Category: Banking Culture

Payday lender penalised for overcharging consumers

Following ASIC intervention, Fair Go Finance Pty Ltd has paid $34,000 in infringement notices for overcharging interest and establishment fees on payday loans. Fair Go Finance will also refund approximately 550 consumers around $34,500 for the interest and fees it collected from consumers in excess of the maximum amount allowed under the National Consumer Credit Protection Act 2009 (National Credit Act).

An ASIC investigation into Fair Go Finance’s ‘Flexi Loan’ product identified that the loans were set up in a manner that attempted to avoid the protections offered to consumers under the National Credit Act.

Although the credit contracts stated the loans could be repaid over a three year period, in practice the consumer was required to repay the loan over a substantially shorter period (which could be as short as 19 days). Consumers were also charged a default fee if they failed to meet the shorter repayment terms.

ASIC identified that Fair Go Finance charged establishment fees of more than twice the 20% maximum allowed. Furthermore, in a number of instances the total amount repaid by consumers over the term of the loan exceeded the maximum amount allowed under the National Credit Act.

Following ASIC’s intervention, Fair Go Finance withdrew the Flexi Loan product.

‘Some payday lenders are still attempting to avoid key protections for consumers of small amount loans,’ ASIC Deputy Chair Peter Kell said.

‘ASIC will continue its focus on the payday lending market so that vulnerable consumers are not denied important protections under the law.’

ASIC acknowledges Fair Go Finance’s co-operation in this matter. Fair Go Finance is taking action to repay consumers and ensure its staff are aware of their responsibilities under the National Credit Act. An external compliance consultant has also been engaged to undertake a review of Fair Go Finance’s business operations and to report back to ASIC.

Federal Reserve Board announced a $131m penalty against HSBC North America

The Federal Reserve Board on Friday announced a $131 million penalty against HSBC North America Holdings, Inc. and HSBC Finance Corporation for deficiencies in residential mortgage loan servicing and foreclosure processing. The penalty is being assessed in conjunction with an agreement involving similar deficiencies that HSBC announced Friday with the U.S. Department of Justice, other federal agencies, and the state attorneys general.

The penalty assessed by the Board is the maximum amount allowed under the law, taking into account the circumstances of HSBC’s unsafe and unsound practices and foreclosure activities. The penalty may be satisfied by providing borrower assistance or remediation in conjunction with the Department of Justice settlement, or by providing funding for nonprofit housing counseling organizations. If HSBC does not satisfy the full penalty amount within two years, the remaining amount must be paid to the U.S. Department of Treasury. The Board will closely monitor compliance by HSBC with the requirements of the order.

The terms of the monetary assessment against HSBC are similar to those that were part of the penalties issued by the Board in February 2012 and July 2014 against six other mortgage servicing organizations that reached similar agreements with the U.S. Department of Justice and the state attorneys general.

The Board previously issued an enforcement action in April 2011 requiring HSBC to correct its servicing and foreclosure-related deficiencies. That action was among 14 corrective actions issued against Board-supervised mortgage servicers or their parent holding companies for unsafe and unsound practices in residential mortgage loan servicing and foreclosure processing.

General guide to account opening updated

The Basel Committee on Banking Supervision has revised the General guide to account opening, first published in 2003.

The Basel Committee issues this guide as an annex to the guidelines on the Sound management of risks related to money laundering and financing of terrorism, which was first published in January 2014. These guidelines revised, updated and merged two previous publications of the Basel Committee, issued in 2001 and 2004.

Most bank-customer relationships start with an account-opening procedure. The customer information collected and verified at this stage is crucial to the bank in order for it to fulfil its AML/CFT obligations, both at the inception of the customer relationship and thereafter, but it is also useful in protecting it against potential abuses, such as fraud or identity theft. The policies and procedures for account opening that all banks need to establish must reflect AML/CFT obligations.

The revised version of the General guide to account opening and customer identification takes into account the significant enhancements to the Financial Action Task Force (FATF) Recommendations and related guidance. In particular, it builds on the FATF Recommendations, as well as on two supplementary FATF publications specifically relevant for this guide: Guidance for a risk-based approach: The banking sector and Transparency and beneficial ownership, both issued in October 2014.

