Banking Culture – Page 99 – Digital Finance Analytics (DFA) Blog

GE Money changes advertising following ASIC concerns

ASIC says GE Money has changed its advertising of personal loans and debt consolidation loans following concerns that the advertising was potentially misleading. The advertisements, which claimed ‘one of the best rates in the market,’ were promoting products which were subject to risk based pricing.

Risk based pricing is where the interest rate offered to the consumer is dependent on the consumer’s credit risk profile, as assessed by the credit provider. Under this pricing model, the consumer applies for the product without knowing what interest rate they will be offered (should their application be successful).

Information provided online by GE Money further described the interest rate as ‘One of the best rates in the market, from 12.99% (comparison rate 14.20%) for loans over $10,000 for new customers.’

In fact, a consumer applying for the product would be offered an interest rate between 12.99% p.a. and 34.95% p.a. ASIC was concerned that the advertising was misleading as only some consumers qualified for the lowest rate.

The overall impression given by the advertisement was that all customers would receive an interest rate that was “one of the best rates in the market”, when this was not correct. ASIC was also concerned that:

the use of the qualifying term ‘from,’ in the context of risk-based pricing with a significant variation between lowest and highest cost, was insufficient to prevent consumers being potentially misled
the headline statement ‘One of the best rates on the market’ where it appeared on a standalone basis was, in this case, too strong a claim to be effectively qualified
in some cases, advertising failed to provide any disclaimer or clarification
the disclaimer on the website failed to disclose the interest rates for risk pricing of loans and how high interest rates could actually go.

ASIC Deputy Chairman Peter Kell said, ‘Price-based marketing fosters competition and can be beneficial to consumers. However, promoters need to ensure that consumers are not misled about an advertised interest rate when their risk profile may affect the actual interest rate offered.’

‘With the increasing practice of risk-based pricing of credit products, ASIC will continue to monitor advertisements in this space and will take action in response to misleading advertisements ,’ Mr Kell said.

Mortgage Data Quality Issues Hit Home

Given the recent changes in the mortgage data set between owner occupied and investor loans, some would suggest the regulators have been flying blind. I discussed this with Ross Greenwood on 2GB tonight. Whilst that may be an overstatement, the reasons for the recent changes are beginning to become clearer. In a speech today RBA Deputy Governor Philip Lowe addressed this head on. More importantly, he highlights that the apparently dramatic switch away from investment loans may be overstated.

The basis of good analysis is good data. Improvements over time in the quality and comprehensiveness of the data on housing prices have, for example, helped improve the general understanding of housing market developments. In contrast, unfortunately, recent problems with the data relating to banks’ owner-occupier and investor housing loans have worked in the other direction, complicating our understanding of what is going on in the housing market.

These data problems have emerged as lenders have taken a closer look at their housing loans following increased supervisory scrutiny. As lenders have looked more closely, what they have found has surprised and, to some extent, concerned us.

There are two issues that are worth drawing your attention to.

The first is that over the past six months there have been very large upward revisions to the value of investor loans outstanding, with offsetting downward revisions to owner-occupier loans. Material revisions have been made by more than 10 institutions, including two of the largest lenders. The scale of these revisions can be seen in Graph 1, which shows the stock of investor credit outstanding as reported in each of May, June and September this year. The cumulative effect of the upward revisions has been to increase the stock of investor credit outstanding by around $50 billion, or 10 per cent. According to these new data, investor loans now account for 40 per cent of total housing loans outstanding, not the 35 per cent reported earlier in the year.

Graph 1

Click to view larger

While the reasons for some of these earlier errors have been identified, in other cases the reasons are unclear and lenders have not been able to provide comprehensive back data. As a result, when calculating growth rates for investor and owner-occupier credit, the RBA has had to make adjustments for what are effectively breaks in the series.

The second data issue has emerged over the past couple of months and has worked in the other direction, with lenders reporting that some loans that were previously recorded as investor loans were really loans to owner-occupiers. This is partly because, when faced with the higher interest rate on investor loans, some borrowers have indicated to their bank that they are not an investor, but rather an owner-occupier, and so should not have to pay the higher rate. Our liaison with lenders suggests that further reclassifications of this nature could be expected over coming months.

