ASIC and Ontario Securities Commission sign agreement to support innovative businesses

ASIC says Innovative fintech companies in Australia and Ontario, Canada will be able to draw on support from the combined resources of their financial regulators as they seek to operate in the others’ market, under a new agreement.

Ontario Securities CommissionAsic Coporate Logo Standard Version Colour

Under the agreement, signed in Toronto this week, the Australian Securities and Investments Commission (ASIC) and the Ontario Securities Commission (OSC) will refer to one another those innovative businesses seeking to enter the others’ market. The regulators may provide support to innovative businesses before, during and after authorisation to help reduce regulatory uncertainty and time to market.

The agreement follows the creation of the Innovation Hub at ASIC in April 2015 and the OSC LaunchPad in October 2016. These initiatives were established to help businesses with innovative ideas navigate financial/securities regulation, support them through the authorisation process and ease their engagement with the regulator.

Signing the agreement, John Price, ASIC Commissioner, said:

‘ASIC is committed to encouraging innovation that has the potential to benefit financial consumers and investors. Since we launched our Innovation Hub last year we have seen a surge in requests by fintech startups seeking assistance about how to navigate the regulatory requirements. These have covered a wide range of issues, as you would expect of such a young and exciting sector, but include robo or digital advice, crowd-sourced equity funding, payments, marketplace lending and blockchain business models. Some of these business concepts are already looking to expand internationally, and these agreements with like-minded regulators will be a significant factor in paving the way.’

Maureen Jensen, Chair and CEO of the OSC, said:

‘Last month, the Ontario Securities Commission unveiled OSC LaunchPad. This is the first dedicated team by a securities regulator in Canada to help fintech businesses navigate securities law requirements and accelerate time-to-market. Today’s agreement – another first for a Canadian securities regulator – reflects our commitment to improving the regulatory experience for emerging businesses that are offering innovative services, products and applications of benefit to investors.’

To qualify for the support offered by the agreement, innovative businesses will need to meet the eligibility criteria of their home regulator. Once referred by the regulator, and ahead of applying for authorisation to operate in the new market, the business will have access to dedicated staff that will help them to understand the regulatory framework in the market they wish to join, and how it applies to them.

ASIC and the OSC have also committed to share information on emerging trends in each other’s markets and the potential impact on regulation.

In March 2015, ASIC announced that it would establish an online Innovation Hub to assist innovative fintech businesses navigate ASIC’s regulatory system. Through its Innovation Hub, ASIC engages with the fintech community, provides assistance to innovative fintech start-ups and liaises with fintech experts through ASIC’s Digital Finance Advisory Committee.

On October 24, 2016, the OSC announced ‘OSC LaunchPad’ to engage with fintech businesses, provide the opportunity for support in navigating securities requirements and strive to keep regulation in step with digital innovation. This initiative supports innovation while fulfilling the OSC’s mandate to provide protection to investors and promote confidence in its markets.

The Interest-Only Loan Debt Trap

Today we discuss some specific and concerning research we have completed on interest-only loans.  Less than half of current borrowers have complete plans as to how to repay the principle amount.

Interest-only loans may seem like a convenient way to reduce monthly repayments, (and keep the interest charges as high as possible as a tax hedge), but at some time the chickens have to come home to roost, and the capital amount will need to be repaid.

Many loans are set on an interest-only basis for a set 5 year term, at which point the lender is required to reassess the loan and to determine whether it should be rolled on the same basis. Indeed the recent APRA guidelines contained some explicit guidance:

For interest-only loans, APRA expects ADIs to assess the ability of the borrower to meet future repayments on a principal and interest basis for the specific term over which the principal and interest repayments apply, excluding the interest-only period

This is important because the number of interest-only loans is rising again. Here is APRA data showing that about one quarter of all loans on the books of the banks are interest-only, and that recently, after a fall, the number of new interest-only loans is on the rise – around 35% – from a peak of 40% in mid 2015. There is a strong correlation between interest-only and investment mortgages, so they tend to grow together. Worth reading the recent ASIC commentary on broker originated interest-only loans.

interest-only-apraBut what is happening at the coal face? To find out we included some specific questions in our household survey, and today we present the results.

