a standard St. George transaction account which charged a monthly fee.

Westpac reported this matter to ASIC under its breach reporting obligations in the Corporations Act. ASIC acknowledges the cooperative approach taken by Westpac in resolving this matter.

Compensation and systems changes

Westpac has now provided refunds to affected customers. The refund payments included an additional amount reflecting interest.

In addition to compensating customers, Westpac is enhancing the account opening process for these Westpac and St. George products to ensure all new eligible customers receive the relevant fee waivers. This includes automated application of the relevant fee waivers based on the customer’s date of birth submitted during the application process. Westpac also monitors this activity to ensure the correct treatment of eligible accounts.

ASIC Deputy Chairman Peter Kell said, ‘Financial institutions that offer products with benefits such as fee waivers must have effective and robust systems in place to deliver the promised benefits to consumers.’

‘Businesses that rely on manual processes to apply waivers, discounts and other benefits should carefully consider how they manage the risks of processes not being followed, including having appropriate controls and procedures in place.’

A history of failed reform: why Australia needs a banking royal commission

From The Conversation.

The move for an inquiry into how banks treat small business customers should not overshadow the ongoing call for a broader royal commission on banks.

Several financial inquries (outlined below) have failed to tackle the growing concentration in the Australian finance sector, or the need to separate general banking from investment banking as the reform process in the United States, UK and Europe is contemplating.

Calls for a royal commission are also underpinned by ongoing reports of misconduct within the banks, summarised in a timeline of bad behaviour below.

Every other major industrial country is at an advanced stage in bank reform, and Australia would be isolated if it did not engage in a similar substantial and structural reform process.
Former Commonwealth Bank chief and Financial Services Inquiry Chair David Murray released the final report of the inquiry in December 2014. Britta Campion/AAP
Financial reform in Australia

1997 Wallis Inquiry

This inquiry has been associated with the “four pillars” policy towards bank mergers (though the inquiry itself did not propose this), and the opposition to any merger between ANZ, CBA, NAB and Westpac. The unwritten policy originated in Paul Keating’s reservations on concentration in the industry. It also led to the CLERP financial reforms announced on fund raising, disclosure, financial reporting and takeovers.

2009 Future of Financial Advice Inquiry

This inquiry stemmed from industry failures, such as Storm Financial and Opes Prime, and explored the role of financial advisers and the general regulatory environment for these products and services. It resulted in the Corporations Amendment (Future of Financial Advice) Act 2012 by the Labor government to tackle conflicts of interest within the financial planning industry. This was subsequently amended by the Liberal government in the Corporations Amendment (Financial Advice Measures) Act March 2016 which softened some of the reforms.

2012 Cooper Inquiry

This was a review into the governance, efficiency, structure and operation of Australia’s superannuation system. It examined measures to remove unnecessary costs and better safeguard retirement savings, claimed fees in superannuation were too high, and that choice of fund in superannuation had failed to deliver a competitive market that reduced costs.

2014 Parliamentary Joint Committee on Corporations and Financial Services Inquiry

This inquiry included proposals to lift the professional, ethical and education standards in the financial services industry. It aimed to clarify who could provide financial advice and to improve the qualifications and competence of financial advisers; including enhancing professional standards and ethics.

2015 Murray Inquiry

This inquiry was intended to provide “a ‘blueprint’ for the financial system over the next decade,” but fell somewhat short of this in not critically addressing the concentration or restructuring of the main banks. While acknowledging the high concentration and vertical integration of Australia’s banking industry the inquiry’s approach to encouraging competition was to seek to remove impediments to its development. The inquiry aimed to increase the resilience to failure with high bank capital ratios, and to reduce the costs of failure, including by ensuring authorised deposit-taking institutions maintained sufficient loss absorbing and recapitalisation capacity to allow effective resolution with limited risk to taxpayer funds.
Demonstraters throw their support behind US Senator Elizabeth Warren’s proposal to reform the Glass Steagall Act. Shannon Stapleton/Reuters
In contrast to the limitations of the Australian reform process, more ambitious reform of the banking sector is being actively considered in the rest of the advanced economies. This is because of widespread international concerns regarding bank monitoring and standards, and the continuing threat of systemic risk and failure.

