Banking Culture – Page 94 – Digital Finance Analytics (DFA) Blog

Shorten says grievance tribunal would not stop bank ‘rip offs’

Bill Shorten is continuing his pressure for a banking royal commission, by highlighting rising bank profits and escalating consumer complaints in recent years.

Shorten said the tribunal that some government MPs – including Liberal Warren Entsch and Nationals John Williams – are urging be set up to consider grievances would not solve the problem. The backbenchers want the tribunal to be a forum to give redress without victims facing expensive legal costs; they say it should also be able to impose fines. The government, under pressure from Shorten’s campaign for a royal commission, has indicated it will consider the proposal.

But Shorten said there was already the Financial Ombudsman Service (FOS), a not-for-profit, non-government organisation for dispute resolution which provides a free service for applicants.

In 2008-09 there were 19,107 new complaints to FOS; by 2014-15 this had risen to 31,895, a 60% increase. Credit card complaints rose by 145%, from 6731 in 2008-09 to 16,458 in 2014-15.

The CBA’s net profit went from almost $4.8 billion in 2006 to nearly $9.2 billion in 2015. The figures of the other banks were: Westpac, about $3.9 billion in 2006 to nearly $8.3 billion in 2015; ANZ, almost $4.5 billion in 2006 to more than $7.8 billion in 2015; and NAB, from about $3.6 billion in 2008 to about $5.8 billion in 2015.

Shorten said that the tribunal that the backbenchers advocated “simply won’t cut it”. “There is already an Ombudsman in place but the number of people getting ripped off has been going up and up.

“While the banks have been getting richer, the rip offs and rackets have been getting worse. The Coalition MPs who say they want to stop these rip offs have a duty to stand up to Mr Turnbull and tell him anything less than a royal commission is just another cop out,” Shorten said.

Michelle Grattan, Professorial Fellow, University of Canberra

Central Banks, The Road Ahead

In a speech entitled “The changing role of central banks“, given by François Groepe, Deputy Governor of the South African Reserve Bank, at the University of the Free State, Bloemfontein, he highlights there are limits to what these institutions can achieve, and there are challenging times ahead.

The past few years have been extremely challenging, both domestically and internationally. The aftershocks of the global financial crisis of 2008-09 have persisted. The advanced economies are still struggling to recover on a sustained basis, while the emerging markets, initially the main engine for the recovery, have fallen out of favour in the past four years, as the Chinese economy has slowed and brought commodity prices down with it.

Low growth is not the only issue. We are seeing increasingly widespread discontent about rising income and wealth disparities in many countries, where the fruits of growth have not been equitably shared and have been aggravated by persistently low growth.

The initial responses to the financial crisis involved both monetary and fiscal policy loosening. But fiscal space was eroded very soon as debt ratios rose to unsustainable levels. This placed a near impossible burden on monetary policy, which persists to this day.

Referring to the post-crisis focus on central banks, Mohamed El-Erian appropriately titled his most recent book The only game in town. Today, I would like to highlight the role that central banks can play in the economy and, perhaps more importantly, point out the limits to what central banks can do. It is important to understand these limits because, I would argue, the biggest risk to central bank independence is the possible backlash from being unable to deliver on unreasonable expectations. Central bank mandates have expanded – perhaps appropriately so – but there are limits to what monetary policy was designed to achieve. Central banks cannot be, and should not be regarded as, “the only game in town”.

Later he makes the point that centrals banks are less insulated from the political arena.

The main argument for independence is that it minimises the politicisation of monetary policy decision-making and avoids what is known as the “political interest rate cycle”. This refers to the incentive of politicians to lower interest rates in advance of elections. The argument is that an operationally independent central bank does not have to bow to such pressures.

The global crisis has created challenges for central banks that could undermine this seemingly comfortable insulation from the political arena. The expanded mandate of financial stability in itself may have implications for their independence, while the other possible objectives – such as financial inclusion and direct finance – imply political decisions being made by unelected officials.

