Tag: Banking Royal Commission

AMP apologises unreservedly and acts to accelerate change

AMP says the company apologises unreservedly for the misconduct and failures in regulatory disclosures in the advice business as revealed in the Royal Commission.

The AMP Limited Board today announces the following actions to accelerate the necessary change within the organisation:

  • The Board and the Chief Executive Officer, Craig Meller, have agreed that he will step down from his role with immediate effect.
  • Mike Wilkins, a Non-Executive Director on the AMP Limited Board since September 2016 and a former CEO of IAG Limited, has been appointed as acting Chief Executive Officer until the search for the new CEO is completed.
  • An immediate, comprehensive review of AMP’s regulatory reporting and governance processes will be undertaken.  This work will be overseen by a retired judge or equivalent independent expert who will be appointed imminently.
  • A Board Committee has been established to review the issues related to the advice business raised in the Royal Commission.  The Committee is chaired by Mike Wilkins and will act with the assistance of external counsel, King & Wood Mallesons.
  • The Group General Counsel, Brian Salter, has agreed to take leave while the review is undertaken.  David Cullen, AMP General Counsel, Governance has been appointed as acting Group General Counsel.

AMP will be making a submission to the Royal Commission to respond to the issues raised.  The submission will, among other matters, address the issue of the independence of the Clayton Utz report.

The Board will withdraw resolution four from its Notice of Meeting to the 2018 Annual General Meeting, which relates to an equity grant for the Chief Executive Officer.

The actions announced today build upon the existing program of work, instigated in 2017. The work underway includes:

  • Customer remediation, with the program well progressed and 15,712 customers identified and $4.7 million fees refunded to date.
  • An external review to ensure all fee for no service business practices have ceased.  This review is now complete and has confirmed that the practices ceased in November 2016.
  • An independent investigation into employee conduct.  Based on the review’s findings, the Board will determine the employment and remuneration implications for any relevant individuals around the fee for no service matter.
  • A review and complete overhaul of governance, systems and processes in the advice business.
  • An enterprise-wide cultural audit conducted by an external consultant.
  • An enterprise-wide review of risk governance, controls and culture also conducted by an external consultant.

AMP Chairman Catherine Brenner said: “AMP apologises unreservedly for the misconduct and failures in regulatory disclosures in our advice business.  The Board is determined that we will meet these challenges head on, accelerating changes in both culture and performance at AMP.

“We have been driving much-needed change and improvement in our advice business, which has undergone significant leadership and governance renewal over the past year but we know we have much more to do to.”

Craig Meller said: “I am honoured to have been the CEO of AMP.  I am personally devastated by the issues which have been raised publicly this week, particularly by the impact they have had on our customers, employees, planners and shareholders.  This is not the AMP I know and these are not the actions our customers should expect from the company.

“I do not condone them or the misleading statements made to ASIC.  However, as they occurred during my tenure as CEO, I believe that stepping down as CEO is an appropriate measure to begin the work that needs to be done to restore public and regulatory trust in AMP.”

Mike Wilkins – biography

Mike Wilkins was appointed to the AMP Limited Board and as a member of its Audit and Risk Committees in September 2016.  In May 2017, he became Chairman of the Risk Committee.  He was also appointed to the AMP Life Limited and The National Mutual Life Association of Australasia Limited Boards in October 2016.

Mike has more than 30 years’ experience in financial services in Australia and Asia in sectors such as life insurance and investment management.  Mike has more than 20 years’ experience as CEO for ASX100 companies.  Most recently, he served as Managing Director and CEO of Insurance Australia Group (IAG).  He is the former Managing Director and CEO of Promina Group Limited and Tyndall Australia Limited.

Mike is a Fellow of Chartered Accountants Australia and New Zealand and is also a Fellow of the Australian Institute of Company Directors.  Mike was made an Officer of the Order of Australia in 2017 for distinguished service to the insurance industry.

Government’s misjudgement on banking royal commission comes back to bite it

From The Conversation.