The objective is to create more effective competition, greater choice, improved governance, more balanced incentives, and responsible behaviour and performance. Central to international reform proposals is the intention of:

shielding commercial banks from losses incurred by speculative investment banking

preventing the use of public subsidies (eg central bank lending facilities and deposit guarantee schemes) from supporting risk taking

reducing the complexity and scale of banking organisations

making banks easier to manage and more transparent

preventing aggressive investment bank risk cultures from infecting traditional banking;

reducing the scope for conflicts of interest within banks

reducing the risk of regulatory capture and taxpayers exposure to bank losses.

Among the ongoing international initiatives to reform the banks are the UK Banking Reform Act, which includes ring fencing retail utility banking from investment banking, due for implementation in 2019.

In the US, the 21st Century Glass Steagall Act, proposed by Elizabeth Warren and supported by Democratic nominee Hillary Clinton, involves separating traditional banks that offer savings and checking accounts from riskier financial services such as investment banking and insurance.

In Europe, the Liikanen Plan, announced in 2012, proposes investment banking activities of universal banks be placed in separate entities from the rest of the group. This has already been taken up widely throughout the European banking sector.

A licence to operate?

The banks have experienced continuous systemic risk (partly of their own making), erosion of their integrity, and a loss of public trust.

The Australian banks are on notice that they need to renew their licence to operate, to reconnect with their sense of duty and the Australian people, and to reconfirm their responsibilities to the Australian economy. This will occur, even if it takes a royal commission to achieve it.

A timeline of banks behaving badly

January 2004: NAB foreign currency options trading

NAB announces losses of A$360 million due to unauthorised foreign currency trading activities by four employees who concealed the losses. Bank risk policies and trading desk supervision prove ineffective. NAB sacks or forces the resignation of eight senior staff, disciplines or moves 17 others and restructures its board of directors. Four traders, including the head of the foreign currency options desk, are subsequently prosecuted and jailed.

2008: global financial crisis takes down Opes Prime, Storm Financial, Allco and Babcock and Brown

The market capitalisation of the stock markets of the world peaks at US$62 trillion at the end of 2007. By October 2008 the market is in free fall, having lost US$33 trillion dollars, over half of its value in 12 months of unrelenting financial and corporate failure. Originating in the toxic sub-prime securities of the New York investment banks, the financial crisis threatens to engulf the economies of the world.

The mythology today is that Australia miraculously escaped the global financial crisis due to the resilience of its regulatory system and the governance and risk management of its banks. The reality is that more than a dozen significant Australian companies went under during the crises (amounting to losses in excess of $60 billion in total). In almost every case at least one of the big four banks were involved in supporting the business models and extending credit to very doubtful enterprises.

July 2012: HSBC money laundering

A US Senate Inquiry discovers that HSBC allowed Latin American drug cartels to launder hundreds of millions of ill-gotten dollars through its US operations, rendering the dirty money usable. The HSBC Swiss private banking arm profited from doing business with arms dealers and bag men for third world dictators and other criminals.

HSBC agrees to pay a fine in excess of US$2 billion to settle US civil and criminal actions. In 2016 it is revealed that UK Chancellor George Osborne intervened to prevent criminal charges against HSBC as this might have undermined financial markets.

2013: Libor rigging

Libor is the international vehicle for settling inter-bank interest rates, and covers markets worth US$350 trillion.

In 2012 it’s revealed that wholesale fraudulent manipulation of the rates has been occurring for years, and throughout the reform process following the global financial crisis. The crisis engulfs many international banks including Barclays, Citigroup, Deutsche Bank and JP Morgan. The irony of the scandal is that Libor was intended as a measure of the state of health of the banking system.

The US Commodity Futures Trading Commission and US Department of Justice impose fines totalling hundreds of millions of dollars on the international banks. In Australia ASIC investigates the role of ANZ, BNP, UBS, and RBS and imposes fines. In 2014 the administration of Libor is transferred to the Euronext NYSE.

2014: Commonwealth Bank financial planning scandal

An ABC Four Corners report reveals CBA customers have lost hundreds of millions of dollars after the bank’s financial advisers recommend speculative investments.

The report describes the sales-driven culture inside the Commonwealth Bank’s financial planning division, with a focus on profit at all cost and a culture that has been built on commissions. The bank is found to have misled potentially thousands of clients.