Compared to financial stability decisions, decisions on monetary policy, while not easy, are more straightforward and better understood by the public. They usually involve the use of one tool, namely the interest rate, and there is a clear objective. The financial stability mandate is more complicated, as it is a shared responsibility. It generally involves government in crisis resolution, particularly when public funds are involved, and the policy tools are more directed at particular sectors; it may therefore be more politically sensitive as the distributional impacts are more apparent than in the case of monetary policy. Furthermore, as has been argued in a paper published by the International Monetary Fund, financial stability is difficult to measure but financial stability crises are evident, so policy failures are observable, unlike successes. As has been noted in the IMF paper, “central banks would find it difficult (even ex post facto) to defend potentially unpopular measures, precisely because they succeeded in maintaining financial stability”. Whichever failures may be perceived on the financial stability front have the potential to undermine monetary policy independence through a general loss of credibility of the central bank.

In conclusion, we are living in challenging times. Central banks are called on to do more and more, and are still called on to provide solutions to the low-growth environment we find ourselves in. But, as I have argued, although central banks play an important role in the economy and society at large, there are limits to what they can do – and these limits are not always well understood. Mohamed El-Erian argues that while we should give central banks due credit, their effectiveness is waning given the limited number of tools available to them. He argues that the world has come to a critical junction, and faces a choice of two roads. One road “involves a restoration of high-inclusive growth that creates jobs, reduces the risk of financial instability, and counters excessive inequality. It is a path that also lowers political tensions, eases corporate governance dysfunction, and holds the hope of defusing some of the world’s geopolitical threats. The other road is one of even lower growth, persistently high unemployment, and still worsening inequality. It is a road that involves renewed global financial instability, fuels political extremism, and erodes social cohesion as well as integrity”.

This is a sombre warning – and relevant both domestically and at the global level. It is clear what the preferred road is. Taking it requires political leadership and political will. This is not a responsibility that can be abdicated to central banks.

Good corporate governance is good for banks’ bottom line

From The Conversation.

Sound corporate governance not only boosts banks’ efficiency, it is also good for the profit of Australian banks and their shareholders.

However, new research shows that factors such as the number of board meetings, the involvement of large shareholders in boardroom decisions and whether or not the board has independent members don’t play a significant role in achieving those goals.

Our study, published in the Journal of International Financial Markets, Institutions and Money, investigated the effectiveness of certain corporate governance measures on the performance of 11 Australian banks from 1999 to 2013.

It showed Australian banks improved efficiency after the introduction in 2003 of the Australian Securities Exchange (ASX) Principles of Good Corporate Governance, which aimed for improved governance mechanisms and thus better control over bank management.

The principles meant all ASX-listed firms should have certain board attributes. It is recommended, for example, that a board’s chairman should not be part of the executive team, that boards should consider size and composition (such as gender equality) to meet the reasonable expectations of most investors in most situations, and that different committees for detailed oversight be established.

What makes a difference?

The study assessed the impact of corporate governance by the number of directors, the proportion of non-executive directors, the number of board meetings, committee meetings, and the largest share of the individual shareholders in Australian banks.

After the introduction of the ASX’s principles, the Australian banking industry performed better in maximising its total revenue (from lending and non-lending activities) for any given level of borrowing and operating expenses. The results also revealed that the “Big Four” banks – National Australia Bank (NAB) Commonwealth Bank (CBA), ANZ and Westpac – performed better in this than any competing regional banks.

We found that board size and committee meetings improve bank efficiency. This suggests that larger boards bring higher knowledge into the decision and supervisory process.

Committees considered in this study were: audit, nominating, remuneration and risk. These committees are seen as the main influence on boards’ most important decisions.

However, the number of independent board members and number of board meetings had no significant impact on a bank’s technical performance.

The study didn’t find any evidence of large shareholders executing power to affect banks’ performance.

Good corporate governance has intrinsic links to profit. Shareholders want value for money in paying board members. Regulators seek fewer failures and higher stability. And banks intend their corporate governance arrangements to deliver stronger oversight of management.

Investors have become more concerned about the role of the board in recent decades, especially in the wake of major corporate collapses including Ansett, OneTel, HIH and Bankwest in Australia. As a result, investors have demanded stronger corporate governance.

The consequences of ignoring risks and weak governance can be costly. For example, two former National Australia Bank (NAB) foreign currency options traders who were sentenced in 2006 for manipulating foreign exchange spot trades that falsely inflated profits and hid losses. The Australian Securities and Investments Commission (ASIC) noted in 2006 that

By 13 January 2004, when the fictitious trades were discovered by the NAB, the loss incurred was approximately $160 million.