As for the remainder of the guidelines, the content of the proposed guide is in no way intended to strengthen, weaken or otherwise modify the FATF standards. Rather, it aims to support banks in implementing the FATF standards and guidance, which requires the adoption of specific policies and procedures, in particular on account opening.

A consultative version was issued in July 2015. The Basel Committee wishes to thank all those who took the trouble to express their views during the consultation process.

BMW Finance pays $391,000 penalty for breaching responsible lending and repossession laws

Car finance provider, BMW Australia Finance Ltd (BMW Finance), has paid penalties totalling $391,000 and had a condition placed on its Australian credit licence following concerns raised by ASIC.

The licence condition requires BMW Finance to appoint a compliance consultant after ASIC found it breached important consumer protection provisions relating to responsible lending and the repossession of motor vehicles.

ASIC found that between November 2014 and May 2015, BMW Finance:

  • failed to make reasonable inquiries about, and take reasonable steps to verify, consumers’ stated living expenses, income and cash at bank when there was an unexplained discrepancy in the figures provided, and made insufficient  inquiries about consumers’ capacity or plans to repay substantial balloon repayments due at the conclusion of the loan term;
  • failed to assess credit contracts it entered into with consumers as unsuitable, and entered into unsuitable credit contracts, when documentation provided by consumers showed there was insufficient income available after expenses to service monthly loan repayments; and
  • failed or delayed in its obligations to provide customers with statutory information setting out their rights and the options available to them after a finance company repossesses a mortgaged vehicle or the consumer voluntarily returns that vehicle.

These failures by BMW Finance to comply with the requirements of the law resulted in customers entering into unsuitable loans and losing the benefit of important protections to reduce the impact of financial hardship.

ASIC Deputy Chair Peter Kell said, ‘The outcome with BMW Finance shows failing to comply with important consumer protection provisions can result in significant penalties. ASIC will continue to monitor compliance with these provisions to reduce the risk of borrowers being placed into unsuitable loans, and to ensure that borrowers are informed of their rights and options available to them when facing financial hardship.’

In addition to the penalties, the licence condition requires BMW Finance to appoint an independent compliance consultant to conduct a review of, and report to ASIC on BMW Finance’s policies and procedures on a quarterly basis over 12 months to ensure compliance with consumer credit laws.

ANZ Announces New Team, and Focus (+Digital)

ANZ Chief Executive Officer Shayne Elliott today announced changes to the bank’s senior leadership team to improve focus on its retail, commercial and institutional customers. Commenting on the changes Mr Elliott said: “ANZ has terrific retail and commercial businesses in Australia and New Zealand and we have a great global institutional bank servicing regional trade and capital flows.

“These changes simplify how we work internally and allow us to bring greater focus to what we do uniquely well for our customers. The aim is to ensure we successfully compete in a world where connectivity and digital are more important to customers than ever before and where community expectations have never been higher,” he said.

Announcing the changes, which are effective from Monday 1 February, Mr Elliott also set out a number of medium-term priorities for ANZ:

  • Delivering value for customers through more innovative, convenient and engaging financial services.
  • Being Australia’s only truly regional bank by delivering solutions for customers through a more focussed, better connected international network.
  • Continuing to build a strong, cohesive culture known for ethics, values and fairness.
  • Delivering consistently strong financial results for investors balancing growth and return.

“The new structure brings greater clarity to what we do best for our customers with a leadership team that reflects a diverse mix of experience and new talent from inside and outside ANZ,” Mr Elliott said.

Institutional

  • Mark Whelan – Group Executive, Institutional with responsibility for Institutional Banking. Mr Whelan is one of ANZ’s most experienced executives having most recently been CEO Australia. Formerly Mr Whelan was Managing Director Commercial Australia and his previous roles include Managing Director Institutional Asia Pacific, Europe and America based in Hong Kong, and Joint Managing Director Global Markets.
  • Farhan Faruqui, Group Executive, International reporting to Mr Whelan and based in Hong Kong, will have responsibility for ANZ’s Institutional business in Asia, Europe and America. He will also join ANZ’s Executive Committee reflecting the strategic importance of Asia to ANZ’s future success.