The bank sets up an internal inquiry and compensation (though is subsequently accused of dragging its feet on compensation). A Senate inquiry into the performance of ASIC during the affair recommends establishing a Royal Commission to examine the banks.

May 2015: Forex manipulation

Following the Libor scandal, it is discovered that traders have been deliberately orchestrating trades in the $US5.3 trillion-per-day global foreign exchange market to their own advantage.

“They acted as partners – rather than competitors – in an effort to push the exchange rate in directions favourable to their banks but detrimental to many others,” says US Attorney-General Loretta Lynch. “And their actions inflated the banks’ profits while harming countless consumers, investors and institutions around the globe.”

US and British regulators fine Barclays, Citigroup, JP Morgan, RBS, UBS, and Bank of America more than US$6 billion in recognition of the scale and duration of the fraud.

March 2016: ASIC targets ANZ for rigging the bank bill swap rate (BBSW)

ASIC commences legal proceedings against ANZ for unconscionable conduct and market manipulation in relation to the bank’s involvement in setting the bank bill swap reference rate (BBSW) in the period March 2010 to May 2012. It foloows up with actions against NAB and Westpac.

The BBSW is the primary interest rate benchmark used in Australian financial markets, administered by the Australian Financial Markets Association (AFMA). It is alleged the banks traded in a manner intended to create an artificial price for bank bills.

March 2016: CommInsure payments scandal

The insurance arm of the Commonwealth Bank comes under media scrutiny for operating along similar lines to the earlier financial planning business.

A company whistleblower reveals the measures the bank is taking to avoid making insurance payouts to policyholders, many of whom are sick or dying.

Author: Thomas Clarke, Professor, UTS Business, University of Technology Sydney

ING Bank compensates Living Super customers due to potentially misleading costs and fees statements

According to ASIC, ING Bank (Australia) Limited, the promoter and investment manager of the ING Direct Superannuation Fund (Living Super), will compensate around 24,500 members approximately $5.38 million following ASIC concerns that statements made in its promotional material about the fees paid in connection with its Living Super product were potentially misleading.

In particular, ASIC was concerned that ING Bank promoted Living Super, between March 2015 and September 2016, as having ‘No Fees’ for the ‘Cash Investment Option’, ‘No Investment and Administration fees’ for the ‘Balanced Option’ and having low fees options without making it clear that customers were paid a lower interest rate on the cash portion invested with ING Bank than the rate paid by ING Bank to its Saving Maximiser customers for the relevant investment options. Some of the promotions also did not indicate the “no fees or low fees” features may not continue should ING Bank no longer be the investment manager.

ASIC discussed its concerns with ING Bank that some members of Living Super may have been misled into believing they would receive the same returns on cash investments held with ING bank as ING Direct banking customers with the Savings Maximiser product.

ING Bank has acknowledged that its communication could have been clearer and is writing to all members of Living Super to inform them that the interest rates paid on Living Super may be different to the rates paid to direct banking customers and further, that the fees for Living Super may change should ING Bank no longer be the investment manager.

ING Bank have advised ASIC they will also write to affected members informing them of the compensation paid and will not retain any of the financial benefit from the lower interest rate that was applied.

ING Bank has told ASIC that it will no longer be promoting Living Super based on No Fees or No Investment and Administration Fee. It has made changes to its internal policies and procedures to help ensure that similar potentially misleading promotions are not undertaken.

ASIC also expressed disappointment that ING Bank was promoting Living Super using product inducements to clients separate from the superannuation product such as cash payments. ASIC observes that promotions of this type are a bad practice that may encourage decisions to be made on the basis of short term considerations that may not reflect the needs of a member. ING Bank has advised ASIC that it will stop offering separate product inducements in relation to Living Super.

ASIC Commissioner Greg Tanzer said, ‘This action reflects ASIC’s ongoing focus on the disclosure of fees and costs in superannuation.

‘Consumers need to be able to make informed decisions about their superannuation and managed investments, based on accurate and consistent fees and costs disclosure.

‘Promotion of superannuation products based on low or no fees can be very influential on consumers. This makes it very important to ensure any such promotion is not potentially misleading by reducing the benefits consumers receive in exchange for the no fees or low fees features’, Mr Tanzer said.

