Banking Culture – Page 95 – Digital Finance Analytics (DFA) Blog

More scrutiny needed on commissions paid to life insurance advisers

The proposed changes to commissions for selling life insurance may just tip the system back in favour of the customer. For years paying life insurance advisers by commission was not seen as a conflict of interest, even when it incentivised bad advice and continuous changing of policies.

The changes will reduce the incentives for upfront commissions and allow better monitoring of the cost of the policy relative to the commission, however there is still no legislative cap on total commissions payable.

Problems with the current system

Life insurance covers death, illness, injury and disability. The consumer pays the insurer for their policy and then the insurer pays the adviser who gets a proportion of the premium as a commission.

Up-front commissions can be up to 130% of the first year’s premium followed by 10% of subsequent premiums. “Hybrid” commissions (which sit between upfront and “level” commissions) usually amount to 80% of the first year premium and 20% of subsequent premiums. Level commissions are about 30% of each year’s premium.

The upfront commission is an incentive for advisers to switch clients from one life insurance policy to another in order to keep collecting the high commission. They may churn clients from a suitable life insurance policy, to one that may let them down when they most need it.

Sometimes the policy life insurers recommend is not in the best interests of the client. Some advisers act outside the law.

ASIC has found a high correlation between high commissions and lapsed life insurance policies.

People are holding the same life insurance policy for fewer years and ASIC also found more than a third of life insurance advice didn’t comply with the law ensuring its quality.

Advocates arguethat commissions are about preserving the value of the business, not guarding against under-insurance and the risk to the client.

There are rules to protect consumers from conflicts of interest and conflicted remuneration. However the life insurance industry was successful in securing exemptions from the conflicted remuneration rules in the Future of Financial Advice reforms.

The exception to the exemption from the ban, is a group life policy for a superannuation fund or an individual policy for a member of a default superannuation fund.

How the government plans to fix this

At the time of these reforms the parliament recommended monitoring life insurance and subsequent ASIC studies identified problems. This led to an industry commissioned report.pdf) which put forward concrete measures to minimise conflicts of interest such as a fee for service model and competitive approved product lists.

The (Murray) Financial System Inquiry recommended level commissions, that is, the same commissions on each year’s premium, arguing that the upfront style commission should not be greater than an ongoing commission. In its response to the Murray Inquiry, the Government said it would address this by the end of 2015.

The current bill, which was before parliament prior to the election, removes the exemption of life insurance commissions from the definition of conflicted remuneration, effectively banning these commissions. But it then reinstates these commissions in two circumstances.

Commissions can be paid if the benefit and the cost of the policy is the same for each year, that is, level. It changes the timing of the commission, putting a cap on upfront commissions and evening out payments over the life of the product.

In another circumstance, if the first year plus subsequent years commissions are less than an ASIC determined fair ratio between the commission and the cost of the policy, more commissions can be paid. In fact there is an obligation to repay it if the policy is cancelled or if the cost of the policy is reduced.

The claw back applies only if the insurer gives the adviser an upfront commission. It’s designed to prevent the incentive for switching or churning through policies.

ASIC will have the power to determine an acceptable fair ratio and extra commission, effectively setting the allowed amount of commissions.

The Trowbridge Report.pdf) proposed an initial capped payment for advice that could be paid, only once every five years, plus level commissions capped at 20% of premiums.

There is ongoing debate about fee for service payment for product advice and whether consumers are prepared to pay. The problem is how much does it really cost to prepare advice and how much is it really worth?

The proposed bill gives the life insurance industry further time to reform itself. However the industry has been on notice from at least 2012 that it needs to change and the question is whether it has now been given too much time.

The ASIC review in 2018 could recommend banning all life insurance commissions.

Author: Gail Pearson, Professor, Business School, University of Sydney

Partial Progress On Reforming Major Interest Rate Benchmarks – FSB

The Financial Stability Board (FSB) today published Reforming Major Interest Rate Benchmarks which provides a progress report on implementation of its July 2014 recommendations to reform major interest rate benchmarks.