Retail and Commercial

  • Fred Ohlsson – Group Executive, Australia with responsibility for Retail and Commercial Banking in Australia. Mr Ohlsson comes to the role from ANZ New Zealand where he has been Managing Director, Retail and Business Banking since 2013. He has worked in a range of senior roles at ANZ since 2001 including General Manager Commercial Products (Australia) and General Manager Products and Marketing for Esanda
  • David Hisco – Group Executive and CEO, New Zealand. Mr Hisco will continue in his role as Chief Executive Officer, ANZ Bank New Zealand Limited and will have additional responsibility for the Pacific (excluding Papua New Guinea), given its strong New Zealand linkages, and for ANZ’s retail business in Asia.
  • Joyce Phillips – Group Executive, Wealth, Marketing and Innovation with responsibility for ANZ’s insurance, investments and private banking businesses, as well as Group Marketing and Innovation.
  • A new role of Group Executive, Digital Banking will be established with responsibility for ANZ’s digital transformation. An external appointment to the role is expected to be announced in the coming months.

Other members of ANZ’s Executive Committee continuing to report to Mr Elliott are:

  • Graham Hodges – Deputy Chief Executive Officer who will have responsibility for ANZ’s international partnership investments in Indonesia, Malaysia, China and The Philippines. Mr Hodges will also remain Acting Chief Financial Officer. The internal and external search for a new Chief Financial Officer is well advanced and is expected to be finalised in the coming months.
  • Susie Babani – Chief Human Resources Officer
  • Alistair Currie – Chief Operating Officer
  • Nigel Williams – Chief Risk Officer

As part of the changes Gilles Planté, Deputy CEO Institutional and International Banking, Managing Director Business Portfolio Management and a member of ANZ’s former Management Board will be leaving ANZ.

DFA observes that the new GE Digital Banking is interesting, given that digital touches every aspect of banking and their customers. How will digital capabilities be overlaid on the existing operations?

ASIC releases report on debt management firms

ASIC today released a research report that aims to better understand the debt management industry in Australia and the consumer experience in using debt management firms. Debt management firms promise to help consumers in financial hardship or with listings of payment defaults on their credit reports.

The report, Paying to get out of debt or clear your record: the promise of debt management firms (REP 465), was commissioned by ASIC’s Consumer Advisory Panel (CAP).

The research involved two phases:

  • a qualitative analysis and mystery shop of debt management firms by BIS Shrapnel Pty Ltd; and
  • a survey on the involvement of debt management firms acting for consumers in Ombudsman schemes covering the financial services, telecommunications and energy and water sectors.

Findings – qualitative analysis and mystery shop:

  • fees and costs were opaque making it difficult for consumers, often in significant financial hardship, to assess the cost relative to the purported value;
  • fees were often ‘front loaded’ – that is, fees were payable before services were provided thereby increasing consumer commitment through sunk costs;
  • some sales techniques create a high-pressure sales environment;
  • little information was given about important risks and some firms had a poor understanding of the relevant law and the consequences of particular strategies which may lead to unsuitable services for consumers.

Findings – Ombudsman survey data and analysis:

  • a growing number of firms are representing consumers at external dispute resolution (EDR)—this is concentrated among a few large players, with an increasing number of  small firms entering the market;
  • the disputes brought to EDR schemes by debt management firms relate almost exclusively to arguments about the removal of default listings on consumer credit reports (despite the breadth of other issues that can arise for indebted consumers);
  • while an increasing number of consumers are being represented at EDR by debt management firms, this is not leading to more credit reporting related disputes being found in favour of consumers.

‘Where consumers go to debt management firms, it is important they understand what they are getting and how much it will cost, so they can decide if it’s worth it,’ said ASIC Deputy Chairman Peter Kell.

‘The promise is always more prominent than the price”, he said.  “It is hard to find information about fees and they tend to be high, front loaded, and not refunded if the promise isn’t delivered.

‘It’s also important for consumers to understand that they have alternatives to the use of such firms that may be free of charge, such as financial counselling services.