Former Aussie mortgage broker convicted of submitting false or misleading documents

ASIC says Mr Madhvan Nair, a former mortgage broker with AHL Investments Pty Ltd (trading as Aussie Home Loans), was convicted and sentenced in the Downing Centre Local Court last week on eighteen charges involving the submission of false or misleading information to banks.

Mr Nair was convicted after admitting to providing documents in support of eighteen loan applications to Westpac Banking Corporation (Westpac), Australia and New Zealand Banking Group (ANZ) and National Australia Bank (NAB) knowing that they contained false or misleading information.

The applications contained documents which purported to be from the applicant’s employer. These documents were false and in most instances, the loan applicant had never worked for the particular employer.

For each and all eighteen charges, Mr Nair was convicted and released upon entering into a recognizance in the amount of $1,000 on the condition that he be of good behaviour for three years.

In sentencing Mr Nair, Magistrate Atkinson noted that it was a serious matter and that there are tough laws for good reason.

Magistrate Atkinson described the nature of the offending in submitting 18 separate loan applications containing false information or documents as very troubling. Noting Mr Nair had no prior convictions, his ill health, the relatively small financial benefit he received, his plea of guilty and high level of cooperation with ASIC, Magistrate Atkinson stated that had any of the factors been different, the defendant may have faced full-time imprisonment.

ASIC Deputy Chair Peter Kell said, ‘ASIC wants to ensure that dishonest brokers are removed from the industry and we will take all necessary steps to achieve this.’

The Commonwealth Director of Public Prosecutions (CDPP) prosecuted the matter.

Background

ASIC’s investigation found that between September 2012 and June 2014, Mr Nair submitted eighteen loan applications containing false borrower employment documents. Of the eighteen loan applications, twelve were approved and disbursed, totaling $3,256,684.

Mr Nair received commission on those twelve loans of $7,583.49. In addition, Mr Nair received cash payments totalling $2,500 from two of the loan applicants upon approval of their loan applications. Mr Nair received a total financial benefit of $10,083.49 as a result of the approved loan applications.

The eighteen loan applications ranged in value from $10,000 to $490,875.

Mr Nair received his commission through Smee & Pree Nair Enterprises Pty Ltd (ACN 091 014 756), a company controlled and owned by Mr Nair.

On 5 July 2016, Mr Nair appeared at the Downing Centre Local Court and pleaded guilty to seventeen charges under sections 160D and one charge under the former section 33(2) of the National Consumer Credit Protection Act 2009.

Section 160D (formerly section 33(2)) makes it an offence for a person engaging in credit activities to give information or documents to another person which is false in a material particular or materially misleading.

Mr Nair was sentenced on 30 August 2016.

Since becoming the national regulator of consumer credit on 1 July 2010, ASIC has taken 80 actions involving loan fraud, including 61 actions to ban individuals and companies from providing or engaging in credit services or holding an Australian credit licence. ASIC has also commenced 14 criminal proceedings involving loan fraud.

ANZ to refund $28.8 million to more than 390,000 accounts as a result of unclear fee disclosures

ASIC says Australia and New Zealand Banking Group Limited (ANZ) is refunding $28.8 million to 376,570 retail accounts, and 17,230 business accounts, after it failed to clearly disclose when certain periodical payment fees would apply.

Periodical payments are automatic ‘set and forget’ fixed-amount payments put in place by the customer. They are an alternative to direct debit arrangements, and allow customers to establish a regular payment to another account (for example, to make fortnightly rental payments). Banks may charge a fee for this service, depending on the terms and conditions for the account.

In ANZ’s case, the account terms and conditions stated that a periodical payment was a transaction to ‘another person or business.’ This meant that transactions made by the customer to another account in the customer’s own name, whether with ANZ or another financial institution, were not covered by ANZ’s own definition of a periodical payment and could not be charged the fees that could otherwise apply to periodical payments.

ANZ discovered that it was charging fees on payments made between accounts held in the customer’s own name, contrary to its definition of a ‘periodical payment’. ANZ subsequently reported the matter to ASIC as a significant breach of its financial services obligations. ASIC acknowledges the cooperative approach taken by ANZ in its handling of this matter, and its appropriate reporting of the matter to ASIC.

