Tag: Banking Royal Commission

ANZ CEO weighs in on the HEM debate

The use of the Household Expenditure Measure to assess serviceability was initially less common for broker-originated loans, but such is no longer the case, ANZ chief Shayne Elliott has revealed, via The Adviser.

Appearing before the financial services royal commission in its seventh and final round of hearings, ANZ CEO Shayne Elliott was questioned over the bank’s use of the Household Expenditure Measure (HEM) to assess home loan applications.

In round one of the commission’s hearings, ANZ general manager of home loans and retail lending practices William Ranken admitted that the bank did not further investigate a borrower’s capacity to service a broker-originated mortgage.

In his interim report, Commissioner Kenneth Hayne alleged that using HEM as the default measure of household expenditure “does not constitute any verification of a borrower’s expenditure”, adding that “much more often than not, it will mask the fact that no sufficient inquiry has been made about the borrower’s financial position”.

Counsel assisting the commission Rowena Orr QC pointed to a review of ANZ’s HEM use by consultancy firm KPMG upon the Australian Prudential Regulation Authority’s (APRA) request.

The KPMG review found that 73 per cent of ANZ’s loan assessments defaulted to the HEM benchmark.

Mr Elliott noted that since the review, ANZ has taken steps to reduce its reliance on HEM, with the CEO stating that the bank plans to reduce the use of HEM for loan assessments to a third of its overall applications.

When asked if there was a disparity between the use of HEM through the broker channel and branch network, Mr Elliott revealed that prior to the bank’s move to reduce its reliance on the benchmark, the use of HEM was less prevalent for broker-originated loans.

“Perhaps surprisingly, when we did the review, when we were talking about the mid-70s [percentage], the branch channel actually had slightly higher usage or dependency on HEM as opposed to the broker [channel].

“[That] actually is counterintuitive,” he added. “I think it would be reasonable to expect that if [ANZ] knows these customers, one might expect to use HEM less.”

Mr Elliott attributed the disparity to the higher proportion of “top-ups” for existing loans through the branch network, noting that ANZ’s home loan managers would be more likely to “shortcut the process” through the use of the HEM benchmark.

However, the CEO said that according to the latest data that he’s reviewed, the branch network’s reliance on HEM is lower than in the broker channel.

“[It’s] changing as we speak,” he said.

“As in the latest data I saw, the branch network is now lower in terms of its usage or reliance on HEM versus the broker channel. And that’s because we are in, if you will, greater control of that process in terms of our ability to coach and send signals to our branch network.”

However, he added that the use of the benchmark for broker-originated loans is “coming down rapidly” in line with the bank’s overall commitment to reduce its reliance on HEM.

Flat-fee ‘credible alternative’ to commission-based model

Further, as reported on The Adviser’s sister publication, Mortgage Business, Mr Elliott told the commission that a flat fee paid by lenders to brokers is a “credible alternative” to the existing commission-based remuneration model.

When asked by Ms Orr about his view on broker remuneration, Mr Elliott said that a flat fee paid by lenders is a “credible alternative” to the current commission-based model.

In a witness statement provided to the commission, Mr Elliott said that there’s “merit in considering alternative models for broker remuneration to ensure that the current model remains appropriate and better than any alternative”.

Reflecting on his witness statement, Ms Orr asked: “Is that because you accept that there’s an inherent risk that incentives might cause brokers to behave in ways that lead to poor customer outcomes?”

The ANZ CEO replied: “There is always that risk. [The] term incentive is to incent behaviour. Therefore, it can be misused or it can cause unintended outcomes if the broker is apt to be led by their own financial reward.”

Mr Elliott acknowledged that “no system’s perfect” and that a “fixed fee is also capable of being misused and leading to unintended outcomes”.

However, he added: “It is just my observation that there is at least some data on this from other markets, most notably in northern Europe. It seems a model that’s worth looking at.”

Mr Elliott continued: “I’m not suggesting it’s necessarily an improvement. It just feels like a credible alternative.”

The ANZ CEO compared a flat-fee model in the broking industry to the financial planning industry.

“The service is the work you are paying for, and perhaps the fee should not necessarily be tied to the outcome.

“I think that’s not an unreasonable proposition.”

However, the ANZ chief noted the negative implications of a flat-fee model, stating that with lenders ultimately passing on costs to consumers, the model would be a “major advantage” to higher income borrowers.

“The difficulty with the fixed fee, if I may, is it essentially is of major advantage to people who can afford and have the financial position to undertake large mortgages,” he said.