If you are a politician, what do you do when your bad judgement – or worse – has been dramatically called out for all to see?

That’s the question which has faced the government as appalling behaviour by the Commonwealth Bank, AMP and Westpac has been revealed this week at the royal commission into misconduct in the banking, superannuation and financial services industry.

Former deputy prime minister Barnaby Joyce went the full-monty confession. “In the past I argued against a Royal Commission into banking. I was wrong. What I have heard … so far is beyond disturbing”, he tweeted.

Joyce is now a backbencher, and free with his opinions. It’s another story with current ministers. They continue trying to score political points over Labor, which had been agitating for a royal commission long before it was set up.

The ministers claim the government laid down terms of reference that took the inquiry beyond what Labor was proposing. But although Labor never released terms of reference, it flagged in April 2016 a broad inquiry into “misconduct in the banking and financial services industry”.

The real difference between the government and the opposition was the emphasis on superannuation. While Labor’s inquiry would have covered it, the government wrote in a specific term of reference, hoping evidence about industry funds might embarrass the unions and therefore the ALP. The commission has yet to reach those funds.

Revenue Minister Kelly O’Dwyer, pressed about her refusal to admit the government had erred in opposing a commission, told the ABC on Thursday, “Initially, the government said that it didn’t feel that there was enough need for a royal commission. And we re-evaluated our position and we introduced one”.

Well, that’s the short version. In fact, the government was forced to drop its resistance when Nationals rebels threatened to revolt. Take a bow, Queensland Nationals backbenchers Barry O’Sullivan, George Christensen and Llew O’Brien. You did everyone a service.

Indeed, the Nationals were on the case of the banks very early. Nationals senator John “Wacka” Williams for years pursued the rorts, through Senate committee investigations.

The government’s resistance to the royal commission was bad enough but remember its earlier record on consumer protections in the financial services area.

When the Coalition came to power it was determined to weaken measures Labor had introduced. Eventually, it was thwarted by the Senate crossbench, with the upper house disallowing its changes.

Just why the government was so keen to shield an industry where wrongdoing had been obvious is not entirely clear. It appears to have been a mix of free market ideology, a let-the-buyer-beware philosophy, and some close ministerial ties with the banking sector.

In light of what is coming out, the government should be ashamed of its past performance.

This week, the commission heard about AMP, which provides a wide range of financial products and advice, charging for services it didn’t deliver, and deliberately misleading the regulator, the Australian Securities and Investments Commission (ASIC), about its behaviour.

It also heard how the Commonwealth Bank’s financial planning business charged customers it knew had died, including in one case for more than a decade. Linda Elkins, from CBA’s wealth management arm Colonial First State, agreed with the proposition put to her that the CBA would “be the gold medallist if ASIC was handing out medals for fee for no service.”

A nurse told of the financial disaster after she and her husband, aspiring to set up a B&B, received advice from a Westpac financial planner, including to sell the family home.

Seasoned journalist Janine Perrett, who now works for Sky, tweeted, “I thought nothing could shock me anymore, but in my forty years as a journo, most of it covering business, I have never seen anything as appalling as what we are witnessing at the banking RC. And I covered the 80’s crooks including Bond and Skase.”

The commission’s interim report is due September 30 and its final report by February 1, not long before the expected time of the election. There is speculation over whether the reporting date will be extended. Bill Shorten says the inquiry should be given longer if needed; Finance Minister Mathias Cormann has indicated the government would do what Commissioner Kenneth Hayne wanted.

Those in the government who think the original timetable should be adequate note that, unlike for example the royal commission into institutional responses to child sexual abuse, this inquiry is not undertaking deep dives into everything, but exposing the general problems.

From the opposition’s point of view, it would be desirable for the inquiry to run on. That would keep the banks a live debate, and leave it for Labor, if elected, to deal with the commission’s outcome. Shorten is already paving the way for a compensation scheme financed by the industry. Given the poisonous unpopularity of the banks, the Coalition could hardly run a scare about what a Shorten government might do.

Ideally, the government needs the issue squared away before the election.

