Westpac Hit By AUSTRAC Court Action

AUSTRAC, Australia’s anti money-laundering and terrorism financing regulator, has taken Westpac to court, alleging the major bank violated anti-money laundering and terrorism regulation on over 23 million occasions. Via Australian Broker.

According to AUSTRAC CEO Nicole Rose, the decision to commence civil penalty proceedings came on the back of a detailed investigation into Westpac’s non-compliance.

The regulator has alleged Westpac’s oversight of its program intended to identify, mitigate and manage money laundering and terrorism financing risks was deficient.

AUSTRAC has found the failures led to “serious and systemic non-compliance” with the AML/CTF Act.

“These AML/CTF laws are in place to protect Australia’s financial system, businesses and the community from criminal exploitation. Serious and systemic non-compliance leaves our financial system open to being exploited by criminals,” said Rose.

“The failure to pass on information about IFTIs to AUSTRAC undermines the integrity of Australia’s financial system and hinders AUSTRAC’s ability to track down the origins of financial transactions, when required to support police investigations.”

Westpac allegedly failed to:

  1. Appropriately assess and monitor the ongoing money laundering and terrorism financing risks associated with the movement of money into and out of Australia through correspondent banking relationships
  2. Report over 19.5m International Funds Transfer Instructions to AUSTRAC over nearly five years for transfers both into and out of Australia
  3. Pass on information about the source of funds to other banks in the transfer chain, depriving them of information needed to manage their own AML/CTF risks
  4. Keep records relating to the origin of some of these international funds transfers
  5. Carry out appropriate customer due diligence on transactions to the Philippines and South East Asia that have known financial indicators relating to potential child exploitation risks

AUSTRAC aims to build resilience in the financial system and ensure the financial services sector understands, and is able to meet, compliance and reporting obligations.

“We have been, and will continue to work with Westpac during these proceedings to strengthen their AML/CTF processes and frameworks,” Rose said. 

“Westpac disclosed issues with its IFTI reporting, has cooperated with AUSTRAC’s investigation and has commenced the process of uplifting its AML/CTF controls.”

Westpac is a member of the Fintel Alliance, a private-public partnership established by AUSTRAC to tackle serious financial crime, including money laundering and terrorism financing.

Mortgage Expense Benchmarks Under The Microscope

The use and regard to expenditure benchmarks is “an area that is ripe for further guidance from ASIC”, and will be a focus of the updated RG 209 guidance next month, the financial services regulator has suggested. Via The Adviser.

Speaking at the parliamentary joint committee on corporations and financial services hearing on its oversight of the Australian Securities and Investments Commission (ASIC) and the Takeovers Panel on Tuesday (19 November), chairman James Shipton and commissioner Sean Hughes revealed some of the specific issues that will be addressed in its upcoming revised guidance on responsible lending.

The chair told the parliamentary joint committee that there was a need for “more contemporaneous” guidance around responsible lending, particularly given the increasing number of online lenders, the upcoming open banking scheme and increased data, the evolution of business practices, updates to technology, and automatisation of systems.

Commissioner Hughes elaborated that the “greater use of technology and technological tools to verify borrow information in real time” and have it “fully verified using technology solutions within 58 minutes” was an advancement that was not available when the National Consumer Credit Protection Act (NCCP) was written 10 years ago.

Another area that required updating was around expense benchmarks used to verify borrower expenses – such as the Household Expenditure Measure (HEM) – particularly given the fact that some categories of expenses are not included in HEM, such as certain medical costs, superannuation contributions and mortgage repayments.

Commissioner Hughes said: “We are not requiring lenders to scrutinise how many cups of coffee you are having, whether you are going to an expensive gym and all those things. That is not what our guidance requires.

“What our guidance is suggesting (and I emphasize suggesting) is that lenders could have regard to unusual patterns and expenditure, which take a borrower outside normal patterns for that person.”

He continued: “There are some categories of expense that require a lender to go above and beyond the standardised benchmark. So, this is something we’ve recognised through the consultation process that we have undertaken. It’s been something that all the submissions have commented on, and we think it’s an area that is ripe for further guidance from ASIC.”

Mr Hughes later told the committee that another area ASIC will be “zeroing in on” will be the level of enquiries needed for refinances, among other activities.

He said: “[W]hat we do want to preserve, as part of our guidance in the next version, is the concept of scalability. And this is something that other submitters [to the consultation] have commented on as well. 