The report finds progress has been made by the three major benchmarks of EURIBOR, LIBOR and TIBOR. Reflecting the systemic importance of these reference rates authorities in the European Union, Japan and United Kingdom have taken steps to regulate the administrators of the IBORs. Member authorities represented on the Official Sector Steering Group (OSSG), benchmark administrators and market participants from other jurisdictions, including Australia, Canada, Hong Kong, Mexico, Singapore and South Africa, have continued to take steps to improve the existing interbank rates in their own jurisdiction.

However, the report finds that while substantial progress has been made, the reforms of the IBORs have not been completed. Administrators should now focus on transition and decide how to anchor rates in transactions and objective market data as far as practicable. Similarly, it finds that more progress remains to be achieved in identifying risk-free rates (RFRs) and promoting their use where appropriate. Where groups have been set up to identify a single alternative and to promote its use, the final choice has yet to be made and transition planning is still in preliminary stages.

The major interest reference rates are widely used in the global financial system as benchmarks for a large volume and broad range of financial products and contracts. The cases of attempted market manipulation and false reporting of global reference rates lowered confidence in the reliability and robustness of existing benchmark interest rates. Uncertainty surrounding the integrity of these reference rates represented a potentially serious source of vulnerability and systemic risk. Against this background, in February 2013, the G20 asked the FSB to undertake a fundamental review of major interest rate benchmarks. In July 2014 the FSB published the recommendations for reform developed by the OSSG. The OSSG published its most recent progress report in July 2015.

ABA Announces Independent Review of Product Sales Commissions and Product Based Payments

As part of the industry initiatives announced on 21 April 2016, the ABA’s member banks have requested that the Australian Bankers’ Association (ABA) commission an independent review of product sales commissions and product based payments. The ABA has appointed Mr Stephen Sedgwick an independent person with relevant qualifications and experience to conduct this review. A final report will be published no later than 31 March 2017, however, the reviewer will aim to complete the review by the end of 2016. The final report is expected to provide an overview of product sales commissions and product based payments in retail banking and other industries, identify possible options for better aligning remuneration and incentives so that they do not result in poor customer outcomes and set out actions which may be considered by banks and the banking industry to implement the findings.

Mr Sedgwick will be supported by legal and remuneration experts to inform his findings and ensure the conduct of the review and the options for implementation that it identifies are consistent with the legal and regulatory obligations that apply to participants in the review. Gilbert + Tobin Lawyers will provide competition law and policy expertise and legal oversight to ensure all participants meet their legal obligations, including competition laws. Mercer will provide expertise and input to the review with regards to remuneration and incentive structures and global best practice.

Mr Sedgwick will also have access to additional expert advice as needed from a Bank Advisory Group and a Stakeholder Advisory Panel. The Stakeholder Advisory Panel will include representation from across consumers, employees and professional standards.

While the banking industry will fund the review, the banking industry will not have any influence over the findings and options identified by the reviewer beyond our input as a participant in the review, and the reviewer and secretariat will act independently and not in the interests of, or on behalf of, the ABA or its member banks.

Depending on the completion of the ASIC review into remuneration structures and payment arrangements in mortgage broking, the findings of the ASIC review may be incorporated into the findings and options of the independent review final report or issued as a supplement to the final report.

Some options identified by the final report may require regulatory approval or legislative reform to enable banks to take action. Regulatory approval or legislative reform would ensure banks meet their various legal obligations, including under competition laws, and ensure any changes or further action by banks are agreed to be in the public interest.

Where regulatory approval is pursued, it is expected to occur around 6 months after the final report is provided and decisions are made about the industry’s response to the final report. If legislative reform is required, the timing of implementation will be dependent on the time required for passage of the legislation through the Parliament and subsequent commencement and transition arrangements.

Scope and Approach

The final report is expected to provide an overview of product sales commissions and product based payments in retail banking and other industries, identify possible options for better aligning remuneration and incentives so that they do not result in poor customer outcomes and set out actions which may be considered by banks and the banking industry to implement the findings.

