Tag: ASIC

ASIC action leads to Allianz refunding over $8 million in consumer credit insurance premiums and fees

ASIC says that Allianz Australia Insurance Limited (Allianz) will refund over $8 million in consumer credit insurance (CCI) premiums and fees including interest to more than 15,000 consumers.

This follows ASIC’s review of the sale of CCI by lenders in Report 622 Consumer credit insurance: Poor value products and harmful sales practices (REP 622), and forms part of ASIC’s broader priority to address harms and unfair practices impacting consumers in insurance.

Allianz’s refund relates to the sale of cover to consumers who were ineligible to make a claim for unemployment or disability, the sale of death cover to customers under 21 years of age who were unlikely to need that cover, and the charging of fees to customers who paid premiums by the month without adequate disclosure.

The remediation program covers certain CCI products issued by Allianz including mortgage and loan protection policies sold through financial institutions. These CCI products provided cover against the risk of consumers being unable to meet loan commitments because of death, injury, illness or involuntary unemployment.

To address these issues, Allianz will,

  • for ineligible sales of unemployment and disability cover,
    • refund premiums charged plus interest for active, cancelled or lapsed policies sold between 1 January 2011 to 31 December 2018;
    • reassess all withdrawn and declined claims where the consumer was ineligible for the policy at the time of sale;
    • invite consumers to submit a claim if they have not already done so and pay valid claims plus interest; and
    • continue to honour active policies and not rely on employment eligibility criteria as a basis to decline an unemployment or disability claim;
  • for sales of death cover to customers under 21 years of age,
    • refund all premiums charged plus interest for active, cancelled or lapsed policies sold between 1 January 2011 to 31 December 2018; and
    • preserve existing death cover for active policyholders on current terms without charging for it;
  • for monthly policy payment customers,
    • refund all administration fees and loading charged plus interest; and
    • correct any future direct debit amounts.

ASIC Commissioner Sean Hughes said, ‘Disappointingly, our work on the sale of CCI has highlighted widespread mis-selling and poor product design. This remediation outcome is only one of many examples where CCI has failed consumers.  We expect insurers to cease to sell insurance products that provide little or no value.’

‘We need a financial system that is fair. Insurers and other financial institutions need to rise to the challenge and embed the principle of fairness into their businesses to ensure we do not see any further instances of this kind of poor value product being pushed on to consumers’ added Mr Hughes.

Allianz will stop issuing new CCI policies from 30 September 2019. It will continue to fulfil its obligations to existing CCI policyholders. 

Allianz is expected to write to all affected consumers about their refund offer from October 2019. Consumers with questions about their cover should contact Allianz by email at here_to_help@allianz.com.au.

Background

ASIC’s recent review of the sale of CCI has resulted in refunds of over $100 million due to more than 300,000 affected consumers. On 11 July 2019, we released Report 622 Consumer credit insurance: Poor value products and harmful sales practices (REP 622) detailing our findings and setting minimum standards for lenders and insurers who issue or sell CCI (19-180MR).

ASIC is currently consulting on a proposal to ban the sale of CCI and direct life insurance through unsolicited telephone calls (19-188MR). The proposed ban aims to address unfair sales conduct and protect consumers from being sold products that they do not need, want or understand.

ASIC has also commenced investigations into a number of entities that have been involved in mis-selling CCI to consumers.

Separately, in 2018, Allianz refunded $45.6 million to 68,000 consumers for add-on insurance sold through car dealerships that were of little or no value (18-008MR).

AFCA to name financial firms in determinations

The Australian Financial Complaints Authority will begin naming financial firms in its published determinations to increase transparency in the financial sector and enhance consumer confidence.

The change comes following the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

AFCA undertook a public consultation and submitted an application to the Australian Securities and Investments Commission (ASIC) to change the AFCA Rules. 

AFCA Chief Ombudsman and CEO David Locke said AFCA is committed to being open, transparent and accountable to the public.

“AFCA plays an important public role and we recognise that transparency in our data and decisions is essential to rebuilding trust in the financial sector,” Mr Locke said.

“We already publish decisions on our website, but we have been unable to name the financial firms involved. 