“So for instance, if I use the example of a borrower who is seeking to refinance an existing loan that retains the same overall credit headroom – perhaps swapping out another security, taking advantage of lower interest rates – we would say that, if all other things haven’t changed and the borrower’s capacity to repay the loan remains the same and their income seem stable, that would not require a lender to do the forensic detailed examination of how many cups of coffee, or gym memberships, etc., they have that might be required in other instances.”

Other areas that the new guidance will reportedly clarify include detailing situations where the responsible lending guidance does not apply (such as small-business lending) as well as when the guidance does apply outside of mortgages (such as for credit cards and unsecured personal loans).

However, Mr Shipton emphasised that ASIC’s new guidance will be “principles-based” rather than dogmatic, and “provide discretion by financial institutions and lenders, to be able to exercise their good professional discretion in determining these areas”, given that there is “always going to nuance” and “unique situations” in providing finance.

He continued: “There will never be able to be a set of rules or guidance written which will be able to precisely convey and allow for every precise circumstance. That’s why principles-based guidance is important. That’s what we’re going to, that’s what we’re going to be aiming to do.”

Reserve Bank Increases Its Supervision of BNZ

The New Zealand Reserve Bank has increased its supervisory monitoring of the Bank of New Zealand (BNZ) and applied precautionary adjustments to its capital requirements following the identification of weaknesses in BNZ’s capital calculation processes.

BNZ identified a number of errors while undertaking a programme of remediation, which began in early 2018 and is expected to continue into 2020. These included three capital calculation errors, which resulted in misreported risk weighted assets over a number of years.

It is now required to increase the risk weight floor of its operational risk capital model from $350 million to $600 million capital. The $250m increase is a supervisory capital overlay.

The Reserve Bank requires banks to maintain a minimum amount of capital, which is determined relative to the risk of each bank’s business. BNZ has not been in breach of minimum capital requirements at any point.

“However given the likelihood that further compliance issues will be discovered during the review and remediation, the Reserve Bank regards a precautionary capital adjustment as prudent,” Deputy Governor Geoff Bascand says.

In 2017, the Reserve Bank conducted a review of bank director attestation processes and noted that many banks were attesting to compliance on the basis of negative assurance, ie they did not have evidence to suggest that they were not in compliance.

Breaches are now being identified as banks review their governance, control and assurance processes and move from a negative assurance to a positive evidence-based assurance framework. Over the past year, a number of banks have disclosed breaches of their conditions of registration, Mr Bascand says. Many of these have related to errors in the calculation of their regulatory capital or liquidity which, in some cases, have gone undetected for a number of years.

“We are reassured by BNZ’s response to the issues along with the independent oversight from PWC,” Mr Bascand says. “BNZ has committed to providing the Reserve Bank with regular and timely updates of the details of issues as they are discovered and the remedial activity as this work progresses. “The additional capital overlay will be removed when remediation is complete. It is the Reserve Bank’s expectation that the current review will identify all outstanding compliance issues and potential breaches.”

Digital Takeovers, Transactions May Harm Consumers: ACCC

Takeovers of smaller rivals by digital platforms, including their data sets, may pose a threat to consumers’ choice and privacy, said ACCC Chair Rod Sims.

Mr Sims was speaking at the Consumer Policy Research Conference (CPRC) Conference on the ACCC’s perspectives on consumer welfare in the data economy.

“Few consumers are fully informed of, nor can they effectively control, how their data is going to be used and shared. There are further concerns when the service they sign up to is taken over by another business,” said Mr Sims.

Mr Sims raised these issues in relation to Google’s recently announced proposed acquisition of Fitbit.

“The change in data collection policies, when a company like Fitbit transfers its data to Google, creates a very uncertain world for consumers who shared very personal information about their health to Fitbit under a certain set of privacy terms,” said Mr Sims.

At the time of Google’s acquisition of DoubleClick, DoubleClick reportedly denied that the data it collects through its system for serving ads would be combined with Google’s search data.  Eight years later, Google updated its privacy policy and removed a commitment not to combine Doubleclick data with personally identifiable data held by Google.

When Facebook acquired WhatsApp, Facebook claimed it was unable to establish reliable matching between Facebook users and WhatsApp users’ accounts. Two years later, WhatsApp updated its terms of service and privacy policy, indicating it could link WhatsApp users’ phone numbers with Facebook users’ identities.

“Given the history of digital platforms making statements as to what they intend to do with data and what they actually do down the track, it is a stretch to believe any commitment Google makes in relation Fitbit users’ data will still be in place five years from now.”