As a result, ANZ will refund fees that were charged to customers for payments into another account in the customer’s own name. These fees include:

non-payment fees charged on personal and commercial accounts when the payment did not proceed because of insufficient funds held in the ANZ deposit account; and

payment fees charged on commercial accoumts when a payment is processed from the ANZ deposit account.

The total amount being refunded includes approximately $25.8 million of fees, with an additional $3 million in interest.

ANZ has subsequently changed its terms and conditions to clarify instances where fees for periodical payments apply to an ANZ deposit account.

ASIC Deputy Chairman Peter Kell said, ‘Good fee disclosure is integral to ensuring that consumers are in an informed position about how best to manage the cost of their banking.’

ANZ has commenced contacting affected customers to explain the impact and the reimbursement and expects to complete the remediation process by the end of September 2016.

In a separate release, ANZ confirmed it has begun refunding around 390,000 accounts in relation to unclear fee disclosures for certain periodical payments. For the majority of impacted accounts, the fee refunds are below $50.

The issue relates to fees being charged for periodical payments to a customer’s own accounts.

ANZ Group Executive Australia Fred Ohlsson said: “When we identify an issue where we haven’t got things right, we will make sure our customers are not left out of pocket.”

“We proactively reported this matter to ASIC and have been working hard to ensure customers are repaid as soon as possible. We’ve already begun making payments to our customers and expect all customers will be refunded by the end of September.

“I’d like to apologise to all our impacted customers for the concern that we know issues like this can cause,” Mr Ohlsson said.

A total of $28 million is being paid that includes fee refunds and around $3 million in additional compensation. ANZ has already refunded around $11 million to 192,000 accounts.

CommSec pays $700,000 in infringement notice penalties and refunds $1.1 million in brokerage

ASIC says Commonwealth Securities Limited (“CommSec”) has paid a total penalty of $700,000 to comply with two infringement notices given to it by the Markets Disciplinary Panel (“MDP”), and has voluntarily refunded $1.1 million in brokerage to more than 25,000 clients.

Confirmations: disclosure of crossings and trading as principal

The MDP had reasonable grounds to believe that CommSec contravened subsection 798H(1) of the Corporations Act by reason of contravening:

rules 3.2.3 and 3.4.1(3)(f) of the ASIC Market Integrity Rules (ASX Market) 2010; and

rule 3.4.1(3)(f) of the ASIC Market Integrity Rules (Chi-X Australia Market) 2011.

These rules relate to confirmations of transactions which require disclosures in relation to crossings and trading as principal. A crossing occurs where a market participant acts for both the buyer and the seller in a transaction.

Failure to disclose crossings

Between 1 August 2010 and 13 February 2014, CommSec issued 114,841 confirmations to retail clients whose orders were executed as crossings but which did not contain the required statement that the transactions had involved a crossing, namely:

between 1 August 2010 and 13 February 2014, in relation to trading on the ASX market, CommSec issued 6,579 confirmations which failed to include the required disclosure of crossings. This failure was caused by different fields being used by the systems of CommSec and another NZ-based financial services company to identify crossings for the purposes of marking confirmations;

between 1 August 2011 and 9 October 2012, in relation to trading on the ASX market, CommSec issued 56,522 confirmations which failed to include the required disclosure of crossings. This failure was caused by the CommSec’s systems not being able to interpret all of the different condition codes relating to crossings;

between 15 August 2011 and 9 October 2012, in relation to trading on the ASX market, CommSec issued 46,231 confirmations which failed to include the required disclosure of crossings. This failure was caused by a configuration flag within CommSec’s settlement system not being turned on;

between 17 October 2011 and 18 December 2013, in relation to trading on the ASX market, CommSec issued 1,768 confirmations which failed to include the required disclosure of crossings. This failure was caused by a system platform change for the settlement of options market contracts, which contained an incorrect data field, as a result of which it was unable to correctly identify that a crossing had taken place; and

between 15 March 2012 and 26 April 2013, in relation to trading on the Chi-X market, CommSec issued 3,741 confirmations which failed to include the required disclosure of crossings. This failure was caused by CommSec’s retail and institutional participant identifier numbers being treated as two separate participants by Chi-X’s systems.