After revaluation, the incurred losses for NAB totalled $360 million.

In its March 2004 report into the case, the Australian Prudential Regulation Authority (APRA) noted that while the irregular trades did not threaten the bank’s viability or its capacity to meet its obligations to depositors,

the governance and risk management weaknesses identified in the report were serious… NAB will need to address these issues promptly so that it meets “best practice” standards in its treasury area and problems of this kind do not recur.

Regulators have also developed new tools to supervise financial markets, stock exchange and financial institutions and to avoid corporate collapses. In 2008, APRA prudential standards particularly for credit institutions to ensure their stability.

Our research results can be seen as good news for Australian banks in general and the Big Four in particular, in a dynamic and turbulent banking environment. However, regulators must continue to improve corporate governance principles and further strengthen the supervisory conducts of boards.

Author: Amir Arjomandi, Lecturer, School of Accounting, Economics and Finance, University of Wollongong; Juergen Seufert, Assistant Professor in Accounting, University of Nottingham; Ruhul Salim, Associate professor, Curtin University

CMA paves the way for Open Banking revolution

The final report of the UK Competition and Markets Authority’s (CMA) retail banking market investigation, published today, concludes that older and larger banks do not have to compete hard enough for customers’ business, and smaller and newer banks find it difficult to grow. This means that many people are paying more than they should and are not benefiting from new services.

To tackle these problems, the CMA is implementing a wide-reaching package of reforms. Central to the CMA’s remedies are measures to ensure that customers benefit from technological advances and that new entrants and smaller providers are able to compete more fairly. The key measures, which will benefit personal and small business customers, include:

Requiring banks to implement Open Banking by early 2018, to accelerate technological change in the UK retail banking sector. Open Banking will enable personal customers and small businesses to share their data securely with other banks and with third parties, enabling them to manage their accounts with multiple providers through a single digital ‘app’, to take more control of their funds (for example to avoid overdraft charges and manage cashflow) and to compare products on the basis of their own requirements.

Requiring banks to publish trustworthy and objective information on quality of service on their websites and in branches, so that customers can see how their own bank shapes up. Whether a personal customer or small business is willing to recommend their bank to friends, family and colleagues will be a core measure but we will also be requiring banks to publish and make available through Open Banking a range of other quality measures.

Requiring banks to send out suitable periodic and event-based ‘prompts’ such as on the closure of a local branch or an increase in charges, to remind their customers to review whether they are getting the best value and switch banks if not. Unlike many other financial products such as home insurance, current accounts do not have annual renewal dates to act as natural reminders and other possible triggers like business growth are not prompting customers to review what they are getting from their bank.

Underpinning these remedies, the CMA is introducing further measures to make it easier for customers to search and switch. At the moment only 3% of personal and 4% of business customers switch to a different bank in any year. This is despite, for example, personal customers in Great Britain being able to save £92 on average per year by switching provider, with savings of around £80 a year on average available for small businesses. Larger savings are available for overdraft users – for example, personal customers who are overdrawn for one or two weeks every month could save £180 per year on average.

The CMA has also introduced specific measures to benefit unarranged overdraft users, who make up around 25% of all personal current account customers, and small businesses.

Banks make £1.2 billion a year from unarranged overdraft charges. Banks will be required to send alerts to customers going into unarranged overdraft, and inform them of a grace period, to avoid charges – research by the FCA has shown that this type of alert, when combined with mobile banking, can heavily reduce overdraft charges. Banks will also have to set a monthly cap on unarranged charges, and tell their customers about it.

The CMA found that small businesses lack tools providing comprehensive information about bank charges, service quality and credit availability. The CMA is throwing its weight behind the independent charity Nesta in a new initiative to put this right, requiring banks to provide Nesta with financial backing and technical support, alongside introducing a range of other measures targeted at small businesses such as a loan eligibility tool.

Alasdair Smith, Chair of the retail banking investigation, said:

The reforms we have announced today will shake up retail banking for years to come, and ensure that both personal customers and small businesses get a better deal from their banks.