“[A] subsidy would be paid by those least able to afford it, and it runs the risk of making broking a privilege for the wealthy.”

There’s ‘merit’ in a fees-for-service model

Ms Orr also asked Mr Elliott for his view regarding a consumer-pays or “fees-for-service” model.

The QC asked whether such a model would address some of the concerns expressed by Mr Elliott about a flat-fee model.

Mr Elliott said that if a fee is paid by borrowers, it would be “uneconomic” for people seeking a loan to visit a broker, repeating that using a broker would become a “service for the wealthy”.

Ms Orr then asked the CEO for his thoughts on a Netherlands-style fees-for-service model, supported by Commonwealth Bank CEO Matt Comyn, in which both branches and brokers would charge a fee for loan origination.

Mr Elliott replied: “There’s merit in looking at that, [but] it still is an imposition of cost that would otherwise not have been there.”

Mr Elliott added that there would be “new costs” associated with a Netherlands-style model, noting that borrowers seeking a “top-up” for an existing loan would need to pay an additional fee.

In response, Ms Orr alleged that under the current commission-based model, costs are also “filtered back down” to consumers.

To which Mr Elliott replied: “In general terms, yes. Not necessarily in direct terms like that fee I charge you as a borrower, [and] at ANZ, we have, for some time, disclosed [commissions]. So, when you do get a mortgage through a broker, we do advise the customer what we have paid that broker. So, it is disclosed to them.”

The ANZ CEO also said that under a fees-for-service model, consumers could be incentivised to take out larger loans to avoid paying a fee if they wish to top up their loan.

Conversely, Mr Elliott added that if a flat fee is paid by lenders, some brokers may be incentivised to encourage clients to borrow less and “come back for more top-ups so that they get more fees”.

Mr Elliott reported that top-ups on existing loans make up 30 per cent ($17 billion) of total volume settled by ANZ.

The ANZ chief also told Ms Orr that he doesn’t believe a move to introduce an alternative remuneration model would be “hugely successful” without regulatory intervention.

Fund managers not keen on ‘good customer outcomes’

The “dilemma” of pleasing both customers and institutional shareholders as a listed bank have been explored by the royal commission this week, via InvestorDaily.

On Thursday (29 November), Bendigo and Adelaide Bank chairman Robert Johanson spent a short amount of time in Hayne’s witness box where he was mostly used as an example of how banks should be remunerating their staff.

Unlike the big four, Bendigo bankers are paid a higher proportion of their remuneration in a base salary, with a smaller proportion linked to short-term incentives. Part of the long-term incentives are linked to the bank’s Net Promoter Score (NPS) and other customer centric measures.

Mr Johanson told the commission that shareholders have generally supported the bank’s remuneration model, which he admitted was different to its peers.

However, counsel assisting Rowena Orr submitted into evidence a report by proxy advisers ISS Governance relating to Bendigo’s 2018 AGM, which advised shareholders to vote against a resolution approving performance rights and a deferment of shares to the bank’s managing director, Marnie Baker.

The report noted that one reason for the recommendation was the increased weighting given to the “customer hurdle” in Ms Baker’s long-term incentives. The proxy advisers believed this “had no direct link to shareholder wealth outcomes”, and that “customer-centric measures should be “considered and assessed as part of a banking executive’s day job”.

Mr Johanson said he believes, to the contrary of the ISS recommendation, that customer centricity is linked to the long-term viability and profitability of the bank.

“The ‘day job’ as is were includes thinking about how all parts of the remuneration package are working together to achieve common outcomes,” he said.

“The proxy advisers of course are employed by institutions. It provides a pretty rigorous way for large numbers of institutions to get to grips with these questions when historically they haven’t been that interested in them.

“But the people who pay the proxy advisers themselves are assessed typically on short-term financial outcomes. So it’s no surprise that a fund manager is interested in short-term financial outcomes because we all as investors, through our superannuation funds, are concerned about whether our fund has done well over the last six months or not.

“There is a dilemma in all this.”

Mr Hayne suggested the process was “reducing some quite complex problems to binary outcomes”.

Approximately 40 per cent of Bendigo and Adelaide Bank is held by institutions.

Bank branches becoming ‘uneconomic’ says ANZ CEO

ANZ chief executive Shayne Elliott has conceded that branches are losing their lustre as cash becomes a niche payment solution and consumers opt to bank online, via InvestorDaily.