The government insists it has already put in train a good deal to clean up the industry including a one-stop-shop for complaints, higher standards for financial advisers, beefing up ASIC, and a tougher penalty regime.

Morrison on Friday will announce the detail of stronger new penalties for corporate and financial misconduct, including ASIC being able to ban people from the financial services sector.

One argument the government made against a royal commission was that it would just delay action. But of course if it had been held much earlier, by now we might have in place a full suite of reforms.

Most immediately, the shocking stories from the commission are adding to the government’s problems in trying to sell its company tax cuts for big business to key crossbench senators and to the public.

Author: Michelle Grattan, Professorial Fellow, University of Canberra

Heavy penalties are on the table for banks caught lying and taking fees for no service

From The Conversation.

Another week of hearings of the Financial Services Royal Commission has seen financial services company AMP admitting it mislead the Australian Securities and Investment Commission (ASIC) on 20 occasions. The commission also saw evidence of both AMP and the Commonwealth Bank of Australia paying themselves client money when there was no adviser allocated to provide services, or the client had passed away.

It seems ASIC and the Director of Public Prosecutions will have no lack of evidence to pursue civil penalties and criminal cases. The bigger issue is what charges to go with.

In deciding what to pursue, ASIC and the DPP will need to weigh up the costs, the charges individuals are willing to plead guilty to, and the outcomes that will best serve the public interest.

Convicting individuals clearly “sends a message”, but these employees are easily replaced with others just as willing to commit the offences, unless the organisation’s culture is changed.

ASIC has confirmed it has a broad-ranging investigation into AMP already underway, and the Treasurer has suggested the behaviour might attract jail time.

Whether or not bankers get jail time will depend on the actual offences charged and a range of sentencing factors. However, the courts are increasingly emphasising the importance of substantial sentences for white collar crime.

Offences with similar maximum penalties in the UK led to a UBS banker who manipulated the London Interbank Offered Rate being sentenced to 14 years jail in 2015. Another joined him in 2016 for two years and nine months and three others were also convicted.

What AMP and CBA did

AMP and CBA have admitted they failed to provide information and report breaches to ASIC as required by the Corporations Act. Misleading Australian government agencies is also a criminal offence under the Act and the Commonwealth Criminal Code.

As well as dealing truthfully with ASIC, all entities licensed to offer financial services must act “efficiently, honestly and fairly” and take reasonable steps to ensure their employees do likewise.

It is not hard to see how taking clients’ money without providing a service is not efficient, honest or fair.

Civil penalties

Civil sanctions could apply to conduct at AMP and CBA which could ultimately involve disqualification for up to 20 years from working as a corporate officer and/or a fine of up to A$200,000.

Officers of a corporation are very senior employees and usually immediately below board level. They have a duty to be careful and diligent and act in the best interests of the company under the Corporations Act. There is a range of lesser charges from general dishonesty to false documentation offences.

Officers of a corporation have duties which require them to be careful and diligent. This is because the officers may have failed to follow up or failed to prevent conduct) after finding out about what was going on.

If ASIC and the DPP can go further and prove that AMP and CBA officers have intentionally caused their company to break the law, it is virtually impossible that conduct could be in the interests of the corporation. AMP and CBA officers may have also breached criminal offences in the Corporations Act if the wrongdoing was reckless or intentionally dishonest.

Criminal charges

Turning to more general offences, here criminal penalties range from 12 months in jail for misleading ASIC, to significant penalties for conspiracy to defraud.

Any bank employee who was involved in the creation of misleading documentation might well be exposed to fraud charges. Under Commonwealth and state law, fraud can involve reckless deception of another (either ASIC or the clients) with an intention to gain a financial advantage for another (AMP or CBA) Those offences have maximum penalties of 10 years jail. There is a range of lesser charges from general dishonesty to false documentation offences.
Those who assisted might well also be liable through accessorial liability.

Prosecutors could also turn to the conspiracy to defraud offence. The Commonwealth version of the offence involves an agreement to dishonestly influence a public official’s decisions. An agreement to provide false documents to ASIC would seem easily to fit this offence. Again, this has a maximum penalty of 10 years.