“We welcome ASIC’s approval to change our Rules, which will allow us to now name financial firms in decisions we publish on our website.

“This is an important change, and the public will now be able to access increased information about the actions of financial firms.”

AFCA is working with ASIC to determine the start date for the naming of financial firms. Further updates will be provided when available.

From ASIC:

ASIC has approved changes to the Australian Financial Complaints Authority (AFCA) Rules to allow the scheme to name financial firms in published determinations. 

In its first six months, AFCA received 35,263 complaints. About 4,500 to 5,000 complaints are currently expected to be finalised each year by way of determination. While the publication of determinations has been a longstanding feature of the external dispute resolution schemes in Australia, the names of firms involved in financial services, superannuation and credit complaints have not been published to date. 

AFCA applied for approval to change their Rules to enable identification of firms following public consultation. Consumers who are party to a complaint will continue to be anonymised in all determinations. 

In approving this change ASIC took into account stakeholder feedback to AFCA’s public consultation and the statutory approval criteria. 

ASIC’s view is that naming firms in determinations can help identify conduct or market problems within firms or affecting specific products or services, as well as highlighting where firms have done the right thing. It will also enhance transparency and accountability of firms’ performance in complaints handling and of AFCA’s own decision-making. 

To support the new Rules, AFCA will shortly be issuing updated operational guidelines which set out examples of the circumstances in which a determination naming a financial firm would not be published. This includes where naming may expose confidential information about a firm’s systems or policies. 

Naming firms in AFCA determinations is part of a broader set of reforms aimed at increasing transparency in financial services. This includes Parliament giving ASIC power to collect and to publish internal dispute resolution (IDR) data at firm level.  The UK Financial Ombudsman Service has been naming firms in published determinations since 2013

ASIC sues NAB for dealing with unlicensed home loan introducers

ASIC has commenced proceedings in the Federal Court against National Australia Bank (NAB) for breaches of the law arising from failures with its Introducer Program.

ASIC alleges that between 3 September 2013 and 29 July 2016, NAB accepted information and documents in support of consumer loan applications from third party introducers who were not licensed to engage in credit activity.

As a result, ASIC alleges NAB breached s31(1) of the National Consumer Credit Protection Act 2009 (National Credit Act) which prohibits credit licensees from conducting business with parties engaging in credit activity without an Australian credit licence (ACL). ASIC also alleges that NAB breached its obligations under s47 of the National Credit Act requiring it to engage in credit activities efficiently, honestly and fairly and to comply with the Act.

The proceedings relate to the conduct of 16 bankers accepting loan information and documentation from 25 unlicensed introducers in relation to 297 loans.

One of the key objectives of the National Credit Act’s licensing regime is consumer protection. The imposition of a licensing regime was intended to address concerns that third-party referrers (including brokers and introducers) may misrepresent consumers’ financial details to ensure loans are approved, and their commissions are paid, in circumstances where the consumers’ true financial position means that the loan should not be made.

ASIC is asking the Court to find that NAB breached the National Credit Act and to impose a civil penalty on NAB for doing so. The maximum penalty for one breach of s31(1) of the National Credit Act, during the time of contravention, was 10,000 penalty units, or $1.7 to $1.8 million.

The proceeding will be listed for directions on a date to be determined by the Court.

Background

Since at least 2000, NAB operated the credit industry’s largest referral program, known as the ‘Introducer Program’, whereby a third-party introducer could ‘spot and refer’ a potential customer to NAB in exchange for commission if the customer entered into a loan with NAB. Between 2013 to 2016, NAB’s Introducer Program generated $24 billion dollars’ worth of loans.

Introducers referring customers through the Introducer Program were only to provide NAB with the potential customer’s name and contact details. In order for an introducer to provide NAB with further information or documents, the law required that the introducer be authorised under an ACL.

ASIC’s investigation uncovered that NAB bankers overstepped the ‘spot and refer’ requirement by accepting information and documentation from the 25 unlicensed introducers, including completed home loan applications, payslips, copies of customer identification documents and more. This behaviour can pose a serious risk to consumers, as ASIC also identified that in some instances the documents provided to NAB by the unlicensed introducers were false.