Counsel assisting Rowena Orr asked why the major bank has been reducing its retail footprint during Mr Elliott’s time on the stand at the royal commission this week.

Mr Elliott estimated 35 ANZ branches closed this year and up to 50 had ceased operating last year.

ANZ has closed around 110 branches in the past decade: 55 in inner regional Australia, 44 in outer regional areas, six in remote locations and four in very remote areas.

Mr Elliott noted that some branches had also opened in that time, describing it as a redistribution of its network.

“Why so many branches this year, Mr Elliot?” Ms Orr asked.

“Well, consumer behaviour is changing very quickly. And not that it has changed just this year but over the last few years we’re seeing a number of fundamental changes,” Mr Elliott said.

“The Reserve Bank governor the other day referred to the fact that the usage of cash is almost becoming a niche payment solution.”

Mr Elliott added that most of what people are doing in branches is cash related, in deposits and withdrawals. He also noted a decrease in retail traffic of around 20 to 30 per cent over the last couple of years in areas where the bank had closed shops.

However, small business usage was said to remain reasonably solid.

“So essentially, we are confronted with a dilemma where we have shops and a distribution network with less and less people in it, and therefore, at some point they become uneconomic,” he said.

“At the same time, what we have seen is a rapid increase in the use of technology for people who prefer to do their banking on their phone or at home, or even in some cases, on the phone.”

Ms Orr asked if people still go into branches to inquire about loans.

“Yes, perhaps, although I would say for ANZ – and we may be different from our peer group – our home loan book only – less than a third of home loans are originated through a branch,” Mr Elliott said.

“Around 55 per cent come through brokers and another roughly 15 per cent come through our mobile banking network, ie, we send somebody to you. So the branch network is not a terribly efficient or well-used avenue for home loans.”

ANZ had considered two proposals with closing branches, one to sell and the other to continue with a branch by branch closure program. Mr Elliott said the organisation had chosen to continue with closures based on customer behaviour and impact data.

Mr Elliott was also asked about the considerations that ANZ takes into account during branch closures. He responded by saying the bank does not consider the financials of the branch, rather the transactions that are available in the area and local alternatives in close by branches and ATMs.

“There’s very little correlation between what happens in the branch and the economic outcome to the bank. What most people do in a branch drives very little value,” he said.

“We don’t charge fees for most of what they do. It is a service that is not necessarily correlated to where we generate our profits or earnings.”

He added that delinkage is accelerating, with more people using brokers.

ANZ’s attitude towards its retail banking division is in stark contrast to that of its largest competitor, CBA.

When CBA boss Matt Comyn gave evidence before the Hayne inquiry last week he made clear the group’s preference for consumers to use its extensive branch network.

Mr Comyn revealed that CBA had sought to introduce a “flat fee” commission-based model in January 2018, before choosing not to go ahead with the change in fear that the rest of the sector would not follow suit.

MFAA CEO Mike Felton said that CBA’s position was “not surprising”, but was “entirely self-serving” and was “designed to destroy competition and reduce the bank’s reliance on the broker channel”.

Commenting on CBA’s attempt to introduce a flat-fee remuneration model, Mr Felton said: “CBA’s model is anti-competitive and designed to drive consumers back into their branch network, which is the largest branch network of the major lenders.

“Mr Comyn’s solution for better customer outcomes is a new fee of several thousand dollars to be paid by consumers to CBA for the privilege of becoming a CBA customer.”

Mr Felton added: “Cutting what brokers earn by two-thirds would save CBA $197 million, which is good for CBA’s shareholders. However, it would destroy competition, leaving millions of customers without access to credit outside of major lenders.”

Ken Henry calls time on capitalism

The NAB chairman has suggested that it is time for the traditional capitalist model to be flipped on its head; via Investor Daily.

 Dr Ken Henry, chairperson at National Australia Bank, suggested during round seven of the royal commission that maybe it was time for the banks to rethink its capitalist model.

“The capitalist model is that businesses have no responsibility other than to maximise profits for shareholders. A lot of people over the past 12 months have said that’s all that you should hold boards accountable for.”

Dr Henry said that some people would argue customers were part of pleasing shareholders as treating customers well was important to the long-term interests of shareholders.

“But that approach sees customers as instruments in an instrumental fashion, that the customers are seen as the means by which shareholder profits are secured, rather than the customer being the focus,” he said.

Dr Henry said a debate was now being had over what businesses should be accountable for and the possibility of an alternative solution.

“Within NAB we have thought very deeply about whether we should see our customers in purely instrumental terms, as a means to the end rather than the end to itself.”