Similarly, common law conspiracy to defraud charges could be available for dishonestly misleading customers in a way that caused them financial loss. There are no prescribed maximum penalties for this version of the offence.

Multiple offences could mean sentences served concurrently, or partly cumulatively.

Although the wrongdoing may seem clear to the public, it is likely that complex matters of proof will emerge and ASIC will need to make a range of decisions about the best approach to ensuring cultural change occurs. While convictions might be deserved, the public interest is best served by ensuring that prosecutions are part of wider regulatory action leading to better banking practices.

Authors: Dimity Kingsford Smith, Professor and Director, Centre for Law Markets and Regulation, UNSW Law, UNSW; Alex Steel, Professor, UNSW Scientia Education Fellow, UNSW

730 Does AMP, CBA At The Royal Commission

A segment broadcast 18 April 2018 discussing the issues raised in the inquiry, and shortcomings of the regulator.

More evidence of bankers behaving badly (on purpose) and regulators “asleep at the wheel”.

And remember the number of financial planners continues to increase..

Later in the evening, Matter of Fact went further into the structural issues arising.

More Cultural Badness From The Finance Sector.

Today we take a look at the latest from the Royal Commission into Financial Service Misconduct, which recommenced its hearings yesterday again, with a focus on the Financial Planning Sector.

Financial Advisers provide advice on a range of areas of consumer finance, investing, superannuation, retirement planning, estate planning, risk management, insurance and taxation.

ASIC says between 20 and 40% of the Australian adult population use or have used a Financial Planner.  That means that around 2.3 million Australians over 18 received advice. A number of issues have surfaced in recent years, including charging fees for no service, or advice not provided in full, the provision of inappropriate financial advice, as well as improper conduct by financial advisors and the misappropriation of customer’s funds.

There has been massive growth in the number of financial advisers, to more than 25,000 up 41% from 2009.  5,822 Financial Advice licences were issued in Australia to firms able to offer advice. What you may not know is that the top five players in Financial Advice in Australia are the big four banks and AMP, who together have nearly 48% of the $4.6 billion dollars in annual revenue.  30% of advisers work for one of the major banks and 44% work for the top 10 organisations by revenue, so it is very concentrated. Then there is a long tail of smaller organisations with 78% operating a firm with less than 10 advisors. The average advice licence covers 34 individuals operating under it.

There have been a number of significant scandals relating to the provision of financial advice in recent years.

Townsville based Storm Financial encourage investors to borrow against their home to invest in indexed share funds, in a “one size fits all model” of advice. Storm collapsed in 2009 will losses of more than $3 billion dollars. Around 3,000 of its 14,000 clients had suffered significant losses. Many of the investors were retired or about to retire, and with limited assets and income. Some lost their family homes or had to postpone their retirement. The founders were found to have caused or permitted inappropriate advice to be given and had breech their duty of care under the corporations’ act. Specifically, the one size fits all model of advice failed to take into account individual circumstances which led to devastating consequences for the individual investors. They had focused too much on the profitability of the business as opposed to the best interests of individual investors. ASIC worked with a number of major players for customers who had made investments through Storm. CBA undertook to make $136 million dollars in compensation to many CBA customers who borrowed from the bank to invest through Storm and who had suffered financial losses. This is in addition to $132 million CBA paid under the Storm resolution scheme.  ASIC looked at settlements distributed by Macquarie Bank to Storm investors leading to a revised agreement where the bank agreed to pay $82.5 million by way of compensation and costs. Bank of Queensland agreed to pay $17 million as compensation for Storm related losses.