The findings and options will not prescribe specific remuneration structures, but will identify principles for removing and changing product sales commissions and product based payments where they could lead to poor customer outcomes.

Any findings and options identified and presented in the final report will take into account the submissions of all interested parties but will be determined and framed according to the independent judgement of the reviewer.

The publication of the final report does not imply that the Stakeholder Advisory Panel or its individual member organisations provided any endorsement of the final report, in whole or in part.

The findings and options will be those of the reviewer. The ABA and its member banks will need to consider the report and determine their response and any next steps. The banks are committed to meaningful change that is supported by independent advice and a transparent and public process, and they will have regard to the findings and options identified by the report in determining and implementing appropriate reforms, consistent with their obligations including under the competition law.

To achieve this, the independent review will:

Build on the Future of Financial Advice (FOFA) reforms by identifying and collating the existing product sales commissions and product based payments that apply in relation to the sale, offer and distribution of identified banking products to retail and small business customers.
Assess whether and how product sales commissions and product based payments in retail banking could lead to poor customer outcomes, including identifying and collating examples as part of building a framework to assess whether the payment could result in poor customer outcomes.
Identify and test options for strengthening the alignment of remuneration and incentives and customer outcomes by either removing or changing those product sales commissions and product based payments which could lead to poor customer outcomes.
Identify options to guide potential responses for banks, including whether regulatory approvals or other actions are needed to enable banks to make any changes or take actions to address the relevant issues.

As part of the review, the reviewer will be conscious of factors such as competition and customer choice in retail banking in Australia as well as the importance of recognising and rewarding good performance.

Scope

Staff and roles in retail banking

The review will cover product sales commissions and product based payments received directly or indirectly by people selling banking products as a result of the number or value of products sold, offered or distributed to retail and small business3 customers. By focusing on roles in retail banking, the review may include bank staff who are employees, contractors and others in customer facing roles and non-customer facing roles, such as managers and supervisors, involved in selling, offering or distributing retail banking products to retail and small business customers.

In addition to bank staff, where payments are made by the banks to non-bank sales channels or intermediaries, such remuneration structures will be in scope.

Remuneration structures

Product sales commissions and product based payments will be reviewed where:

They include fixed or at risk payments that are a direct or formulaic payment (either $ or %) for the sale of one product or multiple products or the gross revenue generated from those products, and may include performance bonus payments and other sales incentives.
They are monetary or non-monetary and paid or given to staff or others (non-bank channels or intermediaries) by a bank.
They could result in poor customer outcomes. The reviewer will need to build a framework in consultation with banks and stakeholders to assess whether the payment could result in poor customer outcomes.

Retail banking products

The types of retail banking products in scope of the review include:

Basic banking products (e.g. transaction accounts, term deposits, travellers cheques)
Non-cash payment products (e.g. travel money cards)
General insurance products (except for personal sickness and accident)
First Home Saver Accounts (FHSA)
Consumer credit insurance (CCI)
Consumer credit products (including mortgages, personal loans and credit cards), and
Small business lending.

Scope exclusions

There have been extensive and significant changes to remuneration structures across financial services over the past few years. These changes have been due to legislative reforms as well as changes driven by the industry. The review is intended to build on these changes and now look at remuneration structures in retail banking.

The review will, therefore, not include product sales commissions or product based payments already addressed through other reforms and reviews. Specifically:

Remuneration structures, product design issues and quality of advice regarding life insurance products as covered by the Review of Retail Life Insurance Advice (“Trowbridge Review”). The changes identified by this review have not yet been implemented. The banking industry supports fully implementing the recommendations of the Trowbridge Review and is committed to legislative reforms to support the industry making these changes to remuneration structures.
Advice related business models that comply with the FOFA reforms and associated exemptions contained in law and regulations.
Stronger Super reforms which removed the payment of commissions on default superannuation.
Fee based commissions that are transparent to the customer (i.e. fee for service or fee for advice).
Product sales commissions and product based payments made for the distribution of commercial insurance products through insurance brokers and other intermediaries, with the exception of CCI.
Product sales commissions and product based payments received as a result of products sold, offered or distributed to wholesale customers including institutional banking customers, commercial banking customers and global asset fund managers.