Dr Henry noted that views within the bank differ, but added that NAB had realigned its incentives to focus on its customers.

“For what it’s worth, NAB’s view clearly today is that incentives should be aligned with customer experience, customer outcomes to be clear,” he said.

However, as Dr Henry demonstrated on the stand, this has not always been the case for NAB, as counsel-assisting Rowena Orr showed that APRA held the view that NAB’s remuneration was not appropriate.

“APRAs view was that NAB’s remuneration arrangements weren’t operating as they should to support the prudent management of risk at NAB?” said Ms Orr

“That was their view, yes,” said Dr Henry.

As Ms Orr pointed out, APRA’s review of NAB claimed that the bank had a heavy emphasis on profitability measures in individual performance assessments and unlike its peers had no risk-adjusted measures of profitability.

“Well, it was no surprise. Concerning. Absolutely concerning, but not a surprise,” said Dr Henry.

Evidence of the remuneration model was presented by Ms Orr when she questioned Dr Henry why NAB in 2016 gave its executives their full short-term variable remuneration.

Ms Orr pointed out that in 2016, NAB’s bonus pool was set at 100 per cent and that CEO Andrew Thorburn did not even mention the matters when stating the decision.

“So, he (Mr Thorburn) didn’t mention any of those matters, adviser service fees, plan service fees, the bank bills swap rate, the foreign exchange breaches,” said Ms Orr.

Dr Henry said that there was enough information about the issues to have impacted the decision, but it did not concern him that it wasn’t raised.

“You said earlier Dr Henry, that you weren’t sure what the board could have done differently or when it could have. I want to suggest to you squarely that this was a point at which the board could have conducted itself differently. It could have sent a strong message by reducing the pool in response to these very significant compliance issues,” Ms Orr said.

“Of course, we could have, and we decided not to. For very good reasons and I’m still happy with those reasons,” said Dr Henry

We’ll wait an eternity for the banks to fix themselves

From The Conversation.

Asked at the banking royal commission how long it might take to embed the right culture in the National Australia Bank, its chairman Ken Henry replied: ten years.

As head of the Commonwealth Treasury before he left to join the NAB board in 2011, Dr Henry was regarded as a good, if cautious, forecaster. So ten years might be about the right answer.

He said there were “cultural inhibitors” at the bank, and he is right.

Deeply embedded within the workings of many financial institutions is a corrupt ethos of client exploitation.

These words might seem harsh, a kneejerk reaction to outrageous and possibly transient circumstances.

But they are neither my words, nor new ones.

Commissions corrupt, inevitably

Way back in 1826, when life insurance was in its infancy, it was already apparent that many policies were being mis-sold.

Charles Babbage, better known as the inventor of the first programmable computer, but also actuary of the Protector Life Assurance Society of London, identified the fundamental problem with commission-based selling of financial products, which he likened to “the acceptance of a bribe”.

It is a system, said Babbage, that will inevitably “corrupt and debase those through whom it is carried on”.

What Babbage described is what economists have subsequently called the “agency problem”, and it is endemic to commission-based remuneration where the agent is supposed to be working in the best interest of the client, but will gain greatest personal benefit by selling the product that offers the largest commission.

It is present whether the product is insurance, or financial advice, or a mortgage.

Bankers’ codes of ethics don’t work

The Royal Commission has shown that insurance companies, banks, brokers and advisers are prepared to trample on the trust placed in them by millions of Australians by putting their own income and interests ahead of their clients’.

The way professions have typically addressed the agency problem is by constructing a set of moral codes and formal regulations to prevent (or at least limit) bad behaviour.

Medics have their Hippocratic Oath; lawyers have their Code of Ethical Conduct, and in large measure they seem to work.

Insurers, bankers, brokers and financial planners have less formal codes of conduct, but it is now clear that they don’t work – they are little more than smokescreens to conceal self-interested avarice.

As Babbage noted almost two centuries ago, wherever financial products are sold on commission, the payment received by the agent or broker has all the characteristics of a bribe.

What will work is removing temptation

These habits of rapacity are so deeply ingrained in the culture and operation of financial institutions that no amount of self regulation, no elaboration or reinforcement of voluntary codes of conduct, has been able to spare the sector from the corruption and debasement that Babbage foresaw.

More self regulation won’t help.

Here’s what would.

First, ban commissions of all types

The government should impose an outright ban on the payment of any commission of any kind with respect to any consumer financial transaction.