We were surprised to find that around 83% of existing interest-only loan holders expect to roll their loan to another interest-only loan, and to keep doing so.  More concerning, only around 44% of borrowing households had an explicit discussion with the lender (or broker) at their last loan draw down or reset about how they plan to repay the capital amount outstanding.  Some of these loans are a few years old.

interest-only-surveyAround 57% said they knew the capital would have to be repaid (we assume the rest were just expecting to roll the loan again) and 26% had no firm plans as to how to repay whereas 39% had an explicit plan to repay.

Many were expecting to close the loan out from the sale of the property (thanks to capital appreciation) at some point, from the sale of another property, or from another source, including an inheritance.

Thus we conclude there is a potential trap waiting for those with interest-only loans. They need a clear plan to repay, at some point. It also highlights that the quality of the conversation between borrower and lender is not up to scratch.

We think some borrowers on an interest-only loan may get a rude shock, when next they try to roll their interest-only loan. If they do not have a clear repayment plan, they may not get a new loan. There is a debt trap laid for the unwary and the APRA guidelines have made this more likely.

Next time we will delve further into the interest only mortgage landscape, because we found the policies of the lenders varied considerably.

 

ASIC Says Up To $178m In Fees For No Service May Be Refunded To Major Bank Customers

ASIC has released Report 499 Financial advice: Fees for no service (REP 499). They say to date, approximately $23.7 million of fee refunds and compensation has been paid, or agreed to be paid, to over 27,000 customers of ANZ, NAB, CBA, Westpac and AMP. But further reviews are being conducted and based on estimates, compensation may increase by approximately $154 million, plus interest, to over 175,000 further customers, meaning that total compensation for related failures could be over $178 million, plus interest.

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The report provides an update on ASIC’s work to address financial institutions’ and advisers’ systemic failures, over a number of years, to provide ongoing advice services to customers who paid fees to receive those services. The report summarises ASIC’s work to ensure customers are fairly compensated. The report is part of ASIC’s Wealth Management Project which is focusing on the conduct of the largest financial advice firms, including the advice arms of AMP, ANZ, CBA, NAB and Westpac groups (refer: 15-081MR).

The failures set out in the report relate to instances where customers were charged a fee to receive an ongoing advice services, but had not been provided with this service because:

  1. The customer did not have an adviser allocated to them, but was charged a fee for ongoing advice – usually by deduction from the customer’s investment products; or
  2. The adviser allocated to the customer failed to deliver on their obligation to provide the ongoing advice service and the licensee failed to ensure that the service was provided.

To date, approximately $23.7 million of fee refunds and compensation has been paid, or agreed to be paid, to over 27,000 customers of ANZ, NAB, CBA, Westpac and AMP under various Australian Financial Services (AFS) licensees that are owned by these businesses. Further reviews are being conducted by the licensees to determine the extent of their ongoing service fee failures. Refunds and compensation are expected to increase substantially as the licensees’ investigations and reviews continue. Based on estimates provided by the licensees to ASIC, compensation may increase by approximately $154 million, plus interest, to over 175,000 further customers, meaning that total compensation for related failures could be over $178 million, plus interest.

ASIC has commenced several enforcement investigations in relation to this conduct.

Most of the failures outlined in this report occurred before the commencement of the Future of Financial Advice (FOFA) reforms. The changes made by those reforms were a significant factor in the identification of the failures, and also substantially reduce the likelihood that the type of systemic failures described in this report will occur in the future. In particular, the requirement to now provide an annual Fee Disclosure Statement to the client, and the requirement for the client to ‘opt-in’ to the advice relationship every two years, will significantly reduce the risk of fees being charged without any advice service provided.

‘Changes introduced through the FOFA reforms have shone a light on the advice fees that customers are paying and the services they should be receiving in return,’ said ASIC Deputy Chair Peter Kell. ‘Our report identifies the institutions’ systemic failures in this area, which we are putting right by ensuring that customers are fairly compensated.’

ASIC’s MoneySmart website has updated information on how much financial advice costs and what to expect from a financial adviser. Customers should check they are receiving the services they are paying for. Customers who are paying ongoing advice fees for services they do not need can ask for those fees to be switched off. Customers who have paid fees for services they did not receive may be entitled to refunds and compensation, and should lodge a complaint through the bank or licensee’s internal dispute resolution system or the Financial Ombudsman Service.