We are breaking down the barriers which have made it too easy for established banks to hold on to their customers. Our reforms will increase innovation and competition in a sector whose performance is crucial for the UK economy.

Our central reform is the Open Banking programme to harness the technological changes which we have seen transform other markets. We want customers to be able to access new and innovative apps which will tailor services, information and advice to their individual needs.

This is backed up by a wide package of measures to improve the current account switching service, to make it easier for small businesses to shop around and open new accounts or get a loan, and to see how the quality of service provided by your bank compares with other providers.

We are also taking measures to give customers much greater control over their overdraft charges, so that they are clearly told when they are about to be incurred and have an opportunity to avoid them. Alongside this, banks will have to cap their monthly charges for unarranged overdrafts.

The CMA will now focus on putting in place the remedies announced today, working with others whose role it is to make individual remedies happen, such as HM Treasury, FCA, Bacs and Nesta

ASIC review highlights inconsistent practice by firms handling confidential information and conflicts

An ASIC review of risks related to the handling of confidential information and conflicts of interests, particularly in the provision of sell-side research and corporate advisory services, has found that most firms have policies and procedures in place to deal with these risks. However, there remain instances of poor and inconsistent practice in their application.

Investment-Pig Report 486 Sell-side research and corporate advisory: Confidential information and conflicts of interest details the review’s findings and highlights areas of concern requiring a greater focus and care.

Between September 2014 and June 2016, ASIC conducted reviews of the policies, procedures and practices of a range of investment banks and brokers active in the Australian market and reviewed a sample of transactions, including initial public offerings (IPOs) and secondary offerings. This review followed on from previous monitoring and surveillance work undertaken by ASIC that had indicated some poor practices in these areas.

While most firms have specific policies and procedures in place, the review found considerable variation in the following market practices:

Identification and handling of confidential information: Some organisations do not have appropriate arrangements to handle situations where staff members come into possession of confidential information. This includes the inadequate use or supervision of information barriers and restricted trading lists.

Management of conflicts of interest: There is an inconsistency in how conflicts of interest are managed. This includes the structure and funding of research, insufficient separation of research and corporate advisory activities (particularly the involvement of research in soliciting business during the IPO process), decisions about share allocations in capital raisings, and mixed practices in relation to the disclosure of conflicts of interest.

Staff and principal trading:

There is also considerable variation in the strength of controls to manage staff trading, including trading by corporate advisory and research staff. In particular, some questions remained as to whether the approval process adequately addressed the conflicts of interest, and whether a staff member might be in possession of confidential information.

In mid-sized firms, it is more common for staff to participate in capital raising transactions that the firm is managing. This presents an increased risk of unacceptable or questionable activity that firms need to be aware of and manage.

ASIC Commissioner Cathie Armour said the purpose of the review was to understand current market practices and identify areas of particular concern.

‘The proper handling of confidential information and the management of conflicts is a key element in preserving and promoting market integrity, improving market efficiency and increasing investor confidence,’ she said.

‘Where confidential information is mishandled or conflicts are not managed appropriately there is a risk that a breach of financial services laws may occur. This may include insider trading, market manipulation, misleading and deceptive conduct, and breaches by Australian financial services licensees of their general obligations.

‘All firms should review this report and consider whether their controls – including policies, procedures, training and monitoring – are appropriate and sufficiently robust to meet legal and regulatory requirements’, Ms Armour said.

ABA Welcomes Federal Government’s review into external dispute resolution

The Australian Bankers’ Association has today welcomed the release of the terms of reference of the Federal Government’s review into external dispute resolution.

“The handling of customer complaints is a major factor in people’s trust in their financial institution,” the ABA’s Executive Director – Retail Policy, Diane Tate, said.

“Banks want to help customers work through any problems to avoid the need for external dispute resolution, however, in some instances it is necessary.

“It’s important to make sure that external dispute resolution works well. Customers need to know how and where to get a complaint or dispute resolved,” she said.

“The ABA supports broadening external dispute resolution schemes so more people have access to them if needed. This includes considering increasing the monetary limit on the claims that the Financial Ombudsman Service can assess and on the amount of compensation it can award.

“The ABA looks forward to working with the Government on this review to help ensure people have easier and greater access to get a problem resolved,” Ms Tate said.