The effect of these recent reclassifications on measured growth rates can be seen in Graph 2. Taken at face value, the data suggest a very sharp slowing in growth in investor credit and a sharp pick-up in owner-occupier credit (shown as the dotted lines). However, if we make adjustments for these reclassifications then the changes in growth rates are much less pronounced (the solid lines).

Graph 2

Click to view larger

These various data problems have reinforced our view that the supervisory focus on investor lending has been entirely appropriate. And it is disappointing that some lenders’ internal systems have not been up to the task of reporting accurate data on the split between investor and owner-occupied housing loans.

This issue was discussed at the most recent meeting of the Council of Financial Regulators, with Council members considering what steps could be taken to improve the quality of data. Among other things, it has been decided that APRA, the RBA and the Australian Bureau of Statistics will, next year, undertake a thorough review of the data collected from authorised deposit-taking institutions regarding their domestic books.

However, what incentives are there for lenders to provide the right data to the regulators? And what penalties should be imposed when they fail to provide adequate data? Without good data, we are all flying blind.

US Banking Supervision, More To Do

Fed Chair Janet L. Yellen addressed the Committee on Financial Services, U.S. House of Representatives on Banking Sector Supervision. She said that before the crisis, their primary goal was to ensure the safety and soundness of individual financial institutions. A key shortcoming of that approach was that they did not focus sufficiently on shared vulnerabilities across firms or the systemic consequences of the distress or failure of the largest, most complex firms. Although changes have been made, substantial compliance and risk-management issues remain.

There has since been a significant shift in focus has led to a comprehensive change in the regulation and supervision of large financial institutions. These reforms are designed to reduce the probability that large financial institutions will fail by requiring those institutions to make themselves more resilient to stress. However, recognising that the possibility of a large financial institution’s failing cannot be eliminated, a second aim of the post-crisis reforms has been to limit the systemic damage that would result if a large financial institution does fail. This effort has involved taking steps to help ensure that authorities would have the ability to resolve a failed firm in an orderly manner while its critical operations continue to function.

They created the Large Institution Supervision Coordinating Committee (LISCC). The LISCC is charged with the supervision of the firms that pose elevated risk to U.S. financial stability. Those firms include the eight U.S. banking organizations that have been identified as GSIBs, four foreign banking organizations with large and complex U.S. operations, and the four nonbank financial institutions that have been designated as systemically important by the Financial Stability Oversight Council (FSOC).

With regard to capital adequacy, the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR) is designed to ensure that large U.S. bank holding companies, including the LISCC firms, have rigorous, forward-looking capital planning processes and have sufficient levels of capital to operate through times of stress, as defined by the Federal Reserve’s supervisory stress scenario. The program enables regulators to make a quantitative and qualitative assessment of the resilience and capital planning abilities of the largest banking firms on an annual basis and to limit capital distributions for firms that exhibit weaknesses.

The financial condition of the firms in the LISCC portfolio has strengthened considerably since the crisis. Common equity capital at the eight U.S. GSIBs alone has more than doubled since 2008, representing an increase of almost $500 billion. Moreover, these firms generally have much more stable funding positions. The amount of high-quality liquid assets held by the eight U.S. GSIBs has increased by roughly two-thirds since 2012, and their reliance on short-term wholesale funding has dropped considerably. The new regulatory and supervisory approaches are aimed at helping ensure these firms remain strong. Requiring these firms to plan for an orderly resolution has forced them to think more carefully about the sustainability of their business models and corporate structures.

Nevertheless, while they have seen some evidence of improved risk management, internal controls, and governance at the LISCC firms, they continue to have substantial compliance and risk-management issues. Compliance breakdowns in recent years have undermined confidence in the LISCC firms’ risk management and controls and could have implications for financial stability, given the firms’ size, complexity, and interconnectedness. The LISCC firms must address these issues directly and comprehensively.

Their examinations have found large and regional banks to be well capitalized. Both large and regional banking organizations experienced dramatic improvements in profitability since the financial crisis, although these banks have also faced challenges in recent years due to weak growth in interest and noninterest income. Both large and regional institutions have seen robust growth in commercial and industrial lending.

Finally, community banks are significantly healthier. More than 95 percent are now profitable, and capital lost during the crisis has been largely replenished. Loan growth is picking up, and problem loans are now at levels last seen early in the financial crisis.