Failure to disclose trading as principal

Between 16 May 2011 to 13 February 2014, CommSec issued 50,484 confirmations to retail clients in relation to which CommSec had entered into transactions as principal but which did not contain the required statement that CommSec entered into the transactions as principal and not as agent, namely:

between 16 May 2011 and 13 February 2014, in relation to trading on the ASX market, CommSec issued 3,949 confirmations which failed to state that CommSec entered into the transactions as principal. This failure was caused by different fields being used by the systems of CommSec and another NZ-based financial services company to identify principal trading for the purposes of marking confirmations;

between 15 August 2011 and 9 October 2012, in relation to trading on the ASX market, CommSec issued 46,231 confirmations which failed to state that CommSec entered into the transactions as principal. This failure was caused by a configuration flag within CommSec’s settlement system not being turned on; and

between 26 February 2013 and 6 March 2013, in relation to trading on the ASX market, CommSec issued 304 confirmations which failed to state that CommSec entered into the transactions as principal. This failure was caused by the introduction of new operator references in CommSec’s system which did not contain the phrase typically used by CommSec to indicate when a related entity was the originator of the orders.

The MDP specified a penalty of $400,000 for the alleged contraventions.

CommSec voluntarily refunded approximately $1.1 million in brokerage to more than 25,000 clients, and notified 48,205 clients of the lack of disclosure and to provide corrective disclosure.

CommSec also co-operated with ASIC throughout its investigation and did not dispute any material facts.

Download the infringement notice

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.

Verification of identity of selling shareholders

The MDP had reasonable grounds to believe that CommSec contravened subsection 798H(1) of the Corporations Act by reason of contravening rule 5.5.2 of the ASIC Market Integrity Rules (ASX Market) 2010. This rule requires a trading participant to maintain the necessary organisational and technical resources to ensure that, among other things, trading messages submitted by the participant do not interfere with the efficiency and integrity of the market.

The MDP has reasonable grounds to believe that, between 2 August 2010 to 14 April 2013, CommSec did not have in place adequate organisational and technical procedures or controls that verified the name and address on an issuer sponsored holding matched that of the client who provided the instructions prior to submitting the orders for the sale of the holdings.

The MDP specified a penalty of $300,000 for the alleged contravention.

Download the infringement notice

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.

Directors of Storm Financial found to have breached their director duties

ASIC says the Federal Court has found that the directors of Storm Financial, Emmanuel and Julie Cassimatis, breached their duties as directors. The Court also found that Storm Financial provided inappropriate advice to certain investors.

Since around 1994, Storm Financial operated a system created by the Cassimatises, in which what ASIC considered to be “one-size-fits-all” investment advice was recommended to clients. The advice recommended that clients invest substantial amounts in index funds, using “double gearing” (Storm Model). This approach involved taking out both a home loan as well as a margin loan in order to purchase units in index funds, create a “cash dam” and pay Storm’s fees. Once initial investments took place, “Stormified” clients would be encouraged to take “step” investments over time.

By the time of Storm’s collapse in early 2009, approximately 3,000 of its 14,000 client based had been “Stormified”. In late 2008 and early 2009, many of Storm’s clients were in negative equity positions, sustaining significant losses.

The case that ASIC advanced against the Cassimatises centered around a sample of investors who were advised to invest in accordance with the Storm Model. ASIC alleged that the advice provided to those investors by Storm was inappropriate to their personal circumstances, considering that each of the investors were alleged to be over 50 years old, were retired or approaching and planning for retirement, had little or limited income, few assets and had little or no prospect of rebuilding their financial position in the event of suffering significant loss.

Among other things, it was also alleged that Storm failed to properly investigate the subject matter of the advice given to those investors. As such, ASIC also alleged that Storm failed to do all things necessary to ensure that the financial services covered by its licence were provided efficiently, honestly and fairly.

ASIC further alleged that because the Cassimatises were responsible for the day-to-day significant decisions in relation to the provision of financial services to Storm’s clients and exercised a high degree of control over its systems and processes, they had caused Storm to contravene its obligations under the Corporations Act and did not exercise their powers as directors of Storm with the degree of care and diligence that a reasonable person would have exercised in that situation.