“Banks are also taking steps to improve complaints handling processes. Banks will appoint dedicated customer advocates to offer support and give customers a greater voice when things go wrong.

“Banks are also making sure that if a dedicated program is needed to deal with a more difficult problem, these remediation programs operate effectively,” she said.

“This is part of a range of measures recently announced by the banking industry to enhance customer protections, increase transparency and accountability and build trust and confidence in banks.”

Terms of reference released for complaints system review

From Financial Standard.

The federal government has released the terms of reference for the independent review into the financial system’s external dispute resolution and complaints framework.

The independent expert panel consisting of Professor Ian Ramsay (chair), Julie Abramson and Alan Kirkland and will examine the Financial Ombudsman Service (FOS), the Superannuation Complaints Tribunal, and the Credit and Investments Ombudsman to ensure that they’re working effectively to meet the needs of consumers and industry.

The review will have regard to efficiency, equity, complexity, transparency, accountability, comparability of outcomes and regulatory costs.

“The terms of reference also allow for comprehensive consideration of the effectiveness of the existing framework, as well as consideration of different models in providing effective avenues for resolving disputes,” said Minister for Revenue and Financial Services, Kelly O’Dwyer.

“The Turnbull Government is committed to ensuring the three bodies are working effectively to meet the needs of users.”

The panel requested a three month extension and will now provide a report to the government by the end of March 2017.

“The additional time will allow for in-depth consultation with stakeholders, industry, the dispute resolution and complaints schemes, peak bodies, and regional and consumer representatives.

“This review builds on the government’s response to the Financial System Inquiry which sets out a suite of policies to improve Australia’s financial system,” O’Dwyer said.

The review will make recommendations on:

The role, powers, governance and funding arrangements of the dispute resolution and complaints framework in providing effective complaints handling processes for users, including linkages with internal dispute resolution

The extent of gaps and overlaps between each of the bodies (including consideration of legislative limits on the matters each body can consider) and their impacts on the effectiveness, utility and comparability of outcomes for users

The role of the bodies in working with government, regulators, consumers, industry and other stakeholders to improve the legal and regulatory framework to deliver better outcomes for users, and

The relative merits, and any issues that would need to be considered (including implementation considerations), of different models in providing effective avenues for resolving disputes

In making its recommendations the review can take into account best practice developments from international dispute resolution arrangements and other sectors and will consult with ASIC on the concurrent review of the FOS’s small business jurisdiction.

The review also has the ability to make observations, but not recommendations, on the establishment of a statutory compensation scheme of last resort.

The FOS has welcomed the release of formal terms of reference and has endorsed the work of the independent expert panel and key considerations guiding the review.

Chief ombudsman Shane Tregillis said: “FOS is committed to the principles of fair, open and simple resolution of financial disputes. Reducing complexity for consumers in accessing effective independent dispute resolution has the strong support of FOS.”

Tregillis further welcomed the ability of the panel to make observations on a compensation scheme of last resort.

“FOS has been a longstanding advocate of a compensation scheme over many years. It is essential for the effective operation of external dispute resolution that consumers who get an award of compensation by FOS can be confident that this compensation will be paid.” Tregillis

Bank executives forced before parliamentary committee for ‘regular health check’

From The Conversation.

Malcolm Turnbull has announced that the heads of Australia’s big four banks will be grilled annually by the House of Representatives economics committee, as the government hits back at the banks’ refusal this week to pass on the full interest rate cut.

Turnbull, who fronted the media with Treasurer Scott Morrison, said the banks “operate under a social licence”. “They are built on a foundation of trust and they have to earn that trust through being open and accountable at all times.”

In what the government dubs a “regular health check”, Turnbull said the banks would appear at least once a year “to give a full account of the way in which they are managing their affairs, their dealing with customers, their interest rate policy”.

The banks would be regularly accountable to the Australian people through parliament “in exactly the same way as the Reserve Bank and APRA [the Australian Prudential Regulation Authority],” he said. The appearances would be part of the “regular financial calendar”.

The move follows Turnbull’s Wednesday tongue-lashing of the banks for passing on only part of the 25 basis points cut, and the pressure the government has been under from Labor which continues to advocate a royal commission into the banks.