‘Many stakeholders have raised concerns with ASIC and other regulators about potential harms posed by firms that may provide unsuitable services, act in ways not in the best interests of clients, or at worst, engage in predatory conduct leaving the consumer worse off,’ Mr Kell said.

Background

Debt management firms promise to help consumers in financial hardship or with listings of payment defaults on their credit reports by:

  • ‘cleaning’, ‘fixing’ ‘repairing’, ‘removing’ or ‘washing’ away default listings on credit reports
  • developing and managing budgets
  • negotiating with creditors, including lenders, telecommunications companies , utilities companies or debt collectors
  • advising and arranging formal debt agreements under Part IX of the Bankruptcy Act, 1966.

While the models are diverse, many debt management firms operate one-stop-shop models offering a combination of some or all of the above services.

The debt management industry has grown despite the fact that  consumers can freely access:

  • their credit report and challenge an incorrect listing at no cost;
  • help from financial counsellors or community legal services;
  • independent ombudsman schemes to help resolve disputes with lenders, telcos and utilities providers.

This suggests that there is a lack of consumer awareness about the potential benefits of alternatives to debt management firms.

There is no uniform regulatory framework for debt management firms and barriers to entry are low or non-existent. Consumers in financial hardship can be extremely vulnerable and behavioural research shows that financial stress can materially affect people’s ability to make good decisions.

Case studies

The report includes case studies, which demonstrate that some consumers experience poor outcomes.

Westpac pays $1 million following ASIC’s concerns about credit card limit increase practices

ASIC has announced that Westpac has improved its lending practices when providing credit card limit increases to customers. Westpac has also committed to a remediation program that includes proactive customer refunds, and a contribution of $1 million over four years to support financial counselling and literacy.

ASIC was concerned that Westpac failed to make reasonable inquiries about some consumers’ income and employment status before increasing their credit card limit. In particular, ASIC was concerned that Westpac, in relying largely on its automated processes, was not making reasonable inquiries of individual cardholders, which is not consistent with the responsible lending obligations under by the National Consumer Credit Protection Act 2009 (the National Credit Act).

Westpac has committed to a number of steps to address ASIC’s concerns including:

  • Changing its credit limit increase processes to ensure that, at a minimum, reasonable inquiries are made about a customer’s income and employment status to ascertain their financial situation before the limit is increased.
  • A remediation program involving a review of credit limit increases previously provided where a cardholder experiences financial difficulty, with consumer refunds paid where appropriate.
  • Engaging an independent external expert to provide assurance of the effectiveness of the remediation program.

Westpac will also make a $1 million payment to support financial counselling and financial literacy initiatives.

Michael Saadat, Senior Executive Leader of Deposit Takers, Credit and Insurers said, ‘Credit card issuers, like all consumer credit providers, have to meet obligations under responsible lending laws.’

‘ASIC maintains an ongoing focus on compliance with these laws. Where we see non-compliance, we will take action, including taking steps to ensure affected consumers are appropriately remediated.’

ASIC acknowledges the co-operation of Westpac in resolving this issue, including suspending its sending of credit limit increase invitations until ASIC’s concerns were resolved and Westpac’s processes improved.

Bank of England proposes tougher rules on bonus buy-outs

More on banking culture. The Bank of England is proposing to strengthen the remuneration requirements on buy-outs of variable remuneration. These proposals represent an important addition to the current remuneration rules which seek to ensure greater alignment between risk and reward, discourage excessive risk-taking and short-termism and encourage more effective risk management.

The Bank of England has previously sought views on a number of options for addressing the issue of buy-outs, in which a firm compensates a new employee for any unpaid remuneration that is cancelled when they leave their previous firm. The proposed changes to the Remuneration Part of the PRA Rulebook will apply to all material risk takers (MRTs) at PRA-regulated banks, building societies and designated investment firms. However, in accordance with the PRA’s existing approach to proportionality, these rules would not need to be applied to firms which fall within level three of the proportionality framework.

The practice of buy-outs has the potential to undermine the effectiveness of the current remuneration rules. When a new employer buys-out an employee’s cancelled bonus, the individual becomes insulated against the possibility of their awards being subject to ex-post risk adjustments through the application of either malus (the withholding or reduction of unpaid awards) or clawback (the recouping of paid awards). Through the practice of buy-outs, individuals can therefore effectively evade accountability for their actions.