In a 217 page judgment, Justice Edelman found that:

Storm provided advice to certain investors, that was inappropriate to their personal circumstances and failed to give such consideration to the subject matter of the advice and did not properly investigate the subject matter of the advice given.

“A reasonable director with the responsibilities of Mr and Mrs Cassimatis would have known that the Storm model was being applied to clients such as those who fell within this class and that its application was likely to lead to inappropriate advice. The consequences of that inappropriate advice would be catastrophic for Storm (the entity to whom the directors owed their duties). It would have been simple to take precautionary measures to attempt to avoid the application of the Storm model to this class of persons.” (paragraph 833)

Commissioner Greg Tanzer said, “This is an important decision which emphasises the importance of directors’ duties to ensure that they do not cause the companies that they control, to breach the law. The decision also highlights the significant obligation on financial services licensees to provide financial advice that is appropriate to the persons to whom it is given.”

The matter will be listed for a further hearing at a later date to determine what civil penalties and disqualification orders should be imposed on the Cassimatises as a result of the breach of their director duties.

Bank employees speak out on ‘broken’ system

From The NewDaily.

A broken incentives scheme is pressuring bank employees to act against the interests of customers, insiders have revealed.

Anonymous complaints from bank tellers and other staff published this week paint a disturbing picture of a workforce that is stressed, overworked, undertrained and ethically conflicted.

“To keep their jobs and feed their families, they are desperate and will do what is demanded of them – exceed their target – however they have to,” one bank worker wrote.

“The whole culture of selling products to customers even if they don’t really need them is not ethical,” wrote another.

“Sales target [is] more important than compliance and the customer,” wrote a third.

These and many other damning survey responses collected by the Finance Sector Union (FSU) are proof, according to the union, that the “root cause” of the recent bank scandals is a remuneration system that forces employees to foist insurance, savings accounts, retail super funds, loans, credit cards and other products on customers who don’t need them.

FSU acting national secretary Geoff Derrick told The New Daily that bank employees are “just as likely to be victims of the system as the consumers” because their bonuses and pay are linked to demanding sales targets.

“These are targets imposed from the highest levels of the industry and they are forced down the food chain to the front line,” Mr Derrick said.

“If we change the pay system and recognise banking and finance as a professional service where there is a best interest duty owed to the customer, and pay people accordingly, then we will go a long way to fixing the problems we currently face.”

The FSU’s call for reform coincided with a remuneration overhaul by British investment fund Woodford Investment Management, which this week abolished bonuses and put all staff on a flat salary. Its founder, Neil Woodford, said in a statement that bonuses are “largely ineffective” and can lead to “wrong behaviours”.

Financial sector regulation expert Dr Andy Schmulow, a lecturer at The University of Western Australia, said the problems complained of by bank employees were the “trickle-down effect” of a “wider incentive culture”.

“Counter staff are experiencing a trickle-down effect of a wider incentive culture which puts profits first, second and third, and where banks are measured only on profit and face no real sanctions, which is why compliance is either dispensed with or ignored.”

Dr Schmulow said the vertical integration of banks, whereby they distribute the very same financial products they create, has been a “disaster” for the industry and the nation.

“It leads to a misallocation of productive investment, either through poor choices foisted on consumers, or through consumers withdrawing from financial advice all together,” he said.

Outrage at the banks is building. Even some in the Turnbull government are calling for action. Liberal backbencher Warren Entsch has proposed the creation of a bank tribunal to hear the complaints of disgruntled customers who cannot afford court action. Prime Minister Malcolm Turnbull has said he is receptive to the idea.

But the FSU’s Mr Derrick warned that focussing on a bank tribunal could “sidetrack” the push for a bank royal commission, which he said would be more likely to trigger an overhaul of banker pay.

The FSU survey was conducted in response to the Sedgwick review of banker remuneration currently being conducted by the Australian Bankers Association (ABA).

ABA chief executive Steven Münchenberg responded to a request for comment by praising the Sedgwick review and dismissing a royal commission as “unnecessary”.

“An independent review is being conducted by a former Australian Public Service Commissioner into how bank staff are paid, to help ensure that when people are rewarded for selling products and services they are putting customers’ interests first. This review commenced on 12 July and the Finance Sector Union is a member of the Stakeholder Advisory Panel providing input into the review.