During the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, NAB identified that misconduct in their Introducer Program went undetected until 2015 for reasons including:

  • no head of the Introducer Program, with a General Manager only being appointed in October 2016
  • a lack of systems to monitor or review introducers, and
  • controls over the Introducer Program relied heavily on bankers.

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Interim Report Volume 2: Case Studies details a range of misconduct in relation to the NAB Introducer Program (page 1 -16). This includes:

  • the misconduct identified in the present proceedings
  • the misconduct that was the subject of ASIC’s administrative action against former NAB Branch Manager Rabih Awad; and the misconduct that was the subject of ASIC’s administrative action against former NAB Branch Manager Rabih Awad (18-211MR), and
  • the misconduct identified in ASIC’s criminal prosecution and administration action against former NAB Branch Manager Mathew Alwan (19-216MR).     

In July 2018, ASIC banned Mr Awad (who is one of the 16 bankers identified in the present proceedings) from engaging in credit activities and providing financial services for a period of seven years.

Mr Awad was found to have given NAB false payslips, letters of employment, and entered false referee contact details in NAB’s lending systems in multiple home loan applications. A majority of the false documentation submitted to NAB by Mr Awad was provided to him by a real estate agent who was previously registered as a NAB Introducer.

On 20 August 2019, Mr Alwan (who is not one of the 16 bankers identified in these proceedings) pleaded guilty to one count of ‘intention to defraud by false or misleading statement’, an offence under the NSW Crimes Act. The charge relates to Mr Alwan’s conduct in relation to 24 home loan applications which he falsely told NAB were referred by his uncle’s business ‘Suit Club’, a registered NAB Introducer. This resulted in NAB paying Suit Club $56,955 worth of commission.  In October 2018, ASIC permanently banned Mr Alwan from engaging in credit activities and providing financial services for the same misconduct.

On 25 March 2019, NAB announced that it will be terminating the Introducer Program on 1 October 2019.

The Fall Out from The ASIC-Westpac HEM Case

Last week the Judge delivered his verdict in the ASIC-Westpac HEM case, essentially because of the ~260,000 loans examined in the case less than 5,000 would have potentially had their loans tweaked lower if the HEM was not used, whereas the bulk of the loans would have been bigger if HEM was not utilised in the decisioning.

I have now had the chance to speak to a number of industry players, and most have fallen into expected camps. Lenders in the main welcome the decision, suggesting that common sense has prevailed, and that ASIC was not reasonable in its interpretation of responsible lending guidelines. On the other side, consumer advocates are calling for tighter controls and suggesting that the HEM benchmarks, even in their revised form are too low – meaning that households are committed to servicing loans they cannot afford. And ASIC has commenced a review of responsible lending by years end.

But among my conversations on this topic, I found a sensible and balance view expressed by Fintech CEO Mark Jones from SocietyOne.  They of course are on the cutting edge of technological innovation through their lending processes in Australia.

Mark made the point that recently lenders have been raising their standards, but the question becomes whether a lender has to try and uncover untruthful declarations from prospective borrowers. In Australia there is no clear-cut legal obligation of borrowers to be honest and transparent in their declarations, whereas in the USA there is such a legal obligation, and in New Zealand a Code of Conduct.

He cited examples where applicants had clearly lied on loan application forms.

What is the right balance between asking in painful detail for information from applicants, some of which are unsure of their specific spending patterns, and the fact that in any case if they take a loan, they may be capable of “life-style modification”?

So, he sees HEM in the context of the broader loan assessment processes, with data from applications tested again HEM, and additional dialogue around other unusual commitments which might include school fees, alimony, and other elements.  This is all around knowing your customer.  And there needs to be a focus on both discretionary and non-discretionary categories to give a complete picture.