Today’s proposals intend to ensure the practice of buy-outs does not undermine the intention of the current rules on clawback and malus or allow employees to avoid the proper consequences of their actions.

The Bank of England proposes that buy-outs should be managed through the contract between the new employer and employee. The employment contract would allow for malus or clawback to be applied should the old employer determine that the employee was guilty of misconduct or risk management failings. The proposed rules would also allow new employers to apply for a waiver if they believe the determination was manifestly unfair or unreasonable.

Andrew Bailey, Deputy Governor for Prudential Regulation and CEO of the Prudential Regulation Authority said:

“Having the right incentives is a crucial part of an effective accountability regime. Remuneration policies which lead to risk-reward imbalances, short termism and excessive risk taking undermine confidence in the financial sector. Individuals should be held accountable for their actions and not be able to actively evade the consequences of their actions. Today’s proposals seek to ensure that individuals are not rewarded for bad practice or wrong-doing and should help to encourage a culture within firms where reward better reflects the risks being taken.”

Should Banks Be Able To Create Money?

Banks today have the power to extend their reach by multiplying the value of loans against deposits and shareholder capital held. Indeed, all the recent regulatory work has been to try and lift the capital ratios, to protect the financial system and to try to ensure in event of failure, tax payers are be protected. We have highlighted how highly leveraged the main Australian Banks are. And this morning we discussed the risks associated with a credit boom.

Last year the Bank of England suggested that banks have the capacity to create UNLIMITED amounts of credit, in fact creating money, unrelated to deposits.

In this light, a working paper from the IMF in 2012 (note this is a research document, not the views of the IMF), “The Chicago Plan Revisited“, is worth reading.

The decade following the onset of the Great Depression was a time of great intellectual ferment in economics, as the leading thinkers of the time tried to understand the apparent failures of the existing economic system. This intellectual struggle extended to many domains, but arguably the most important was the field of monetary economics, given the key roles of private bank behavior and of central bank policies in triggering and prolonging the crisis.

During this time a large number of leading U.S. macroeconomists supported a fundamental proposal for monetary reform that later became known as the Chicago Plan, after its strongest proponent, professor Henry Simons of the University of Chicago. It was also supported, and brilliantly summarized, by Irving Fisher of Yale University, in Fisher (1936). The key feature of this plan was that it called for the separation of the monetary and credit functions of the banking system, first by requiring 100% backing of deposits by government-issued money, and second by ensuring that the financing of new bank credit can only take place through earnings that have been retained in the form of government-issued money, or through the borrowing of existing government-issued money from non-banks, but not through the creation of new deposits, ex nihilo, by banks.

Fisher (1936) claimed four major advantages for this plan. First, preventing banks from creating their own funds during credit booms, and then destroying these funds during subsequent contractions, would allow for a much better control of credit cycles, which were perceived to be the major source of business cycle fluctuations. Second, 100% reserve backing would completely eliminate bank runs. Third, allowing the government to issue money directly at zero interest, rather than borrowing that same money from banks at interest, would lead to a reduction in the interest burden on government finances and to a dramatic reduction of (net) government debt, given that irredeemable government-issued money represents equity in the commonwealth rather than debt. Fourth, given that money creation would no longer require the simultaneous creation of mostly private debts on bank balance sheets, the economy could see a dramatic reduction not only of government debt but also of private debt levels.

We take it as self-evident that if these claims can be verified, the Chicago Plan would indeed represent a highly desirable policy. Profound thinkers like Fisher, and many of his most illustrious peers, based their insights on historical experience and common sense, and were hardly deterred by the fact that they might not have had complete economic models that could formally derive the welfare gains of avoiding credit-driven boom-bust cycles, bank runs, and high debt levels. We do in fact believe that this made them better, not worse, thinkers about issues of the greatest importance for the common good. But we can say more than this. The recent empirical evidence of Reinhart and Rogoff (2009) documents the high costs of boom-bust credit cycles and bank runs throughout history. And the recent empirical evidence of Schularick and Taylor (2012) is supportive of Fisher’s view that high debt levels are a very important predictor of major crises. The latter finding is also consistent with the theoretical work of Kumhof and Rancière (2010), who show how very high debt levels, such as those observed just prior to the Great Depression and the Great Recession, can lead to a higher probability of financial and real crises.