Westpac to refund premiums for unwanted insurance cover

ASIC says following an ASIC surveillance, Westpac will write to more than 10,600 insurance customers and will offer to refund any premiums paid for insurance cover they did not need. Westpac charged customers for loan protection insurance while the customer did not have a loan on foot and where the customer did not intend to be covered for that period.

Customers affected include those who took out a Mortgage Secure (MS) or Home Loan Protection (HLP) insurance policy when they applied for a home loan. These products were sold as consumer credit insurance (CCI) since 2002 and 2007 respectively, and were designed to provide a benefit in the event that the customer was not able to repay their home loan due to certain events occurring such as sickness or death.

An ASIC surveillance uncovered that Westpac may have been collecting premiums from some customers for a CCI policy over a period when the customer did not have a home loan. In particular, ASIC was concerned that Westpac had been collecting premiums for these products:

before a home loan was drawn down,
after a home loan was repaid, or
where a customer did not go ahead with a home loan.

ASIC Deputy Chair Peter Kell said, ‘It is important that a product is sold in a way that is consistent with what it is designed to do, in order to ensure that customers don’t pay for something they don’t need. In this case, Westpac customers may have been paying for insurance cover they did not need, either because it covered risks that were not present or risks against which they were already insured.’

Esanda compensates consumers for conduct by finance broker

ASIC says that following an ASIC investigation of Get Approved Finance, a West Australian car finance provider, Esanda has agreed to compensate more than 70 borrowers for car loans organised by Get Approved Finance.

ASIC’s investigation found that between 2011 and 2014, over 15 brokers employed by Get Approved Finance engaged in unfair conduct by having Esanda approve loans for consumers with poor credit histories, who otherwise did not meet Esanda’s lending criteria. The brokers arranged for a friend or relative of the consumer to become the nominated borrower, instead of the consumer who was not eligible for credit. They did this by misleading the friend or relative about the effect of the documents they were signing, for example, by stating they were a guarantor rather than the borrower.

The Get Approved Finance brokers also sold add-on products (such as insurance or warranties), on behalf of various insurers, to some borrowers without their knowledge or consent. The additional premiums increased the amount borrowed and therefore the risk of borrowers defaulting. In one case, the consumer was sold add-on products costing more than $15,000, increasing the amount borrowed from around $24,000 to over $39,000.

The total value of the loans financed was more than $1.38 million, with some loans approved of over $50,000.

Get Approved Finance was able to earn commissions from both Esanda and the providers of the add-on products that would have been lost if Esanda had rejected the applications for credit. ASIC was concerned that Esanda did not have systems in place to manage the risks created by these commission payments or to effectively identify the serious misconduct by the Get Approved Finance brokers, given that it continued for over two years.

Esanda is a division of Australia and New Zealand Banking Group Ltd.

West Australian-based finance broker, Jeremy (WA) Pty Ltd, trades as Get Approved Finance.

NAB changes debt collection practices following concerns by ASIC

According to ASIC, National Australia Bank (NAB) has made changes to its debt collection practices following ASIC concerns that some of NAB’s collection letters may have been misleading, deceptive or unconscionable.

ASIC was concerned that NAB was sending debt collection letters to customers using letterheads for “Fairhalsen Collections” and “Brunswick Collections Services”, which may have given the incorrect impression that NAB had sold, outsourced or otherwise escalated a debt when this was not the case. These letters only disclosed that the entity was a division of NAB in fine print at the bottom of the page.

ASIC was also concerned that letters sent to some customers during the collection process stated that if the debt was not paid, or contact made:

legal proceedings for recovery of the entire debt might commence without further notice and that such proceedings could result in a judgment being entered and/ or bankruptcy;
a debt collector might visit the customer’s home to collect the debt; or
NAB might use any other legal action necessary to collect the debt.

In fact, for the majority of recipients, such action was either unlikely or would only be considered at a later stage in the collection process.

In response to ASIC’s concerns NAB has removed from its collection letters:

references to Fairhalsen Collections and Brunswick Collection Services
representations in relation to face-to-face contact, legal action and bankruptcy (unless such action is likely to occur).