The systems which Fintech’s like SocietyOne use are more sophisticated and can handle the complex algorithms which reflect real life. Positive credit and now Open Banking, both of which are arriving, are helpful in uncovering critical information. As a result, there are better outcomes for customers. No lenders want to make a loan which is designed to fail! And it opens the door to more sophistication around risk-based pricing

So, in summary, the trick is to get the right balance between getting every scrap of potential data from a customer, thus getting bogged down in the detail but missing the big picture; and applying simplistic ratios which do not provide sufficient precision to spot good and bad business. And it is this balance which needs to be defined in responsible lending, to a level which passes both community expectations and the operational requirements of lenders. To that end, the debate should not really be about HEM at all!

Fake and Ineffective Regulation

From the excellent Wilson Sy, reproduced with permission.

Recently, on 13 August, the Federal Court rejected the case of Australian Securities and Investments Commission (ASIC) against Westpac for irresponsible mortgage lending and ordered the regulator to pay the bank’s costs.  Such failures at enforcing regulation have occurred numerous times in the past and have cost taxpayers many millions, for little benefit. 

The paper “The farce of fake regulation: royal commission exposed Australia” explains how enforcement failures have led to fake regulation in Australia. In relation to ASIC, the paper noted:

The new commissioner Sean Hughes declared that the mantra at ASIC going forward will be “Why not litigate?” He appears to have a short memory because he should know well from his past experience working at ASIC how costly, unsuccessful and unpopular litigation has been for the regulator. What is the point of more litigation recommended by HRC, if it only ends in failures?

The Hayne Royal Commission (HRC) discovered the lack of enforcement of regulation for past decades, but did not go far enough to discover why.  The reason is: due to the underlying neoliberalist assumption of market efficiency, Australian financial regulation was not designed to protect consumers.  Indeed, it is caveat emptor as noted by Wayne Byres, the chair of the Australian Prudential Regulation Authority (APRA).

In the ASIC vs Westpac case, the judge probably did not understand why a lender such as Westpac would knowingly make bad housing loans risking losses to the bank itself.  So the litigation hinged around the interpretation of responsible lending as to whether there is legal flexibility on the part of the lender to assess mortgage serviceability by using the benchmark Household Expenditure Measure (HEM) rather actual expenditures of individual borrowers.  

Clearly, complex rules by regulators on how a business should be run can usually be refuted by actual evidence and experience.  That is, ASIC does not have enough business knowledge or access to hard data to prove conclusively that the HEM criterion is the main cause of irresponsible lending.  Therefore, unproven causality was inadequate to compel a conviction.

There are so many other aspects of mortgage serviceability to which one could attribute irresponsible lending that it is difficult to see how picking one single aspect will lead to successful prosecution by the regulator.  Probably, by taking on Westpac, ASIC was merely showing that it was following the HRC recommendation for more enforcement.  Without understanding the real problem, HRC has been ineffective in reforming the financial system, as nothing much will change.   

The real reason for why the banks lend irresponsibly is not incompetence, but conflict of interest, because the bad loans they create can be packaged and on-sold to unwary investors as mortgage-backed securities.  Those mortgage-backed securities can be used for speculation with credit default swaps (CDS) and they can be sliced and diced to create other derivative securities such as collateralized debt obligations (CDO).

Hence irresponsible lenders can avoid adverse consequences to themselves by securitizing their loans.  One proven way of removing the perverse incentive to lend irresponsibly is to remove banks’ ability to securitize their mortgages by separating commercial lending from securitization under the prohibition which was the US Glass-Steagall Act.  When banks are broken up so that they are no longer “too big to fail”, they can be allowed to suffer the natural consequences of bad loans without being rescued with “bail-out” or “bail-in” and without protection from bank-runs by banning cash.

ASIC’s Responsible Lending First Round Hearings Concluded

The big four bank has told ASIC to consider the utility of the broker channel before proposing bespoke responsible lending obligations, adding that it has not identified a notable difference in the quality of loans originated by the channel.  Via The Adviser.

In February, the Australian Securities and Investments Commission (ASIC) launched a review to update its responsible lending guidance (RG 209), which has been in place since 2010.

ASIC opened consultation by inviting submissions from stakeholders within the financial services sector and has since commenced a second round of consultation in the form of public hearings, in which stakeholders that provided submissions have been called to provide further guidance.  