Mortgage lending

The review will include product sales commissions and product based payments across mortgage lending. ASIC is currently reviewing the mortgage broking industry, and in particular the consideration of remuneration structures and payment arrangements in mortgage broking. The review will run in parallel with the ASIC review.

Banks are committed to an outcome that takes into account the ASIC findings. Any findings and options relating to mortgage broking will, therefore, align with the ASIC review timeline and wait for the completion of the ASIC review.

Customer outcomes

The reviewer will also be asked to provide observations and insights from the review to assist the banks ensure they have overarching principles on remuneration and incentives to support good customer outcomes and sound banking practices, the scope of which is broader than retail banking.

The development of overarching principles on remuneration and incentives is another initiative in the industry announcement on 21 April 2016.

Commenting on the review, ABA Chief Executive Steven Münchenberg said.

“Banks recognise that how they pay staff is an important factor in determining community trust and confidence in banks,”

“We want to ensure that across the banking industry when people are rewarded for selling products and services they are putting customers’ interests first,” he said.

NAB appoints independent customer advocate

National Australia Bank (NAB) today announced it has appointed Catherine Wolthuizen as independent customer advocate to support its retail and small business customers in resolving serious complaints.

The Customer Advocate-Banking role has been established as part of NAB’s commitment to the Australian Banking Association (ABA) industry initiatives to make banking easier and more transparent for our customers and to strengthen and build independence into our complaints process.

NAB Chief Executive Officer Andrew Thorburn said: “We are committed to making it easier for our customers to do business with us. We want to give them confidence that when we get it wrong, we will do the right thing, and resolve and remediate their issues quickly.

“The role will also give our retail and small business customers an independent and stronger voice. It will support them through the resolution of complaints, which can be a difficult time for some customers.

“The Customer Advocate will also hold us to account and play a part in ensuring our complaints process is robust, transparent and efficient. This will help us to get it right the first time for our customers and give them a greater experience.

“Catherine’s extensive consumer advocacy skills and experience in the financial sector makes her a great candidate to take on this role. We look forward to her contribution”.

The role and scope has been verified by an independent third party and specialist in governance and independence activities, the Ethics Centre, to ensure there are no conflicts of interest and from a customer’s perspective that the role will be effective and independent.

The Office of the Customer Advocate will report to the Group Executive, Governance and Reputation and NAB’s Executive Leadership team and will commence operation in August 2016.

NAB Wealth also has an independent customer advocate for its wealth advice complaints process, which was put in place in May 2015.

NAB’s customer service teams remain a customer’s first point of contact for raising complaints or providing feedback.

About Catherine Wolthuizen

Catherine Wolthuizen has over 15 years’ experience representing the interests of consumers, in Australia and overseas. She is a previous chair of the Consumers’ Federation of Australia, the national representative body for consumer organisations, and a former board member of the Insurance Ombudsman Service.

From 2001-2005, she was a member of a number of consumer advisory panels, advising authorities including the Australian Securities and Investments Commission, the Australian Competition and Consumer Commission and Consumer Affairs Victoria. She led financial services policy for consumer organisation Choice between 2001-2005.

Ms Wolthuizen is a former chief executive of charities Public Concern at Work, Fair Trials International and the Consumer Law Centre Victoria. In 2012, Ms Wolthuizen was appointed an Ombudsman to the UK Financial Ombudsman Service, before becoming Head of Market Affairs. She is a previous member of the independent UK consumer advisory panel to the Legal Services Board, and helped create the Financial Conduct Authority’s Money Advice Service to increase financial capability amongst British consumers.