Kenyan and Australian regulators sign agreement to support fintech innovation

ASIC says the Capital Markets Authority of Kenya (CMA) and the Australian Securities and Investments Commission (ASIC) today signed a Co-operation Agreement which aims to promote innovation in financial services in their respective markets.

The agreement was signed in the margins of the Board meeting of the International Organization of Securities Commissions (IOSCO) held in Hong Kong this week.

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The agreement sets up a framework for co-operation between the CMA and ASIC in the expanding space of innovation in financial services. The parties have agreed to share information in their respective markets including on emerging market trends and regulatory issues arising from the growth in innovation.

Paul Muthaura, Chief Executive, CMA, said: ‘We are committed to facilitating innovation in financial services, leveraging Kenya’s positioning in the region as an innovation centre. This however calls for us to assess lessons learned and to compare strategies to balance innovation and regulation with our peer regulators.’

‘The CMA has recently commenced efforts towards the establishment of a Regulatory Sandbox structure that is designed to encourage innovation in the capital markets. This strategy reflects the CMA’s role in facilitating the introduction of new fintech products in the capital markets area.’

‘ASIC has developed an Innovation Hub and we are keen to share best practices in terms of how to address regulatory issues pertaining to innovation in financial services.’

Greg Medcraft, Chairman, ASIC, said: ‘We are excited to be working more closely with CMA. It operates in a jurisdiction that has seen significant fintech innovation growth. Innovation in financial services isn’t confined by national borders. We hope this agreement will help to break down barriers to entry both here and in Kenya.

‘Since ASIC launched its Innovation Hub in 2015, we have seen a surge in requests by fintech start-ups seeking assistance about how to navigate the regulatory requirements.

‘Most recently we have consulted on the establishment of a Regulatory Sandbox that proposes an environment to allow start-ups to test concepts without a licence – we are currently considering the results of that consultation.’

ASIC permanently bans Aussie Home Loans mortgage broker

Another former Aussie Home Loans mortgage broker has been permanently banned from engaging in credit activities by ASIC, the fourth AHL mortgage broker who has been banned and/or convicted over the past 18 months for submitting false or misleading documents in loan applications. ASIC says the latest is Mr Bernard Meehan, a former mortgage broker for AHL Investments Pty Ltd (trading as Aussie Home Loans).

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ASIC’s investigation found that Mr Meehan had submitted payslips, document checklists and loan serviceability forms in nine home loan applications to Westpac Banking Group (Westpac) over a twelve month period from January 2014 to January 2015, that were false or materially misleading. Among the false documents were payslips that had not been issued by the purported employer.

ASIC found that Mr Meehan’s actions were wrong, inconsistent with a compliance mentality and showed a lacked of insight into what was required of a broker. Mr Meehan failed to adhere to proper procedures and did not accept wrongdoing or show appreciation of the fact that what he did involved failure to comply with credit legislation.

Aussie Home Loans reported the misconduct to ASIC.

ASIC’s Deputy Chairman Peter Kell said, ‘Gatekeepers, such as banks, aggregators and franchise groups have an important role to play in regulating the mortgage broking industry and act as a first line of defence to detect inappropriate practices and behaviour.’

Mr Meehan has the right to appeal to the Administrative Appeals Tribunal for a review of ASIC’s decision.

Background

Since becoming the national regulator of consumer credit on 1 July 2010, ASIC has investigated in excess of 100 matters relating to loan fraud and has achieved many enforcement outcomes against the offenders.

The outcomes range from undertakings by persons to voluntarily leave the industry to bans and prosecutions. To date, ASIC has banned 74 individuals or companies from providing credit services (including 32 permanent bans).

Through the Commonwealth Director of Public Prosecutions, ASIC has also brought criminal prosecutions against 14 credit service providers; with 12 having been convicted of fraud or dishonesty offences relating to the provision of false and misleading information/documents to lenders in client loan applications.