Appearing before ASIC during its first round of public hearings, Westpac’s general manager of home ownership, Will Ranken, was asked to provide an assessment of the quality of mortgages originated through the broker channel.

Mr Ranken noted that the bank’s verification requirements for loans originated via the proprietary channel are the same for those originated by brokers but acknowledged that broker-originated loans require an “extra layer of oversight and governance”.

“When a customer chooses to go to a broker, we’re one step removed, so there’s another layer of oversight and governance on the broker channel,” he said.

However, the Westpac representative stated that the bank has not observed substantive differences in the quality and characteristics of home loans originated by the third-party channel.

“If you look at performance, particularly the metric around 90-day delinquencies, they’re largely the same with our proprietary channel – there’s no meaningful difference between those channels,” Mr Ranken said.

“In terms of the tenure of loans, I think on average it’s measured in months rather than quarters. In terms of the difference [in the average tenure of the loans], it’s one or two [months].

“In terms of the size of a loan, if you look at averages, and averages can be a bit misleading, the average size of a loan through the broker channel is a little bit larger. That’s probably more for smaller loan sizes, customers are happier to deal with a branch, but for larger complex lending requirements, there’s a greater propensity for customers to go to a broker.”

Mr Ranken was then asked if Westpac would support a move by ASIC to prescribe different responsible lending obligations depending on how a loan is originated.

In response, Mr Ranken warned that ASIC should consider the effect of such changes on the value proposition of the broker channel.

“I would say on providing additional guidance on one particular channel over another, it would be important to take into account the very valuable contribution that brokers do make to the overall market,” he said.

“Specifically, I talk to the level of competition that they facilitate in the market, either through providing independence and access to a multitude of lenders, as well as the service they give to customers in terms of assisting them with complex needs. 

“To the extent that guidance may require additional steps either on the lender or the broker themselves, we just want to balance that with ensuring that it maintains a viable and dynamic broker channel.”

When pressed on the question, Mr Ranken added: “We’re comfortable with the policies and procedures that we’ve got in place around the broker channel, so it’s hard to comment on guidance… The devil’s in the detail. It really depends on what the detail of the guidance would be.”

Other stakeholders, however, including consumer group CHOICE, have called on ASIC to enshrine specific broker obligations in its RG 209 guidance.

CHOICE pointed to research from ASIC’s review of interest-only home loans in 2016, which reported that mortgage broking record-keeping from verification enquiries was “inconsistent” and, in some cases, “fragmented and incomplete”.

Despite recent reforms from the Combined Industry Forum, which restricted the payment of commission to the loan amount drawn down by a borrower, the consumer group alleged that the supposed lack of record-keeping was “particularly harmful for consumers” because “brokers are currently incentivised to sell loans that will provide them with the largest commission”.

ASIC’s first round of public hearings concluded, with the second round of hearings to commence in Melbourne on Monday, 19 August.

The regulator is expected to publish its new guidance before the end of the calendar year.

Are The Mortgage Lending Taps About To Open? [Podcast]

We discuss today’s Court ruling in the Westpac ASIC HEM case.

Link to Judgement

Digital Finance Analytics (DFA) Blog
Digital Finance Analytics (DFA) Blog
Are The Mortgage Lending Taps About To Open? [Podcast]
Loading
/

What The HEM Decision Means

The key question now is will the banks revert to their previous practices of doing little to validate household spending patterns as part of the mortgage assessment processes. Some are already saying “buy now” with renewed vigour.

The Royal Commission revealed last year that some lenders ignored household expense data favouring the automated HEM decisioning. But on the basis of the finding, they are now in the clear.

Banks of course need mortgage lending to grow to enable their profits to rise, and in recent times that has been a problem. New lending momentum has been pretty slow.

HEM standards were tightened in July, meaning that the minimum spending benchmarks were lifted especially for households on higher incomes. Some banks have been asking for painful detail and history in lieu of using HEM, and this has slowed lending decisions but around half of loans are still approved by HEM.

We also need to link this with the APRA loosening of the interest rate hurdle which gives lenders flexibility on their decisioning (within limits).