ASIC Deputy Chairman Peter Kell said, ‘Creditors and collectors are entitled to accurately explain the consequences of non-payment of a debt, but the consequences must not be misrepresented or overstated. The threat of legal proceedings and bankruptcy can be very stressful. Collectors must not threaten legal action if such action is not possible, not intended, or not under consideration.’

Why Lifting Capital Ratios Is Not Enough

Regulators here and overseas are forcing banks to hold more capital in order to make the banking system “more secure”. In Australia, because of the lack of true competition, this will in practice mean the banks passing additional costs through to borrowers, thus maintaining the high (on an international basis) shareholder returns. Higher capital means higher priced bank products.

However, continuing to lift capital ratios will not alone make banks more secure. There are other strategies which we need to consider if we are truly to have undoubtedly strong banks. We need, in effect, to broaden the debate.

First, one of the main drivers of higher capital is to ensure that banks, should they get into trouble, would not be bailed out by tax payers via government intervention. In 2007, the UK the government became the major shareholder in a number of banks, which were on the brink. This led in turn to significant public debt, which has yet to be repaid. The FSI estimated that the economic cost of a severe financial sector crisis is around 158 per cent of annual GDP. For Australia, this is around $2.4 trillion. And this is just the annual cost. The question becomes how to handle banks that are too big to fail and get into difficulty. It should be essential for banks to think the unthinkable, and have in the bottom draw a secure exit plan should they get into difficulty, and this resolution plan has to be approved by the banking regulator. It should not simply be “raise more capital”, because as the APRA stress tests highlighted recently, individual banks assumed they could top up their reserves in a crisis, but did not consider the fact that everyone might be trying to do this at the same time (because of a broader crisis) as so might not be successful.

Second, and connected to the work-out plans, we think there is a case to ring-fence the retail bank operations of these large financial conglomerates, from their other operations. Risks in the treasury, wealth management, insurance, and international trade areas are potentially higher than in core retail banking. At the moment, it is all scrambled. The UK for example, to working towards adequate risk separation of core banking operations and the other elements within financial conglomerates. Whilst implementation needs to take account of the structure of individual entities, we think this is important.

Third, the obligations of the top managers in the banks with regards to complying with regulation should be clearly stated and enforced. We have seen some banks essentially flex lending standards to maintain market share. APRA and ASIC have both highlighted these shortcomings and the RBA have admitted risks were higher than initially thought because of loose lending criteria. The obligations on top managers should have legal force, and in severe cases of non-compliance, regulators should be more overtly holding them to account personally. More broadly, this speaks to the cultural norms within the banks, and the incentives in place. It also balances the obligations of regulators and those managing the banks – at the moment, it appears the onus is too much on the regulators to try and “catch” bad behaviour, rather than having the right behaviours championed by the banks themselves. This balance needs to be recast.

Fourth, we need stronger, real competition in the banking sector, not the faux competition where everyone marches to the same tune, and follows each other with rate rises and falls. We have some of the most profitable banks in the world, thanks to weak competition, not brilliant management, or super efficiency. Regulators are more concerned with financial stability than competition, though moving the dial on IRB banks from 15-17 to 25 is a starting point, tweaking capital is not sufficient. With so many regulatory authorities involved, from ACCC, APRA, ASIC and RBA, the onus of driving real competition falls through the cracks, at the expense of Australia Inc. The FSI recommended ASIC be given a specific competition mandate.

We should not become myopic about more capital being the total solution to fixing the banking system. Structure, culture, competition and governance must all be on the table.

National Australia Bank to implement a large scale Financial Advice Remediation program

ASIC has announced that from today, National Australia Bank (NAB) will be contacting customers who may have received non-compliant advice since 2009. Affected clients will have their files reviewed to determine if compensation should be paid. NAB will also provide affected customers with financial assistance to seek professional independent advice where appropriate.

ASIC has worked with NAB to develop their Financial Advice Customer Response Initiative (CRI), a large review and remediation program for customers affected by non-compliant advice. ASIC will ensure that the CRI will provide a fair and effective mechanism for customers to be properly compensated (REF: MR15-101). The CRI will also be subject to independent scrutiny by an external consultant, which will report its findings to ASIC. ASIC acknowledged NAB’s co-operation in this matter. This action is associated with ASIC’s broader Wealth Management Project (refer MR15-081).