ABA released details of the independent review of the Code of Banking Practice

The Australian Bankers’ Association has today released details of the independent review of the Code of Banking Practice, which sets standards of good conduct for banks.

The Code of Banking Practice (the Code) is the banking industry’s code of conduct which sets standards of good banking practice for banks to follow when dealing with their individual and small business customers and their guarantors. The latest version for the Code is known as the Code of Banking Practice (2013).

The Code provides for a review of the Code every five years or earlier if the member banks of the Australian Bankers’ Association (ABA) request the ABA to do so. As part of the industry initiatives announced on 21 April 2016, the ABA’s member banks have requested the ABA to commission an independent review of the Code and to complete this review by 31 December 2016. The ABA commissions this Code review on 7 July 2016. Here are the terms of reference.

Objectives

The banking industry recognises that customers and the wider community expect banks to make sure they have the right culture, the right practices, and the right behaviours.

The Code review will make sure the offer of banking products and services is done in a way that further lifts standards, accessibility and transparency across banking and bolsters the existing strength of the regulatory framework.

Banks are committed to improving their practices and continuing to meet customer needs and community expectations. We want to make sure our Code of Banking Practice is effective in enhancing banks’ capacity to serve consumer interests and to building trust and confidence in banks.

To achieve this, the independent review will:

Consider the effectiveness of the Code and identify the relevance and operation of the Code and changes which have occurred in the legal and regulatory environment, including self-regulation, and changes anticipated in banking services

Understand and collate views about banking practices to ensure the Code continues to set standards for good banking practices building on banks’ legal obligations and other relevant industry codes, standards and guidelines and reflecting consumer needs and behaviour and community expectations

Make recommendations on how the banking industry can strengthen the operation of the Code and promote informed and effective relationships between banks and their individual and small business customers

Give attention to the initiatives contained in the industry announcement on 21 April 2016 and other recent initiatives and the extent to which these commitments should be contained in the Code, and

Ensure banks and consumers are clear about their rights and responsibilities and that the Code articulates the standards of behaviour expected of banks, including promotion of the Code.

Scope

The review will cover all provisions of the Code and any additional matters considered relevant to be included in the Code.

The Code reviewer will give specific attention to assessing and considering:

Purpose and role of the Code in setting the standards for good banking practices and the benefits that the Code provides to banks and their individual and small business customers.

Structure of the Code and clarity in communicating the standards for good banking practices to banks and their individual and small business customers.

The extent to which the Code demonstrates banks’ commitment to putting their individual and small business customers first.

The effectiveness of the key commitments of banks and whether these commitments meet consumer and community expectations to:

Promote better informed decisions about banking services.

Provide information about the rights and obligations of banks and their individual and small business customers in relation to banking services, including raising awareness of the legal and regulatory frameworks governing banks.

Act fairly and reasonably towards individual and small business customers in a consistent and ethical manner.

Comply with all relevant laws and regulations relating to banking services.

Take reasonable measures to provide relevant information and enhance accessibility for people in remote Indigenous communities, older persons and customers with a disability.

Provide hardship assistance to individual and small business customers experiencing financial difficulties.

Resolve complaints and disputes between banks and their individual and small business customers.

Provide appropriate staff training, including on discharging their functions, providing banking services and knowledge of the Code.

Promote the existence of the Code.

The role and mandate of the Code Compliance Monitoring Committee (CCMC), the appropriateness of the differences between the CCMC mandate and clause 36 of the Code, and incentives for compliance by banks with the Code.

The operation of the Branch Closure Protocol, taking into account the recent review and changes made to ensure the effective operation of the Protocol.

In addition, the Code reviewer will have regard to the following:

Definitions, including practical definitions of banking services and small business.

Recognition of the needs of communities in remote, rural and regional areas.

Dealing with the particular needs of agricultural small businesses with respect to banking services.

Direct debits and recurring payments made using a debit or credit card.

Notice provided by banks with regards to any changes with a banking service.

Guarantees provided by a person for the purpose of securing finance or a facility for another individual or small business customer and joint debts.