The second scandal involved Commonwealth Financial Planning Limited. A whistle-blower revealed allegations of misconduct within CFL to ASIC in 2010. It was suggested that some advisers were encouraging investors to invest in high risk, but profit generating products which were not appropriate. Some were even switching products without the client’s permission. This also included forging client signatures. When the GFC hit in 2008, thousands of CFL clients, many of whom were nearing or in retirement, lost significant amounts as a result of this misconduct.   More than $22 million was paid to clients in compensation for receiving inappropriate financial advice from two financial planning advisers. Later it became evident the misconduct was more widespread so CBA implemented a second programme of compensation relating to advice from advisers. Their Open Advice programme had conducted more than 8,600 assessments, of which more than 2,500 required compensations to a total of $37.6 million has been offered.

So turning to the hearings. First up was Peter Kell from ASIC who described the “Fee for no service” problem.

The Future of Financial Advice reforms (FOFA) has tightened the rules, but the fees can be significant. And as we will see, some players simply took the fees to bolster their profits.

Next up was AMP, and we heard over the next day or so of more than 20 occasions when AMP failed in their duty to notify ASIC of a number of potential breaches.

Despite the fact AMP was aware of a range of issues they simply allowed the practices to continue.  There was an absence of monitoring activities, what AMP said it was going to do to ASIC, e.g. training for staff in new procedures was different from what they actually did.  The issues had been occurring since 2009, and AMP acknowledge that on at least 20 occasions they made false and misleading statements to ASIC about potential breeches.

Worse, the Royal Commission revealed today that AMP’s law firm, Clayton Utz, removed outgoing chief executive Craig Meller’s name from a draft of a critical report about the business.

So once again we see the cultural norms in financial services driving poor behaviour, which may bolster profits but at the expense of their customers, and an apparent willingness to avoid the issues with the regulators. This is shameful, but not surprising.

So we see mismanagement again, and failure of regulation.

We suspect we will see more of the same in the day ahead. Frankly I am not surprised because the cultural norms we see displayed here are precisely the same as were observed in the previous lending related hearings. The quantum of change required within our financial services organisations is profound and I also believe the scope of the Royal Commission should be expanded to include the role and function of our regulators.

Multiple failures are clearly costing households dear. But then the companies seem willing to cop the settlements, and move on, without root cause analysis and fixing the problem. This is not acceptable behaviour in my book and is well below community expectations.

Major banks say brokers act for customers, not banks

From The Adviser.

Several major banks have answered a call to clarify where broker allegiances lie, telling the royal commission that brokers act on behalf of customers and are not agents of the banks.

Responding to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry’s closing statements, Westpac and Commonwealth Bank of Australia (CBA) have both revealed that they believe brokers act for consumers, rather than the lenders.

In the closing statements, Commissioner Hayne said it would also be of assistance if parties involved in the hearings could seek to answer the question of who a broker acts for.

“It’s a deceptively simple set of questions to ask: who does a mortgage broker act for? You can put it in three ways, I think, and the issue has at least three elements to it. Who does the broker act for? That might be seen as an inquiry about fact or fact and law. Two, who does the customer think the broker is acting for? And third, who does the lender think the broker is acting for? And do you give separate answers at separate steps along the way? If you do, what are the markers that tell you, “I’ve gone from a step where this set of answers is appropriate into the next stage where that set of answers is appropriate”.

“So who does a broker act for, who does the customer think the broker acts for, who does the lender think the broker acts for, are there varying or varied answers at various steps? If there are, what are they?”

In response, Westpac said it was its position that “the broker acts for the customer”.

“Brokers are instructed by and act on behalf of the customers,” the response reads.

“Westpac has direct contractual arrangements with aggregators. Those agreements make it clear that there is no relationship of agency between Westpac and those aggregators.

“Westpac accredits brokers, but the aggregators that Westpac has a contractual relationship with are responsible for managing broker conduct and requirements.”

However, the big four bank said it was “unlikely that customers would think that the broker acts for the lender, rather than for the customer or for themselves as an intermediary or arranger”.

It continued: “The broker’s independence from the lender is one of the things that customers value about brokers (for example, because they offer access to products from multiple lenders).

“To the extent that there is any customer confusion in this regard, such confusion is unlikely to disadvantage any customer. That is because the customer is likely to consider a broker’s recommendation more carefully if they thought that the broker was acting on the lender’s behalf”.