“Clearly, personal health data is an increasingly valuable commodity so it is important when consumers sign up to a particular health platform their original privacy choices are respected and their personal data is protected even if that company is sold.”

Research from the ACCC inquiry showed around 80 per cent of users considered digital platforms tracking their online behaviour to create profiles, and also the sharing their personal information with an unknown third party, is a misuse of their information.

Facebook’s recent announcement of its planned offering of a cryptocurrency Libra is also a potential cause for concern, said Mr Sims.

“Here we have an organisation, whose lifeblood is to monetise data, getting into the financial services industry,” said Mr Sims.

“A lack of clear information about how their data will be handled reduces consumers’ ability to make informed choices based on that data.”

“During our DPI we found a lack of consumer protection and effective deterrence of poor data practises have undermined consumer’s ability to choose products.”

“Vague, long and complex data policies contribute to this substantial disconnect between how consumers think their data should be treated and how it is actually treated,” said Mr Sims.

“Transparency and inadequate disclosure issues involving digital platforms and consumer data were a major focus of our Inquiry, and remain one of the ACCC’s top priorities.” 

Tax Deductible Child Care – A Good Idea?

According to an article in the New Daily today by Samantha Maiden, “Families would be able to claim child care costs of up to $60,000 a year as a tax deduction under a proposal to be launched by Liberal MP David Sharma on Tuesday”.

However, the biggest benefits go to families with a combined income of $280,000 a year or more who could slash their combined taxable income to $220,000.

Under the proposal, a family that could afford to pay a nanny $60,000 a year could split the cost 50:50 between two working parents as a tax deduction.

Each parent would then be able to reduce their taxable income by $30,000.

The Productivity Commission has previously recommended against making child care costs tax deductible, on the basis that it is not an effective means of support for lower- and middle-income families.

The article also features modelling by Dr Ben Phillips.

He found the policy would leave more than 205,000 households better off, representing one in five of households with children.

The average couple with children would be $618 per annum better off.

“Although households in the top quintile of the income distribution benefit the most on average with an average benefit of $1080 per annum, those in the second quintile (the bottom 20 per cent to 40 per cent of the income distribution) are on average $626 per annum better off. This represents a 1.9 per cent increase in disposal income,” the report states.

‘Premium’ SME Borrowers Are Bad News

Underestimating the appetite of premium quality borrowers has led to a revenue downgrade for fintech business lender Prospa and a 28 per cent reduction in its share price. Via InvestorDaily.

Prospa shares crashed 27 per cent to a record low of $2.80 on Monday morning following the release of the group’s trading and guidance update.

Prospa has revised its revenue forecasts down by 8 per cent to $143.8 million from the $156.4 million as advertised in the company’s prospectus. Prospa floated on the ASX in June with an IPO price of $3.78 and rallied almost 20 per cent in day of trading, lifting the company’s market cap to $720 million. 

However, following this week’s trading update, the company is now valued at $450 million. Sales and marketing expenses are forecasted to be $80.1 million for the calendar year, up 5.5 per cent from the $75.9 million forecast in the prospectus. 

EBITDA is forecast to take a 62 per cent hit from $10.6 million to $4 million. 

Prospa stated that the downward revision to its revenue predictions is largely due to its “premiumisation strategy exceeding our forecast”. Premiumisation is traditionally a strategy employed by companies to make consumers pay more for a product by promoting its exclusivity. But for a small business lender like Prospa, premium customers are actually less profitable. 

“While we continue to grow our lending to all credit grades, we are seeing increased appetite for our solutions from premium credit quality customers who pay lower interest rates over longer terms,” the company said. 

Prospa said its strategy to optimise its cost of funding has facilitated lower rates for customers and broadened its customer base and appeal – allowing the company to tap more of the $20 billion addressable market. 

“The introduction of a new rate card in early April was more successful than anticipated, with approximately 43 per cent of Prospa’s portfolio now represented by premium customers,” the company said. 

“The evolution in book composition towards premium grades has led to a short-term impact on revenue, despite the positive impact premiumisation has had on market penetration, operating leverage, funding diversity and portfolio resilience.”

Lending rates to premium customers are lower than the average book rate and the loan duration is longer. In the four months to 31 October 2019, the average simple interest rate on Prospa’s book has adjusted to 18.5 per cent compared to the prospectus forecast at 18.9 per cent and average loan term has increased to 14.6 months (Prospectus at 14 months). 