Background

The Wealth Management Project was established in October 2014 with the objective of lifting standards by major financial advice providers The Wealth Management Project focuses on the conduct of the largest financial advice firms (NAB, Westpac, CBA, ANZ and AMP). ASIC’s work in the Wealth Management Project covers a number of areas including; (i) ASIC’s work with other the Wealth Management participants to address the identification and remediation of non- compliant advice. This is in addition to the work ASIC is doing to ensure appropriate customer remediation where fees have been charged and no advice service has been provided; ii) Seeking regulatory outcomes where appropriate against Licensee’s and advisers. For example, since ASIC’s Wealth Management Project commenced ASIC has banned the following advisers from the financial services industry:

Online Access Is Driving Payday Industry to New Heights

DFA has completed detailed analysis of households and their use of small amount credit contracts, a.k.a. payday lending. The analysis, derived from our longstanding household surveys, was undertaken in conjunction with Monash University Centre for Commercial Law and Regulatory Studies (CLARS) and commissioned by Consumer Action Law Centre, Good Shepherd Microfinance, and Financial Rights Legal Centre. The report “The Stressed Finance Landscape” is available here.

We review detailed data from the 2005, 2010 and 2015 surveys as a means to dissect and analyse the longitudinal trends. The data results are averaged across Australia to provide a comprehensive national picture. We segment Australian households in order to provide layered evidence on the financial behaviour of Australians, with a particular focus on the role and impact of payday lending.

We think the overall size of the market is growing, thanks to the rise on online access, and we recently posted our modelling, which we summarise below:

The transference to online channels is linked with a rise in the number of households who, whilst not financially distressed (distressed households are first not meeting their financial commitments as they fall due, and are also exhibiting chronic repeat behaviour, and have limited financial resources available) are financially stressed (struggling to manage their financial affairs, behind with loan repayments, in mortgage stress, etc).

Digital disruption opens the door to new lenders (local and overseas), and makes potential access to this source of credit immediate. The volume of loans is set to increase and more than ever will be originated online. In addition, some digital players offer special member designated areas secured by a password, where special offers and repeat loans could be made away from public sight. Online services are now mainstream, and this presents significant new challenges for customers, policy makers and regulators.

Some of the key points (as summarised by Good Shepherd Microfinance) from the report:

• The total number of households using a payday lending service in the past three years has increased by more than 80 per cent over the past decade (356,097 to 643,087 households).

• All payday borrowers were either ‘financially stressed’ (41 per cent) in that they couldn’t meet their financial commitments or ‘financially distressed’ (59 per cent) because in addition to not meeting their financial commitments, they exhibited chronic repeat behaviour and had limited financial resources.

• 2.69 million households are in ‘financial stress’ which represents 31.8 per cent of all households and is a 42 per cent increase on 2005. Of the households in financial stress, 1.8 million are ‘financially distressed’ (just over 20 per cent of all households) – a 65 per cent increase on 2005.

• The number of people who nominated overspending and poor budget management as causes of financial stress had decreased over the past 10 years (from 57.2 per cent to 44.7 per cent). Unemployment has become a more significant factor with over 15 per cent of households indicating this caused their financial problems.

• In 2005, telephone and local shops were the most common interface to payday lenders. By 2015, more than 68 per cent of households used the internet to access payday lending. Mobile phones and public personal computers (eg libraries) were the most common device used.

• The number of borrowers taking out more than one payday loan in 12 months has grown from 17.2 per cent in 2005 to 38 per cent in 2015 and borrowers with concurrent loans have increased from 9.8 per cent to 29.4 per cent in the same period.

• The top three purposes for a payday loan were: emergency cash for household expenses (35.6 per cent). Emergency cash for household expenses included children’s needs (22.7%), clothing (21.6%), medical bills (15.1%) and food (11.4%). More payday loans are being used to cover the costs of internet services, phone bill and TV subscriptions (7.8 per cent) than in 2005 and 2010.

• Many distressed households (38.7 per cent) were refinancing another debt and 36.8 per cent already had another payday loan when taking out their payday loan. Around half of the households that had used payday lending services indicated they would be willing to take out another payday loan.