Mr Meehan is the fourth Aussie Home Loans mortgage broker who has been permanently banned and/or convicted over the past 18 months for submitting false or misleading documents in loan applications. The other three mortgage brokers were:

Mr Madhvan Nair – convicted on eighteen charges involving the submission of false or misleading information to Westpac, National Australia Bank, and ANZ, see 16-219MR and 16-293MR.

Ms Emma Feduniw – convicted and permanently banned for providing false documents in eight loan applications to Westpac, see 16-108MR, 16-186MR and 16-242MR.

Mr Shiv Prakash Sahay – convicted and permanently banned for providing false documents in loan applications for seventeen of his clients to Bankwest and Suncorp Metway Limited, see 15-176MR and 15-128MR.

Forcing insurers to reveal rejected claims a win for consumers

From The Conversation.

Companies offering life insurance will now disclose the outcomes of claims, under a new reporting regime in a bid to increase transparency in the industry. This information won’t only be used by individual customers but also by financial advisers and in the case of many of us, by our superannuation fund, via a group policy.

If super funds consumers and financial planners use this data, it will likely place considerable pressure on insurers who have high rejection rates to improve internal practices, terms of insurance policies and better inform consumers about the scope of the insurance coverage. A history of high rejections would suggest that there is a relatively high risk the insurer would reject future claims. Awareness that an insurer has a high rate of rejections would lead to business being diverted away from them.

Australian Securities and Investments Commission

The new disclosure regime arises from an ASIC review of life insurance claims. As part of the review ASIC looked at the histories of 15 insurers that provide life, total and permanent disability (TPD), trauma and income protection insurance.

The review found the highest rejection of claims rates were for TPD (average declined claim rate of 16%) and trauma cover (14%). The rejections were lowest for life cover (4%) and income protection cover (7%).

Disconcertingly, the rejection rates vary substantially as between insurers. For TPD, three insurers had rejection rates of 37%, 25% and 24% respectively, compared to an industry average of 16%.

ASIC provided a comparison of rejection rates among the insurers it examined, but it kept the insurer names anonymous. For example the reporting on TPD rejections ranged widely.

ASIC’s reluctance to name names in this review is understandable. It found that making comparisons was difficult, partly because the insurance policies have different terms and definitions. Sometimes these differences are subtle, and at other times substantial.

What is heartening is that ASIC proposes reporting on the conduct of individual insurers – that is, it appears ASIC intends naming names. The sooner this is done, the better.

It is in the mutual interests of consumers, superannuation funds managers, financial planners who advise clients on the purchasing of insurance, and the insurance industry itself that there is an improved capacity for purchasers to make informed choices.

Purchasing the right insurance policy is fiendishly difficult. Making anything resembling a rational and informed choice requires knowing which future events are covered by the insurance, and the likelihood of the insurer paying up if a claim is made.

Finding out which events are covered by a policy often requires wading through lengthy and complex product disclosure statements (PDS). In addition, making any reliable assessments about whether the insurer is likely to pay up on a claim is next to impossible. It is somewhat ironic these uncertainties exist as a reason for insuring is to buy peace of mind, and an assurance that if things go wrong we will receive money to compensate for some or all of the insured loss.

The difficulties consumers face in making comparisons when shopping for the right product contribute towards an inadequately competitive marketplace and a lack of consumer trust in insurers. This in turn is fuelling public disquiet that led to ASIC review of the industry.

ASIC found that overall the life insurance industry accepts 90% of claims in the first instance if a decision was made to about whether or not to make a claim. For death claims, an average 96% of claims are paid.

ASIC is concerned, however, that in some cases claims are being rejected on technical or contractual grounds that are not in accordance with the spirit or the intent of the policy. This presents a challenge for insurers to decide how to deal with that small number of claims that may not be covered under the fine print, but under any reasonable consumer or community expectation should be paid.

This sort of information is already published in the United Kingdom where the Association of British Insurers publishes data on claims payouts.

In Australia ASIC proposes working with the Australian Prudential Regulation Authority, the insurance industry and stakeholders to establish a consistent public reporting regime for claims data and claims outcomes. ASIC will report on claims handling timeframes and dispute levels across all policy types.

Enhancing the capacity for consumers to make better informed choices will help build trust in the industry and a more competitive marketplace. It will also help bring greater peace of mind for those purchasing insurance.