CBA does not consider brokers its agents

Likewise, CBA highlighted that “customers believe that brokers are their agents” and that “customers assess satisfaction with their brokers as if they are their agents”.

It added that “broker firm marketing materials also position brokers as customers’ agents”, highlighting statements from both the MFAA and AFG websites to confirm its position.

Doubling down on its stance, CBA said the evidence put forward to the commission during the hearings “does not establish that CBA regarded an accredited broker as acting as its agent”.

CBA outlined that its agreements describe head groups (i.e. aggregators) as its agents, and then, only in relation to the completion and collection of: customer identification, tax file number disclosure, privacy protection of information forms, and any bank account opening application.

The bank stated: “[A]ccredited mortgage brokers do not act as the agent of CBA. They are authorised by CBA to submit application forms to CBA on behalf of customers who choose to apply for a CBA product.

“When the broker submits the loan application to the lender which the customer has chosen, the broker is acting as the agent of the customer, not as an agent of the lender.”

The bank therefore outlines that its remuneration arrangements with brokers and head groups do not breach its statutory obligations.

“The obligation imposed upon CBA… is an obligation to have adequate arrangements in place to ensure clients are not disadvantaged by any conflict of interest that may arise wholly or partly in relation to credit activities engaged in by CBA or its representatives.

“As brokers are not agents of CBA with respect to the relevant conflict, they are not representatives of CBA, as defined in s 5 of the NCCP Act. Consequently, the obligations under s 47(1)(b) do not apply to broker’s activities, as there is no relevant conflict that arises in relation to credit activities engaged in by CBA or its representatives; only in respect of separate and distinct credit activities engaged in by brokers.”

Question “not capable of a simple answer”

NAB, however, was more guarded in its repsonse.

The major bank said: “This is both a legal and a factual question, which – as posed at the current level of generality – is not capable of a simple answer.

“The answer to this question will depend, in any given case, on matters which are not the subject of evidence presently before the Commission including, amongst other things:

(a) the terms of the relevant contract between the broker and the lender, the broker and the customer, the customer and the lender, the aggregator and the broker, and the aggregator and the lender;

(b) the content of extra-contractual communications between those parties; and

(c) the state of mind of the particular customer and the lender.”

Home Prices and Lending To Fall? Perhaps Hard!

The good people at UBS has published further analysis of the mortgage market, arguing that the Royal Commission outcomes are likely to drive a further material tightening in mortgage underwriting. As a result they think households “borrowing power” could drop by ~35%, mainly thanks to changes to analysis of expenses, as the HEM benchmark, so much critised in the Inquiry, is revised.

Their starting point assumes a family of four has living expenses equal to the HEM ‘Basic’ benchmark of $32,400 p.a. (ie less than the Old Age Pension). This is broadly consistent with the Major banks’ lending practices through 2017.

As a result, the borrowing limits provided by the banks’ home loan calculators fell by ~35% (Loan-to-Income ratio fell from ~5-6x to ~3-4x).

This leads to a reduction in housing credit and a further potential fall in home prices.

This plays out similarly to our own scenarios, which we discussed a couple of weeks back, exploring the outcomes from a mild correction, to a crash. A 20% reduction in borrowing power has already hit, by the way, and this before the Royal Commission revelations.

This will have a significant impact on the banks, but a broader hit to the economy also.

 

CBA sought to halve broker flows in 2016

From The Adviser.

Confidential internal documents from the Commonwealth Bank show that the bank sought to reduce the proportion of broker flows from around 45 per cent to “between 20 per cent and 30 per cent” in 2016.

According to an internal Reputational Impact Brief that was raised internally in October 2016, the Commonwealth Bank of Australia (CBA) was actively seeking to reduce the number of accredited mortgage brokers who were either inactive or providing very little business.

The document, which has been published by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, outlines that although CBA had approximately 13,000 accredited brokers at the time, only 1,700 wrote the “overwhelming majority” of its loans.