Laws and regulations covering banking services to individual and small business customers and the extent to which new legal obligations to act in the client’s best interest and responsible lending principles are addressed or require any amendment to the Code.

Treatment of disclosures and communications between banks and their individual and small business customers about products, services, and the costs of these products and services and the evolving technological developments in banking services and electronic communications, including the provision of bank statements to customers.

Sales and distribution and advertising and marketing practices of banks.

The extent the Code covers the practices and qualifications of intermediaries and others banks use in the course of providing banking services.

Commitments to accessibility and financial inclusion, including account suitability and basic bank accounts, financial literacy and the implications of technology developments on banking services.

The desirability for the Code to provide for banks to develop standards for communicating and dealing with vulnerable customers including older persons, customers with a disability and Indigenous customers.

The desirability of the Code to include minimum standards for working with small business customers in financial distress. For example, customer communication; notice period for enforcement actions; on request by the customer, disclosing independent valuation reports of its small business customer obtained by the bank and paid for by their customer; and ethical standards of receivers/ managers (particularly for rural properties with livestock).

The desirability of the Code to set a reasonable compliance timeframe for a small business customer to comply with a bank’s notice of demand and circumstances in which a minimum timeframe should not apply having regard to the provisions of clause 28 of the Code for the bank to work with the customer to try and help their customer overcome its financial difficulties with its credit facility.

The desirability of the Code to include minimum standards for the offer of credit cards, and specifically whether minimum repayment requirements or alternatives should be prescribed.

In addition, the Code reviewer is asked to consider whether the Code ought to comply, and whether it does comply with, ASIC’s Regulatory Guide 183: Approval of financial sector codes of conduct [RG 183]2.

Clause 14.3 of the CCMC mandate requires the CCMC to arrange a periodic review of its activities to coincide with a review of the Code. The Code reviewer is also asked to conduct a review of the activities of the CCMC concurrently with this review. This separate and independent review is given under instructions from the CCMC. More information about this review can be found at www.ccmcreview.cameronralph.com.au.

Independent Reviewer

The ABA has appointed Mr Phil Khoury, Managing Director, Cameron Ralph Pty Ltd, an independent person with relevant qualifications and experience to conduct this review.

In commissioning this Code review and identifying the Terms of Reference, the ABA has sought the views of the ABA’s Consumer Stakeholder Forum and a number of other stakeholders.

The Code reviewer will conduct the review publicly in consultation with:

consumer and small business organisations
financial services industry representatives
Finance Sector Union and employees of banks
relevant regulatory bodies
member banks, and
other interested stakeholders.

The ABA says:

“The Code of Banking Practice (the Code) is important in helping individual and small business customers understand how they can expect to be treated by their bank,” ABA Chief Executive Steven Münchenberg said.

“The independent review will determine if the Code continues to serve customers’ interests and it will make recommendations on how it could be improved,” he said.

Following consultation with stakeholders and banks, Mr Phil Khoury, Managing Director of Cameron Ralph Pty Ltd, has been appointed to conduct the review of the Code.

Mr Khoury will consult with banks, consumer and small business organisations, the Finance Sector Union and employees of banks, regulators and other stakeholders.

In April this year the ABA announced a review of the Code as part of major industry initiatives to build trust and confidence in banks. Mr Ian McPhee AO PSM is independently overseeing the industry initiatives, including this review.

Background:

The Code sets standards of good banking practice when dealing with individual and small business customers and their guarantors. The Code covers obligations for banks in areas including the offer of banking services, information and disclosure, complaints handling, customers with special needs and customers experiencing financial difficulty.

Banks that adopt the Code must reflect this in their contracts with their individual and small business customers and are therefore contractually bound by their obligations.

More information on the Code, including FAQ’s, is available on the ABA website.

Former AUSSIE mortgage broker false loan applications

ASIC says a former mortgage broker with AHL Investments Pty Ltd (trading as Aussie), has admitted through his solicitor to eighteen charges brought by ASIC. The charges related to the submission, by Mr Nair, of loan applications and supporting documents which he knew contained false information, to secure approvals for home loans from Westpac, National Australia Bank, and ANZ.