Author: Justin Malbon, Professor of Law, Monash University

Big four should offer rate tracker mortgages: ASIC

From Australian Broker.

Greg Medcraft, chairman of the Australian Securities and Investments Commission (ASIC), has thrown his support behind rate tracker mortgages, saying they should be introduced by the big four banks.

“These rate tracker mortgages are very popular overseas because the consumer knows there is a fixed margin earned by the bank over the life of the loan,” he said in an interview with the Australian Financial Review.

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“The problem in Australia at the moment is there is a double jeopardy with standard variable rate loans. You don’t know how your SVR will move and all the SVRs are not the same. I think the banks like the confusion in the market.”

Offering mortgages priced at a fixed margin above the RBA’s official cash rate would help eliminate this confusion, he said.

Medcraft’s comments – made prior to his appearance before the Standing Committee on Economics today – are at odds with those made by most of the heads of the major four banks made during last week’s parliamentary review.

The CEO of Westpac, Brian Hartzer, told the inquiry that tracker mortgages were “a recipe for a serious problem” for the banking industry.

“They’re fine when everything’s fine, but when things are not fine they become a real problem, and you can suddenly find that your cost of funds has spiked dramatically and yet you’re unable to reprice your loan book,” he said.

“Tracker mortgages are really quite fraught from a risk point of view and we saw this in the GFC in particular.”

While the CEO of CBA, Ian Narev, said there was no “specific objection” to these types of loans, the bank’s chief risk officer David Cohen said that tracker mortgages worked well when rates fell but not when they rose.

“The experience of customers and banks offshore has been that they haven’t worked so well when rates have risen again post GFC,” he said.

He pointed towards Lloyds Bank which offered tracker mortgages until 2014.

“It felt that a fixed rate, particularly in a rising interest rate environment, was actually a better deal for customers.”

NAB’s CEO Andrew Thorburn said that mortgages which tracked the cash rate would “raise a significant funding risk for us”.

“Our balance sheet, which is deep and wide, has got $200 billion of offshore funds which are not linked to the cash rate,” he told the inquiry. “So if we had too much business, and it was not priced correctly in the tracker portfolio, we are raising a significant risk for the bank.”

The only bank to be supportive of tracker mortgages was ANZ with CEO Shayne Elliot saying there was a “valid place” for the product in Australia.

“In fact, we have looked at it and we continue to look at it to see whether there would be a market proposition for us,” he said. “Our testing really comes down to ‘do we think that consumers would be attracted to it in sufficient volume to make it worthwhile?’”

ASIC probe finds insurance claims issues

From AAP via The West Australian.

The corporate regulator’s review into insurance has uncovered concerns about how claims are handled but no evidence of industry-wide misconduct.

Complainy

The Australian Securities and Investments Commission said on Wednesday that delays in claims handling and the evidence insurers require when assessing claims were the most common cause of disputes with customers.

The review of 15 insurers that make up 90 per cent of the industry showed that declined claim rates were highest for total and permanent disablement.

There were higher claims denial rates for insurance policies sold directly to consumers with no financial advice.

Some insurers had substantially higher than average declined claims rates and a substantially higher than proportionate share of disputes about claims.

However, nine out of 10 claims made on four major types of life insurance policy between 2013 to 2015 were paid out.

“While not finding evidence of cross-industry misconduct, ASIC’s review identified issues of conern in relation to higher claims denial rates and claims handling procedures,” ASIC said.

In a related probe, ASIC’s has obtained about 60,000 documents and has interviewed a range of people as part of its investigation into Commonwealth Bank’s CommInsure.

ASIC said it will work with the Australian Prudential Regulation Authority and insurers over 2017 to establish a public reporting regime that details claims outcomes and dispute levels.

“To improve public trust, there is a clear need for better quality, more transparent and more consistent data on life insurance claims,” it said.

Industry Super Australia chief executive David Whiteley said the recommendations were a step in the right direction, but that government should ban all sales commissions on life insurance.

“Given the importance of life insurance to Australians, the government and industry need to ensure that financial advice is only in the interests of consumers and all conflicts of interests are removed,” he said.