The banks will be required to explain:

international economic and financial market developments and how they were affecting Australia

developments in prudential regulation, including capital requirements, and their effect on Australian banks’ policies

the costs of funds, impacts on margins, and the basis for bank interest rate pricing decisions

how individual banks and the industry as a whole were responding to issues previously raised in parliamentary inquiries through their package of reforms announced in April

bank perspectives on the performance of the Australian economy.

Continuing his attack of earlier this week, Turnbull said there was “no commercial basis… other than to improve their profitability,” for the banks not to pass on the full rate cut. “They must provide a full account of why they have not done so.”

He said the new requirement “will become, if you are a bank chief executive appearing before the House economics committee, part of your regular annual schedule”. He noted that the committee could have additional hearings and call people back.

Morrison said the government had been in touch with the banks about its announcement and had also consulted with the Reserve Bank and the Australian Competition and Consumer Commission and had advised APRA. “So there’s been an appropriate assessment and consideration of how this process would work.”

The Australian Bankers Association chief executive Steven Munchenberg said the government was entitled to call the banks before a parliamentary committee but noted pointedly that “no other businesses are required to justify their commercial pricing decisions in this way”.

“We are confident banks can explain why the interest rates they set for borrowers are determined largely by the costs of funds and the pressures of a highly competitive market, not the Reserve Bank cash rate.”

He said that in making interest rate decisions “banks have to balance the needs of borrowers and savers, and shareholders in banks, most of whom are also ordinary Australians”.

Opposition Leader Bill Shorten said Turnbull was protecting the banks.

This response was a “cop out” from a weak prime minister who was “in the pockets of the big banks”.

“There is nothing Mr Turnbull won’t do to protect the big banks from a Royal Commission. After giving them a $7 billion tax cut, he’s now inviting them to lunch in Canberra once a year so he can wag his finger at them. This is a friendly catch-up, not an investigation,” Shorten said.

Shorten said that Turnbull was only doing what the banks would let him do. “We know this because he admitted he checked with them to see if this is okay.”

Author: Michelle Grattan, Professorial Fellow, University of Canberra

UK Progress On Creating A Fair and Effective Market

A status update has just been released describing some of the steps taken to reform the wholesale Fixed Income, Currency and Commodities (FICC) markets, following the earlier review. Whilst some of the legal and process related issues have been addressed, there are many cultural and behaviourial issues which remain to be addressed by market participants. The review stresses that Firms must create, both individually and collectively, cultures that place integrity, professionalism and high ethical standards at their core to ensure that behaviours are not limited to complying with the letter of regulation or laws. It took years for the ‘ethical drift’ that resulted in misconduct to occur and it will take time to build new ethical norms in financial markets. Progress is at a critical point.

The Fair and Effective Markets Review (FEMR) was launched in June 2014 to conduct a comprehensive and forward-looking assessment of the way the wholesale Fixed Income, Currency and Commodities (FICC) markets operate; help to restore trust in those markets in the wake of a number of high profile abuses in both UK and global financial markets; and to influence the international debate on trading practices.

On 10 June 2015 a Final Report was published, setting out 21 recommendations to:

raise standards, professionalism and accountability of individuals;

improve the quality, clarity and market-wide understanding of FICC trading practices;

strengthen regulation of FICC markets in the United Kingdom;

launch international action to raise standards in global FICC markets;

promote fairer FICC market structures while also enhancing effectiveness; and

promote forward-looking conduct risk identification and mitigation.

Now a status update has been presented to Chancellor of the Exchequer, the Governor of the Bank of England and the Chairman of the Financial Conduct Authority.

The job is far from done. A key theme that came out of the ‘Open Forum’ held by the Bank in November 2015 was that there remains a lack of trust in financial markets and financial institutions because of past misconduct. Participants saw cultural and ethical changes as an essential component of building a social licence for financial markets.

Responsibility must now fall increasingly to market participants to see through the changes in market practices and behaviours that are necessary to restore the reputation of the industry and thereby deliver markets that are both fair and effective. Firms must create, both individually and collectively, cultures that place integrity, professionalism and high ethical standards at their core to ensure that behaviours are not limited to complying with the letter of regulation or laws. As was indicated in the Final Report, a failure to do so will inevitably lead to further regulation and/or legislation.