According to the bank, the lower performing mortgage brokers had both lower conversion rates and higher arrears.

It therefore sought to remove approximately 3,198 mortgage brokers from its accreditation (but only ended up revoking the accreditation of 710 brokers on the basis of inactivity).

The brief reveals that this project was part of a “broader piece of work” that sought to effectively halve the number of brokers writing business to the big four bank.

While outlining that the mortgage broking channel represented 45 per cent of its home loan flows in June 2016, the bank said that it was “seeking to reframe the broker strategy with the aim [of] re-balancing flows from the channel to be between 20 per cent and 30 per cent”.

By March 2017, another Reputational Impact Brief outlined that the bank had approximately 12,000 accredited brokers — one thousand less than just six months before.

This second brief revealed that the decision to reduce broker flows was being driven by “pressure from equity analyst and shareholders to re-balance home loan flows in favour of [its] Proprietary Lenders, where [the bank] make[s] a higher margin”.

Around the same time, the bank reiterated this strategy when The Adviser asked CEO Ian Narev whether the bank was moving away from the broker channel.

This was again referenced in the bank’s most recent half-year results (which also showed that broker numbers still account for 40 per cent of new home loan originations), where it stated: “Our strategic focus on improving the home loan experience for customers continued to drive increased lending through the retail bank’s proprietary channels.”

During the hearings for the royal commission, CBA’s executive general manager for home buying, Dan Huggins, clarified: “I think there is a difference between the sales and the proportion. We certainly have a objective to increase the proportion of loans that are coming through the proprietary channels, but I still want to sustain a strong broking channel and, therefore, the sort of dollar sales… I’m comfortable with where they are now but I would like to move the proportions.

“So if I could hold the current level of sales and my broking channel and then grow… the proprietary channel, that would be – you know, that would be part of the objective.”

The bank did concede, however, that it would have been better if CBA had not disaccredited brokers purely based on volume, but instead required inactive brokers to undergo more training in order to ensure the quality of their work.

Indeed, at the end of 2017, the bank announced that it would be bringing in new benchmarks for mortgage brokers “designed to lift standards and ensure the bank is working with high-quality brokers who are meeting customers’ home lending needs”.

The accreditation crackdown meant that brokers would need to fulfil more requirements, including having at least two years’ experience and hold “at least” a Diploma of Finance and Mortgage Broking Management. The bank has also since amended the way it segments its accredited brokers, bringing in a new, two-tier system: elite broker and essential broker.

Narev’s “confidential” letter to Stephen Sedgwick

As well as reducing broker numbers, the royal commission has revealed that the bank’s CEO was supportive of changes to broker commission.

The royal commission has now released the full contents of a confidential letter written by outgoing CEO Ian Narev to Stephen Sedgwick AO, as the latter was undertaking his review into retail banking remuneration.

As covered in The Adviser’s sister publication, Mortgage Business, the CBA CEO told Mr Sedgwick that he believed broker commissions were conflicted and suggested extending FOFA to include the mortgage industry.

“As the Reviewer identifies, the use of upfront and trailing commissions linked to volume can potentially lead to poor customer outcomes,” Mr Narev wrote.

He added: “A move to a flat-fee payment would enable brokers to be agnostic towards loan size and leverage. However, consideration is needed on the payment amount, on how to link the fixed payment to an underlying security rather than a product (i.e. to avoid unintended incentives to split loans into multiple fixed/variable products), and on appropriate ‘clawback’ periods to dis-incentivise the churning of loans to maximise broker income.

“A move to flat-fee could also consider the removal of ‘trail commissions’ which can encourage brokers to suggest slower paydown strategies (e.g. interest-only) that maximise broker trail commission income.”

Mr Narev added that any changes to volume-based commissions would also “need to be made uniformly across the industry and across both proprietary and broker channels to eliminate bias and avoid significant market disruption”.

Mr Narev concluded: “We agree with the Reviewer’s observations that while brokers provide a service that many potential mortgagees value, the use of loan size linked with upfront and trailing commissions for third parties can potentially lead to poor customer outcomes.