Law firm Maurice Blackburn principal Josh Mennen said an enforceable code of conduct and a Royal Comission were the only credible options for reform.

“The report identifies that particular insurers remain a problem, but does not identify specific insurers against its findings,” he said.

“The public has a right to know who the worst offenders are.”

Mortgage Broker Commissions On The Up

Mortgage Brokers earnt more than $1.1 billion in new commissions in the last year, as their share of new loans continues to rise according to the latest results from the Digital Finance Analytics Mortgage Industry Model.

The model tracks new loan approvals and channel mix and estimates the commissions earned by brokers from lenders.

The share of loans originated via brokers has reach 50% across the market (some say it is even higher, as much as 60%!)

broker-shares-dfa-sept-2016APRA publishes ADI specific data showing that foreign subsidiary banks originate close to 70% of their loans via brokers, other domestic banks, around half, just above the average of the big four, with credit unions and building societies lower.

broker-shares-apraBrokers can earn an upfront commission on each new loan, as well as a trail. According to a recent MFAA document:

Lenders usually pay upfront and/or trail commissions in respect of the loans, mortgage brokers originate. The upfront remuneration offered by lenders is mostly uniform at 0.65%, and trail remuneration also uniform at 0.15% for the life of the loan. Lenders vary in their application of claw-back, ranging from 12-24 month terms as well as their introduction of trail payments (delayed until the 13mth).

The MFAA would like to note that broker remuneration provided by lenders has reduced over the past ten (10) years from a mostly uniform offering of 0.70% and 0.25% for upfront and trail commissions

There are however some variations between lenders in the absolute percentage applied, reflecting commission tiers, targets and other factors. It is hard to get solid industry data because commission arrangements are bi-lateral commercial agreements, and often not fully disclosed.

However, using data from a range of sources, taking into account commission rates and new loan volumes, we have an estimate of the monthly flow in new commissions earned.  Commissions have been rising in line with loan growth (as it directly related to the size of the loan) as well as rising third party origination. Some lenders have tweaked commission structures recently to incentivise specific types of loans.

broker-commissions-apra So, we estimate over the past year, $1.1 billion of new commissions were paid to brokers. A relevant statistic given the current broker remuneration review by ASIC.

The End of the Commission Remuneration Model In Financial Services?

The wind of change seems to be blowing though the financial services sector as the focus on doing the right thing for customers increases. The industry’s dirty secret is that many in the sector are rewarded on a commission basis for selling products and services, irrespective of whether they are right for the customer concerned. Recent scandals have been all about the interests of the industry coming ahead of consumers, whether employed by the firm, or an “independent” advisor.

commissionThis entrenched practice took root as players sought to boost profit by cross selling and up-selling more products to their customers, and targets, plus commissions became a pretty standard, if undisclosed, practice when working with third party advisors.

Whether a bank teller, a financial advisor, a mortgage broker, or other bank employee; behaviour is likely to be influenced by expectations of personal remuneration. This is not transparent to the consumer, who relies on the advice.

But this week we may be seeing signs of a new set of practices emerging. Westpac has said it will no longer pay sales commissions to bank tellers, but performance will be assessed by customer satisfaction. Changes are also afoot in the sales force too.

From next month we’re planning to remove all product related incentives across our 2,000 tellers in the Westpac branch network. Rather, their incentives will be based entirely on customer feedback about the quality of service they received in the branch.

We have also revisited the way we reward specialised sales roles in our network. We will no longer vary reward values based on different products; but rather our people will be rewarded for meeting the full range of our customers’ needs.

The Hansard record of the new RBA Governor’s comments this week made some interesting points about remuneration in financial services and the cultural issues arising.