But this is more than a theoretical discussion, because Switzerland will hold a referendum to decide whether to ban commercial banks from creating money, after more than 110,000 people signed a petition calling for the central bank to be given sole power to create money in the financial system. Its been led by the Swiss Sovereign Money movement – known as the Vollgeld initiative – and is designed to limit financial speculation by requiring private banks to hold 100% reserves against their deposits.

“Banks won’t be able to create money for themselves any more, they’ll only be able to lend money that they have from savers or other banks,” said the campaign group.

If successful, the sovereign money bill would give the Swiss National Bank a monopoly on physical and electronic money creation, “while the decision concerning how new money is introduced into the economy would reside with the government,” says Vollgeld.

In the aftermath of the 2008 financial crisis, Iceland commissioned a report “Monetary Reform – A better monetary system for Iceland” which was  published in 2015, and suggests that money creation is too important to be left to bankers alone.

Consider the impact if banks had to back loans with deposits. Credit would be expensive, and hard to get. Depositors would be better rewarded, and eventually households would deleverage, whilst property prices normalised.  It might just reverse the “financialisation” of society. If it happened, banks would be very different beasts.

Financialisation is a term sometimes used in discussions of the financial capitalism that has developed over the decades between 1980 and 2010, in which financial leverage tended to override capital (equity), and financial markets tended to dominate over the traditional industrial economy and agricultural economics.

UK’s Financial Conduct Authority’s review of banking culture is scrapped

The City regulator, the Financial Conduct Authority (FCA), has shelved plans for an inquiry into the culture, pay and behaviour of staff in banking.

The FCA had planned to look at whether pay, promotion or other incentives had contributed to scandals involving banks in the UK and abroad.

The FCA said it had decided instead to “engage individually with firms to encourage their delivery of cultural change” according to UK reports.

The move means the watchdog’s so-called “banker bashing” review has effectively ended after only a few months.

The decision comes after the FCA’s chief executive, Martin Wheatley, announced in July his decision to quit the post when the Chancellor George Osborne refused to renew his contract, which was due to end in March next year.

In a statement the FCA said: “A focus on the culture in financial services firms remains a priority for the FCA.

“There is currently extensive on-going work in this area within firms and externally.

“We have decided that the best way to support these efforts is to engage individually with firms to encourage their delivery of cultural change as well as supporting the other initiatives outside the FCA.”

Earlier this year, the FCA told banks to sharpen up their efforts to learn lessons from scandals such as foreign exchange and Libor rate-rigging, which have already cost them billions of pounds in fines.

The body said companies’ progress in making improvements as part of the review – designed to examine and compare behaviour within the banking sector, including staff pay and complaints procedures – was initially disappointing and improvements “had been uneven” across the industry.

They also often lacked the urgency required given the severity of recent failings, the watchdog said.

But it also said “some progress had been made on improving oversight and controls and benchmarks” following the scandals involving the benchmark rates in Libor – the interbank lending rate – as well as in foreign exchange and gold markets.

A number of banks have already signalled that changes are being made to their operations.

Conservative Mark Garnier, who sits on the Treasury select committee, suggested Chancellor George Osborne may have been behind the move.

“I am disappointed about it. It remains to be seen whether this is a cancellation or a delay but I fear it probably is a cancellation,” he told BBC Radio 4’s Today programme.

Mr Garnier said there was a “difficult balance” between a strong regulatory regime and “over doing it”.

He added: “There has always been this great argument that perhaps the Treasury is having more influence over the regulator than perhaps it ought to and certainly if I was looking for a Machiavellian plot behind what’s happened here and the tone of the regulator then I suppose I would start looking at the Treasury.

“But I equally think that the regulator has a very, very difficult job to do, which is striking the balance between looking after the people who are its members, the financial institutions, and the consumer.

“And it has certainly been widely talked about that the Treasury thought the regulator was over doing it in favour of the consumer and, certainly from my point of view on the Treasury select committee, I thought otherwise.”