While authorities can put in place legislation and regulation, firms are responsible for creating, both individually and collectively, cultures that place integrity, professionalism and high ethical standards at their core to ensure that behaviours are not limited to complying with the letter of regulations or laws. The work of the FMSB to ensure that market practices and structures are consistent with broader principles of fairness and effectiveness is therefore of vital importance and must be sustained. The complementary work of the Banking Standards Board (BSB) to promote high standards of behaviour and competence in the banking sector has a crucial role to play in this area too and we strongly support its work.

They state that the initial momentum must not be lost. It took years for the ‘ethical drift’ that resulted in misconduct to occur and it will take time to build new ethical norms in financial markets. Progress is at a critical point. It requires all involved to see through the changes that have begun, and to be alert to future challenges, if the financial services of tomorrow are to be characterised by the high standards of fairness and effectiveness to which we aspire.

ANZ wins class action on fees, but we still don’t know the real cost of late payments

From The Conversation.

A six year legal battle came to an end yesterday when the High Court ruled in favour of ANZ Bank, finding by a 4-1 majority that the bank could enforce late payment fees on credit cards.

The lead plaintiff in the class action was Mr Paciocco, who opened two MasterCard accounts with the bank. One card had a credit limit of A$18,000 the other had a A$4,000 limit.

Mr Paciocco was late in meeting his monthly repayments on a number of occasions, and was required to pay late payment fees. The fee was initially $35, with the bank later reducing it to $20. Mr Paciocco was not the only ANZ customer who was late in repaying their credit card debts. During the financial year ended September 2009 the bank had around two million consumer credit card accounts. It charged late payment fees on around 2.4 million occasions, for which it received $75 million.

Mr Paciocco claimed the bank could not enforce the late payment fees because they were “penalties”. Australia’s common law will not allow a party to a contract to enforce a penalty amount under a contract. The question the High Court grappled with was what precisely did the common law understand a penalty to be. Rather annoyingly the Court has returned to the bad habit of each of the five judges hearing the case writing a separate decision. Each judge’s decision covers much of the same ground as the others, with subtle differences here and there. This makes it rather difficult to discern any coherent majority view on any particular issue.

In any event, the Court appeared to agree that a “fee” amounts to being a penalty if it is in the nature of a punishment for non-observance of the credit card contract. That is, it is a penalty if the fee is out of all proportion to the costs or loss caused to the bank by the customer’s late repayment. One view was that a fee becomes a penalty if it is extravagant, exorbitant or unconscionable. That definition sets a very high hurdle for bank customers to surmount when trying to prove a fee is a penalty.

Having decided what a penalty is, the judges were required to determine whether the fee/penalty charged was out of all proportion to the resulting losses caused to the bank. ANZ admitted the late payment fees were not a genuine pre-estimate of the losses it suffered as a result of the late repayment. The Court, however, found the mere fact there was no pre-estimate of the losses to the bank did not automatically mean it was a penalty.

Experts differ

Two expert witnesses gave evidence before the lower courts about the costs to the bank of a customer making a late repayment. One witness estimated the average cost to be $2.60. The other expert took into account a range of factors including the “loss provision costs, regulatory capital costs and collection costs” to the bank, and arrived at a much higher figure.

The Court then debated which of the experts had adopted the correct methodology. The majority found in favour of the second witness, the minority judge found the correct figure was closer to that calculated by the first witness, and therefore found the late repayment fee to be a penalty.

The majority also considered whether the bank had acted unconscionably or unjustly under the provisions of relevant legislation, and concluded that the bank had not breached the legislation.

The case confirms that a person alleging a requirement under a contract to make a certain payment amounts to a penalty must jump a very high bar. He or she must establish that the amount being imposed is extravagant, exorbitant or unconscionable.

The case also illustrates the difficulty in calculating the costs to the bank of customers making late repayments. The onus is on the customer to show the bank is acting extravagantly. It is somewhat disappointing for the many bank customers who are subjected to late payment fees that the Court favoured a costing methodology that itself was arguably extravagant and exorbitant.

Author: Justin Malbon, Professor of Law, Monash University