Mr THISTLETHWAITE: You mentioned earlier your mandate in terms of financial systems stability. There has been a whole host of scandals in recent years with the banks, particularly with their wealth management arms. It is an issue that this committee is going to inquiry into in the coming months. This is a bit of a left-field question, but, from a regulatory perspective, if you were redesigning our financial system regulation in Australia what would you change?
Dr Lowe: I do not think a whole redesign is required.
Mr THISTLETHWAITE: Would you change anything?
Dr Lowe: APRA is the financial regulator, so it is not the Reserve Bank. And APRA has made many changes to the nature of financial regulation recently—really around capital and liquidity. So I think the finance sector feels like it has gone through a period of very accelerated regulatory change. It is best, probably, to kind of let that settle and see how the system adjusts to it. I sense that you are asking about other types of regulation that really go to the issue of bank culture.
Mr THISTLETHWAITE: Is there anything you want to say about that?
Dr Lowe: I cannot help but agree with you that there have been too many examples of poor outcomes, particularly in the wealth management and insurance industries. That is disappointing to us all.
Maybe I can make two other remarks—and, again, a broader perspective. The Australian bank system has performed well over a couple of decades. We did not have the excessive risk-taking culture in the lead-up to the financial crisis. I think that is really important. If we had a really bad risk-taking culture, we could have ended up in the same situation as many other countries did. Part of it is due to APRA’s good regulation, but the banks did not develop this culture that we saw overseas. So that has given us more stability. Again, that is a first-order point.

In terms of behavioural issues—it is hard. I think it comes down to incentives within the organisations, and that is largely remuneration structures. That is a responsibility of management. And, probably, APRA can play some constructive role in encouraging remuneration structures that create the right incentives within organisations. If there was one thing that I could focus on—it is not my responsibility; it is not the Reserve Bank’s responsibility—is making sure that the remuneration structures within financial institutions promote behaviour that benefits not just the institution but its client.
What I would like to see is, really, banking return to be seen as a strong service profession. I do not know how far away from that we are. Banking, historically, has been a profession—a profession of stewardship, custodians, service, advisory, counsellor. Is not a marketing or product-distribution business; banking is a profession.

I like the Banking and Finance Oath. I do not know whether you have seen this, but a number of people have signed up to this, including me, and I encourage others to do it as well. Its first line is: ‘Trust is the foundation of my profession.’ We have got to move beyond people just signing this oath to actually making that in practice. I do not run a commercial bank. I do not know how to embed within a commercial bank the idea that trust is the foundation of the noble profession that we do. It is largely about incentives and remuneration.

The Australian Bankers Association had previously announced a Independent Review of Product Sales Commissions and Product Based Payments

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.

This puts the current ASIC remuneration review of mortgage brokers in a new light perhaps. The outcomes are expected in December. However, this review is being done in secret. As we said in an earlier post:

ASIC has evidently released the final scope of its review of remuneration in the mortgage broking industry – but only to industry insiders. According to media, the corporate regulator has confirmed it will review the remuneration arrangements of “all industry participants forming part of the value distribution chain”. This includes lending institutions, aggregation and broking entities, and associated mortgage businesses – such as comparison websites and market based lending websites – and referral and introducer businesses.

But why, we ask, was the scope not publicly disclosed? Why are ASIC seeking input only from industry participants? We agree the remuneration review is required – but the lack of transparency is a disgrace.

Our guess is that commissions will not be banned, and the findings will focus more on better disclosure.

It is worth remembering that before that the changes to FOFA were disallowed in the Senate in late 2014. The changes would have made if easier for employees to receive incentive payments for product sales.

So now the climate appears to be changing. Will other banks follow Westpac’s lead? Will the remuneration review lead to changes to commission structures (especially trails) or a ban? Could we be seeing signs of fundamental cultural change in the industry? And will consumers be better off?

Worth reflecting on the changes which have emerged in the UK.

From April 2016 investment middlemen, including financial advisers and do-it-yourself investment brokers, will no longer be able to accept commission payments from fund companies.

The changes coming into force are the final phase of a series of new rules that started to apply at the start of 2013, which stopped advisers receiving ongoing, or “trail”, commission on new investments.

This rule has applied to brokers since April 2014. Since this date brokers have not been able to receive ongoing trail commission on new businesses, due to the legislative changes.

But until April 2016 commissions could still be deducted from earlier investments. And it is that backlog of investment which, for many, will soon become cheaper.

From April, instead of taking commissions, all middlemen will have to charge an explicit fee, expressed either as an hourly rate or as a percentage of savers’ investment pot.

The new rules were ushered in to remove any potential bias. But – and this is the catch – these old-style payments will not cease for some investors, such as those who went direct to the fund provider, or invested through a bank.