Early indications are that the static loss rates in the growing premium section of our loan book are well below 4 per cent, which is the bottom of the risk appetite range.

Greg Moshal, co-founder and joint CEO of Prospa, admitted that the lender is experiencing some short-term impacts on its forecasts, but said he remains confident Prospa has the right growth strategies to deliver long-term shareholder value and solve the funding challenges of small business owners across Australia and New Zealand. 

“Originations are growing,” he said. “Portfolio premiumisation means a higher quality loan book and lower rates and longer average terms for our customers. Early loss indicators continue to improve and we expect to continue to invest in new products, sales and marketing.”

New Debt Collection Guidelines Released

New guidelines to be applied by Australia’s banks to debt collection agencies have been released today.

This voluntary Industry Guideline complements the provisions of the Banking Code of Practice (the Code) set out in Chapter 14 (Customers who may be vulnerable), Chapter 41 (Financial Hardship) and Chapter 43 (Recovering a Debt).

This guideline reflects good industry practice and the ABA encourages members to use this guideline to set internal processes, procedures and policies. This Guideline should be read in conjunction with the:

  • Banking Code of Practice
  • ABA Industry Guideline: Financial abuse and family and domestic violence policies.

This Guideline will commence operation from 1 March 2020. Contractual arrangements with some debt buyers may not be able to be updated until their contracts are renegotiated. Some necessary changes may not be able to be made until after the 1 March 2020 implementation date – where this is the case banks will endeavour to comply with the guideline on a best endeavours basis in the first instance and where it is brought to their attention that they have not complied with the guideline, they will promptly rectify this issue for the customer.

The new guidelines outline the process banks must follow before they sell any debt and also what happens once that debt is sold. This includes:

  • Proactively contacting a customer to find other solutions before a debt is sold (this can include restructuring, consolidation and hardship support
  • Not selling any debt that is in the process of being disputed by a customer
  • Only contracting debt collectors that follow all regulatory codes and a bank’s own policies for supporting customers in hardship
  • Regular auditing of all contracted debt collectors to ensure they meet the high standard set by the new guidelines
  • The bank will require a debt collector to consult with a bank before bankruptcy is initiated, giving the bank an opportunity to repurchase the debt if a vulnerability is identified
  • As an interim before a government review, each bank will assess the bankruptcy threshold and determine an appropriate level (for competition reasons the industry as a whole cannot set its own level)
  • If a customer has an ongoing vulnerability and there is no reasonable prospect of the debt being repaid a bank will not sell this debt.

As part of the new guidelines the Australian Banking Association, along with consumer groups the Consumer Action Law Centre, Financial Counselling Australia and the Financial Rights Legal Centre, have written to Federal Attorney General Christian Porter requesting a review of the $5,000 threshold for forced bankruptcy.

CEO of the Australian Banking Association Anna Bligh said the new guidelines contained a wide range of new measures which would increase protections for customers with unsecured debt.

“Banks are stepping up to the plate to ensure vulnerable customers are protected and supported when struggling with unsecured debt such as credit cards and personal loans,” Ms Bligh said.

“Under the new guidelines banks will rigorously audit debt collectors to ensure customers are being treated fairly and with appropriate care, they’ll have the option to buy back debt before any bankruptcy proceedings begin and other significant increases in customer protections,” she said.   

Fiona Guthrie, CEO of Financial Counselling Australia said “”Financial counsellors appreciate the speed with which the banking industry has responded to concerns about the mis-use of forced bankruptcy.

“This new guide includes some really important protections, including that even if a bank sells a debt, the debt purchaser cannot move to forced bankruptcy without the permission of the bank,” she said.

Gerard Brody, CEO of the Consumer Action Law Centre said “We applaud banks taking practical action to ensure forced bankruptcy is the last resort possible.”

“It is so important that debt buyers understand customer circumstances and explain why bankruptcy is appropriate before taking this sort of harsh debt collection action.

“No one should risk losing their home because they’ve found themselves in a vulnerable financial position,” he said.

CEO of Financial Rights Legal Centre Karen Cox said they appreciated the banks’ swift response on this important issue.

“This Guideline should mean that small bank debts do not easily lead to homelessness and disproportionate financial loss,” Ms Cox said.  

We also appreciate the support of the banks in calling for an increase in the bankruptcy threshold so that people are no longer subject to similar risks from other types of small debt,” she said.