ASIC’s investigation found that between September 2012 and June 2014, Mr Nair submitted eighteen loan applications totalling $5,594,559 containing false borrower employment documents. Of the eighteen loan applications, twelve were approved and disbursed, totaling $3,721,684.

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 therefore received a 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 appeared before the Downing Centre Local Court and through his solicitor admitted to providing documents in support of loan applications that were false or misleading.

Mr Nair next appears in court on 30 August 2016 for sentencing

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

Background

Mr Nair was authorised to provide credit services as a credit representative to consumers from 1 July 2010 to 7 July 2014, when Aussie terminated his authorisation.

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

Mr Nair was charged by ASIC under section 160D (and the former section 33(2)) of the National Consumer Credit Protection Act 2009 in relation to his conduct whilst he was engaging in credit activity on behalf of Aussie. Section 160D (formerly section 33(2)) makes it an offence for a person engaging in credit activities to give false or misleading information or documents to another person. He appeared in Court and pleaded guilty to the charges on 5 July 2016.

Mr Nair faces a maximum penalty of one year imprisonment or a fine of up to 60 penalty units (which in the case of sequence 1 equates to $6,600 and in the case of sequences 2 to 18 equates to $10,200), or both, for each charge.

ASIC targets misleading Chinese language home loan advertising

An ASIC review of advertising targeting Chinese speaking home buyers has prompted four mortgage broking firms to change their home loan advertising.

The mortgage broking firms which published the advertising are:

Ace Mortgage Market Pty Ltd (also known as 袁翹新會計師),located in Parramatta, NSW;
Aus Realty Group Pty Ltd (also known as 澳人信貸),located in Hurstville, NSW;
Apex Finance & Mortgage and its business owner (also known as 聯通信貸), located in Burwood, NSW; and
Trans Australia Mortgage Finance Pty Ltd (trading as Apple Home Loans, 全盛信), located in Burwood and Chatswood, NSW.

The range of concerns contained in the advertisements targeting Chinese speaking home buyers included:

representations in Chinese such as ‘lowest fixed rate’ and ‘no proof of income’ – which may be false and misleading statements, or indicate a breach of the responsible lending obligations,
heavy reliance on disclaimers (such as ‘terms and conditions apply’) that did not explain qualifying terms and conditions in the same advertising. Also, promoters tended to advertise benefits in Chinese language, but stated the disclaimers and qualifications in English, when the advertising was aimed at non-English speaking consumers,
failure to disclose the required comparison rate when quoting an annual percentage interest rate,
failure to disclose the required warning about the accuracy of the comparison rates, and
failure by their promoters to regularly review the advertisements to ensure accuracy and compliance with the law.

The specific concerns identified in relation to each company are outlined further below.

ASIC Deputy Chair Peter Kell said, ‘The Australian Consumer Law applies to all advertising, including advertising in foreign languages. Consumers who are unable to understand written English are likely to be more reliant on advertising in their native language when in need of a financial product. Promoters should ensure that their advertising is up to date and complies with the law. If the majority of the advertising is in a foreign language, the warnings, disclaimers or qualifications should be prominently disclosed in the same advertising and explained in that same language.

‘ASIC will continue to monitor all forms of advertising, including advertising targeted at non-English speaking consumers’, Mr Kell said.

Influencing Conduct and Culture – ASIC

A speech by Greg Medcraft, ASIC Chairman, discusses some important issues around corporate culture. Culture matters. Culture is at the heart of how an organisation and its staff think and behave. From the behaviour of the board, through senior management to the front line, he argues that organisations without a customer centric culture are likely to lose out to those who do.

Culture is a set of shared values or assumptions. It can be described as the underlying mindset of an organisation. It shapes and influences people’s attitudes and behaviours towards, for example, customers and compliance.