ASIC is currently taking evidence from the industry on potential changes to responsible lending, and has said we should expect some revisions by years end. Plus they have previously stated that even if they lost the Westpac case, they would still insist that while HEM is a useful too it is not necessary and sufficient to meet their requirements.

The trouble is the original ASIC guidelines were vague, and the “non-unsuitable” formulation left significant ambiguity. This needs to be changed.

The way through this is to use debt to income ratios, something which has been in place in the UK and NZ for some time, as we know the risks of loss are greater when the Debt To Income ratios are higher.

But then the question will become, how prescriptive should the regulators be, and of course in the current weakening economic environment there will be an attempt to push lending harder.

So, my expectation is there will be some loosening of underwriting standards (which is bad) while the Banks can assume class actions relating to responsible lending will be unlikely to proceed.

I expect households will be required to certify the accuracy of their expenses, but that banks once they have that protection will be will to lending within the HEM framework.

So the bottom line is, yes, I expect more credit will be offered, the question is will households lap it up – leading to rises in prices (as credit growth and home price growth are linked), or will the weak wages growth, high costs of living and home price momentum (or lack of it) reduce demand.

The finance and real estate sector will be spinning hard to try and entice people into the market. Just remember we have the biggest debt bomb ticking away.

But the banks are also on notice now.

Amidst the court proceedings with ASIC, Westpac updated its group credit policies “to enhance the way [it] captures customer living expenses, commitments, and verify documentation.”

A Westpac spokesperson said, “We recognise sometimes it can be difficult for customers to provide a complete picture of their expenses and the enhancement of our expense categories means our staff and brokers have the opportunity to prompt customers to remind them about particular expenses they may have forgotten.”

HEM Westpac Win

The Federal Court has dismissed ASIC’s responsible lending case against Westpac and ordered the regulator to pay the bank’s costs. Via ABC.

I will make a separate post on the implications of this finding, in the light of ASIC stated intent to change the responsible lending laws, and the current hearings underway.

ASIC had alleged that Westpac breached responsible lending laws on up to 262,000 home loan approvals made using an automated process that relied on the Household Expenditure Measure benchmark, rather than using each applicant’s individually assessed living costs.

In September last year, Westpac agreed to pay a $35 million settlement to ASIC and admit that it breached responsible lending laws.

However, in November Justice Nye Perram sensationally rejected the settlement, finding that it was ambiguous and that the parties did not actually agree on what the responsible lending laws required and, therefore, how many loans were in breach and what the penalty should be.

Today, Justice Perram dismissed ASIC’s case against the bank, awarding costs against the regulator and leaving it negotiating with Westpac over the legal bill in reaching the failed settlement.

In the rejected settlement, Westpac had admitted its automated loan approval system used the Household Expenditure Measure (HEM) — a relatively low estimate of basic living expenses — to calculate potential borrowers’ living costs.

The bank used the HEM instead of actually evaluating the customers’ declared living expenses, and admitted this practice breached the National Consumer Credit Protection Act in certain circumstances.

However, there was an irreconcilable difference of opinion between ASIC and Westpac over when use of the HEM breached the law.

Out of 261,987 loans approved using the HEM benchmark, 211,937 involved customers declaring expenses that were lower than the HEM — that is, below the typical household’s spending on basic goods and services, and in the bottom 25 per cent of household spending on less essential items.

In these cases, use of the HEM actually reduced the amount of money the customer could borrow compared to what they declared.

In the roughly 50,000 cases where declared living expenses were higher than the HEM, use of the benchmark increased the loan amount the customer could receive.

However, in about 45,000 of these cases, both ASIC and Westpac agreed the use of the customers’ actual expenses rather than the HEM would have had no impact on whether they were deemed suitable for the loan.

That left 5,041 loans approved using the HEM that may not have been if actual declared expenses were used — they would have been referred to manual credit assessment instead.

This meant some of those customers might have been approved for home loans they potentially could not afford to repay without financial hardship.

In rejecting the settlement, Justice Perram said neither party could explain what would have happened after that manual loan assessment process, whether any of these 5,041 loans were actually unsuitable and whether any significant harm had been done to any or all of those customers