• Single men were more likely to use a payday loan (53 per cent) and the average age of the borrower was 41 years old. In the last five years, households in their thirties almost doubled their use of payday loans (16.3 per cent in 2005 to 30.35 per cent in 2015). Only 5.26 per cent of borrowers had a university education. The average annual income of payday borrowers in 2015 was $35,702.

• ‘Financially distressed’ households generally use payday loans either because it is seen as the only option (78 per cent), while ‘financially stressed’ households are attracted by the convenience (60.5 per cent).

Another day, Another IT failure

From The Conversation.

St George Bank ruined a lot of bank holiday plans this weekend when their online banking systems stopped working.

The bank’s Internet systems appear to have stopped working on Sunday evening and were still unavailable almost 24 hours later on Monday afternoon. ATMs were working but, as it was a bank holiday, branches were closed meaning that people who rely on the Internet for account transfers and overseas credit card transactions were out of luck.

Apart from a short message acknowledging the outage on their website, St George has not yet given details of the causes of the problem.

But this was not the only recent Internet banking outage at a major bank.

On the 11th and 12th September, the Commonwealth Bank (CBA) suffered a prolonged disruption to its IT services in particular its ‘industry leading’ banking platform – NetBank. And this was not the only prolonged outage at CBA this year. There were IT service disruptions earlier this year, with failures to transfer money into and out of accounts, thus racking up late and overdraft fees for customers. And also last year, and before that …….

For those who would like to see the impact of such outages on CBA customers, the excellent website Aussieoutages has a whole section devoted to CBA and a blog on which customers can register their frustration, with many of the comments NSFW – as social media terms bad language.

So what has the Commonwealth Bank to say for itself about the latest outages? Nothing!

The media page on the CBA site does not even carry a recognition of the outage let alone an apology. There was however a cock-a-hoop press release on the recent decision to bin the Deposit Levy, to add to CBA’s already record profits, and more bonuses for the CEO Ian Narev. And this is from a company that is claiming to be building a culture of customer service!

Where are the banking regulators when banking customers are inconvenienced by the banks that they are paying records fees to?

Unfortunately, APRA and ASIC continue to play pass the parcel on banking regulation.

OK, but which regulator should be wielding the big stick?

In 2011, DBS Bank, the largest bank in Singapore, suffered a computer outage that deprived its customers of access to banking services for about seven hours (half of that experienced by St George customers).

After an investigation, the local banking regulator, the Monetary Authority of Singapore (MAS) hit DBS with a stern rebuke and a set of new regulatory requirements. The bank was also ordered to “redesign its online and branch banking systems platform to reduce concentration risk and allow greater flexibility and resiliency in operation and recovery capability”. In other words – fix your IT systems, or else.

Importantly, the regulator ordered DBS to increase the capital held in reserve for ‘operational risks’ by 20 per cent, or around $180 million. Under the Basel II banking regulations, banks are required to maintain a capital buffer against operational losses, in particular ‘systems risks’.

Because the failure of Internet systems is clearly an operational risk problem, APRA should be considering at least a 20% addition to the operational risk capital charge on Commbank and Westpac (which owns St George and the other banks like BankSA which went offline at the same time). According to Commbank’s latest Risk (so-called Pillar 3) report, which incidentally has pictures of happy Internet users on the front page, a 20% increase would have CBA having to raise just over an additional $500 million of capital. On the same basis, Westpac would require just under $500 million extra capital. Good luck with that, when banks are scrambling to raise capital to cover upcoming regulatory changes.

But has APRA moved to get the IT systems of the country’s biggest banks under control? No sign so far.

So what of ASIC?

ASIC has recently released its regulatory stance on so-called Conduct Risk, or “the risk of inappropriate, unethical or unlawful behaviour on the part of an organisation’s management or employees”. Conduct Risk is the very latest in regulatory fashion and is an attempt to get banks to treat their customers more fairly.

One would have thought that, in return for account fees, providing access to customers’ own money might be a start for banks?

But a quick look at the ASIC web-site shows the usual list of fines and suspensions on financial institutions so tiny that small fry seem huge. But not a whale or even a barramundi in their nets. ASIC does not go after the big fish.

So which regulator should be going into bat for the costumers of the big banks?

Both!

APRA to ensure that IT systems in banks are robust, by using capital tools. And ASIC to ensure that banks treat customers fairly. Demanding return of fees for non-performance might be start?

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