“Mortgages also sit outside the financial advice framework, even though buying a home and taking out a mortgage is one of the most important financial decisions an Australian consumer will make. We would support elevated controls and measures on incentives related to mortgages that are consistent with their importance and the nature of the guidance that is provided. For example, the de-linking of incentives from the value of the loan across the industry, and the potential extension of regulations such as Future of Financial Advice (FOFA) to mortgages in retail banking.”

ABC The Business Does Mortgage Brokers

A brief segment on Thursday’s programme discussed the Royal Commission in Financial Services Misconduct examination of the mortgage broking industry.

The segment highlighted the significant fees, and the risks of misaligned incentives.

Questions over just who’s interest mortgage brokers act in have reverberated through the $50-billion industry. The broking industry has hit back insisting the customer comes first.

Royal commission: The main takeaways for brokers

More from MPA’s Otiena Ellwand on the Royal Commission.

With the royal commission’s first round of hearings now over, industry leaders have taken a step back to assess what happened and how the latest revelations will impact the third-party channel.

The commission covered a lot of ground over the last two weeks examining the banks and their dealings in the home loans sector, and brokers are a big part of that. The commission identified issues with how household expenses are verified, questioned CBA about its broker accreditation process, scrutinised upfront and trail, and zeroed in on Aussie Home Loans for broker misconduct.

There’s no doubt that brokers will be included in the interim report due by the end of September. So what should brokers know and takeaway from what just happened?

Higher expectations for living expenses and trail

Connective’s group legal counsel, Daniel Oh, said living expenses and how they’re verified will be heavily scrutinised following the royal commission’s examination of ANZ. During that hearing, it was revealed that ANZ failed to follow processes to verify customers’ financial situations. Stating living expenses at or below HEM can no longer be a mechanical process on loan applications, he said.

“You need to ensure that you have done the work to verify and have the necessary evidence to support this figure. If the figure is at or below HEM, expect greater scrutiny,” Oh said.

On trail, Oh expects that at a minimum there will be more scrutiny as to what brokers do post-settlement to justify their earnings.

“Our position on the topic is that you should speak or meet your existing clients at least once a year, if not more, to ensure that client’s needs continue to be met.”

Customer at the centre of everything

William Lockett, managing director of Specialist Finance Group, said the most important takeaway from the royal commission is to always ensure that the customer and their needs are the sole focus of the bank, financial planner or finance broker.

Banks and brokers need to work more constructively together to ensure they are achieving the best outcome for the consumer, he said.

But he also said both need to fess up if they’re at fault. “Banks also need to take sole responsibility for their own failings and shortfalls and likewise finance brokers need to do the same.”

Both groups also need to embark on a mission to restore trust with customers.

“All parties within the financial services industry should continue to look at improving their business model and how they engage with all other parties and ultimately the consumer,” he said.

Accountability and transparency need to be restored

Peter White, executive director of the FBAA, said the banks need to be completely transparent about the issues being revealed at the royal commission and then put positive actions in place to remedy them.

“It doesn’t matter how big you are or how well recognised your brand is, you are accountable for your actions every single time.”

“Also as much as there are issues on our own doorstep, the banks need to make some serious cultural and process changes and ensure those who should be are held very much accountable,” White said.

What’s next for brokers and banks?

Influenced by the quest for ever greater profits, cultural norms in banking have strayed too far from good customer outcomes, and as a result, some households are in strife, said Martin North, principal at Digital Finance Analytics.

The royal commission has and will continue to examine the root causes of this— some of which have been known for a long time— but North said it seems “we need considerable changes”.

“I also feel that the role of brokers will change on the back of this – still a role for them – but on a different basis. Also it raises questions about vertical integration.”

North believes there is still more to come out, and that the focus will be on the cultural practices and remuneration models of the executives in these banks.

“There has been a credit fest, and it’s time for this to be normalised. Regulators were also asleep at the wheel and only reactive to events as they appeared. No one is the customer’s champion – that’s what we need.”