It has been said that ‘culture is the new black’. It is on the minds of governments, regulators, boards, senior executives, and customers globally.

ASIC is concerned about culture because it is a key driver of conduct within the financial services industry. By focusing more on culture, we expect to get early warning signs where things might be going wrong to help us disrupt bad behaviour before it happens and catch misconduct early. We also think it will help us with identifying not just individual instances of misconduct, but broader, more pervasive problems.

Poor culture often leads to poor outcomes for investors and consumers, impacts on the integrity of the Australian financial markets, and can erode investor and financial consumer trust and confidence.

We are at an exciting time in history, when technological innovation is rewriting almost every industry including the financial services industry.

Very recently, Max Levchin, PayPal co-founder and former chief technology officer, said that his new fintech start-up, Affirm – which offers flexible and fast loans and is pitched as an alternative to a credit card – could challenge global financial institutions with a new model designed to better align with customer interests. Regardless of whether this particular vision succeeds, it is evident that new disruptors will continue to challenge incumbents.

In a new Telstra report, Millennials, mobiles and money, it was stated that, ‘millennials may be the first generation to live their lives never requiring nor engaging with a traditional institution and only ever associating the word “branch” with a tree’.

Social licence, social media and the 24-hour news cycle are also changing customer expectations and the way customers behave.

The Telstra report says that ‘the threat from fintech is significant’. It notes that two-thirds of millennials prefer to receive advice on financial products and services via a digital platform, and that automated robo-advice or digital advice is perceived to be more independent and preferred.

In this environment, building and maintaining a culture that your customer can believe in is imperative. There are more choices and information available to customers now than there has ever been before. Firms that do not have a good culture risk losing their customers to firms that do.

We recognise that culture is not something that can be regulated with black letter law. We know that it isn’t feasible to check over every company’s shoulder to test its culture, or dictate how a business should be run.It is an issue that companies themselves must address. Boards and senior management play an important role in setting the ‘tone from the top’ for an organisation. Culture requires senior leaders to think carefully about how their actions and behaviours support and advance the firm’s desired culture.

At the end of the day, you need to have a culture that your customers can believe in. If your culture genuinely reflects ‘doing the right thing’, this will be rewarded with longevity, customer loyalty and a sustainable business.

ANZ and Westpac Report Chinese Home Loan Fraud

The AFR is reporting that hundreds of home loans have been backed by fraudulent Chinese income documents, with the help of dodgy mortgage brokers. The banks have informed the police, suspended the brokers concerned, and have changed their review processes.

The banks also make the point that delinquencies are lower on the small proportion of the book which is foreign investor related. The AFR suggests total loans involved are less than $1 billion.

You can hear our comments on the ABC Radio PM Programme.

Recently some banks have stopped lending to foreign investors. This includes Westpac.

This comes on the back of recent media comments on fraudulent changes being made to mortgage applications, and the ASIC review of broker practices and commissions. ASIC recently highlighted one case of broker fraud.

Given that around half of all mortgages are originated via the broker channel, it is no surprise there is focus on brokers conduct. Our recent post on mortgage brokers discusses this in detail.

ABC Four Corners Does The Housing Boom

Last night the ABC aired a programme on the housing boom. It focused on the impact property investors are having on driving home prices higher and making access to property ever more difficult for owner occupied purchasers who are trying to enter the market. Whilst there was little that was new to followers of this blog, one segment looking at the high rate of vacant units in the Melbourne high-rise developments was striking.

Also, there was evidence of applications being “tweaked” to make incomes higher, such that a loan would pass underwriting muster. Some are suggesting this is a prevalent practice, and links to poor bank culture.

You can read the transcript across at the ABC site, and watch the programme (if you are not Geo-blocked).

Here is the segment on Melbourne’s ghost apartments.

I think the missing element for me was the fact that this is an intentional strategy, led by the Reserve Bank to make housing, and households do the heavy lifting as the mining boom fades. No surprise then that loan to income ratios are off.

The long term implications of this policy have yet to come home to roost.