The cost of the work should be transparently priced, and should be paid for at the point of delivery.

It would, at a stroke, end high-pressure selling and would reward financial advisers and brokers for the service they actually deliver to clients.

Those who deliver good advice would prosper. The rest would go out of business.

The idea lies at the heart of the banning of commissions in Labor’s Future of Financial Advice Act, which unfortunately did not extend its ban on commissions to those for insurance.

Then report fees as dollar amounts

Second, where clients buy a financial product that charges an annual management fee, such as a superannuation account, the fee should be reported to the client in dollar terms rather than the percentage of funds under management.

Each year the client should be given the option of a “free transfer” of their funds to an alternative provider that can offer the same product for a lower fee.

It would open up the opaque structure of management fees to critical review by clients, and would impose competitive pressure to drive down fees, which in Australia’s bloated superannuation sector are more than double the OECD average.

Such reforms would be greeted with howls of protest from super funds (and banks, where banks still control them) but as Babbage foresaw and the Royal Commission has demonstrated, the industry has become so beholden to its own self-interest that it has forfeited the right to control its future.

Author: Paul Johnson Warden, Forrest Research Foundation, University of Western Australia

ASIC ‘strongest message’ to banks was a press release

The chair of ASIC told the royal commission that ASIC’s strongest message to banks was an expression of disappointment in a press release, via  InvestorDaily.

James Shipton, chair of ASIC, was again on the stand during day five of the seventh round of the royal commission and told the commission that ASIC often sent to the banks the strongest message it could.

“We sent the strongest message we could have which was a public expression of disappointment, and also a private expression of disappointment,” said Mr Shipton.

“That is the strongest message you could have sent Mr Shipton?” said Ms Orr.

“That is what I have been advised,” said Mr Shipton.

Mr Shipton was responding to questions from counsel assisting Rowena Orr about the commissions response to NAB’s spot foreign exchange business.

ASIC entered an enforcement undertaking with NAB and it was negotiated that the bank would pay a $2.5 million community benefit and develop a program of changes within its foreign exchange business to prevent, detect and respond to conduct.

It was to be assessed by independent expert Promontory in November 2017, yet the commission heard that by March 2018, Promontory produced a report that it was unable to assess the program.

“Progress in developing the program has been slow. There appears to have been no comprehensive risk assessment across NAB’s spot foreign exchange business against the enforceable undertaking requirements and relevant regulatory standards and guidance,” said Promontory.

It was then decided that, despite the enforceable undertaking requiring it to take action, ASIC gave NAB another three months to deliver the program without any action taken against them for not complying.

Mr Shipton said that it was a reasonable decision and that NAB did face negative consequences for their failure to comply with the undertaking.

“Our approach, we wish our approach was stronger, but we sent the strongest message we could,” he said.

Mr Shipton throughout day 5 continued to assert that ASIC had made mistakes but that it hadn’t failed.

“I prefer mistakes. I use the expression mistakes because failings to me means there has been no success, no functioning and that we haven’t been doing it at all. And we have,” he said.

Another ‘mistake’ of ASICs was to offer infringement notices ahead of litigation, suggested Ms Orr, who questioned why the notices had to be voluntarily entered into by the entity.

“Why do you need to get an indication as to whether they will accept and pay it?  The parking inspector doesn’t seek an indication from the person he’s giving a parking fine to as to whether they will accept and pay it,” she said.

Mr Shipton blamed ASICs response on limited resources but said they did not cosy up to the banks.

Mr Shipton said the commission still sought indication from entity’s around infringement notices but that it had changed the mindset around litigation.

“The starting point today would be to ask the question and turn our minds to why not litigate this demonstrable breach,” he said.

CBA Had Suggested Broker Fee For Service

Commonwealth Bank’s CEO Matt Comyn spent yesterday (19 November) in front of counsel assisting Rowena Orr QC, discussing many of the issues which came about in commissioner Kenneth Hayne’s interim report, via Australian Broker.

During the hearing Comyn said he supported a flat fee for service remuneration model for brokers and regulation change over trail commission.

He also said he had been in talks as far back as April 2017 considering making the change for CBA, but in the week before feared a “first mover disadvantage” if no one else made the same move.

Comyn was quizzed on research he had put forward to both the Sedgewick review and ASIC’s review into broker remuneration and said that brokers were “sensitive to where the commission structure is set”.

This was due to the findings of one report which suggested that broker flows to lenders increased with higher broker commissions. According to this evidence, one lender gained a 5.9% market share when they offered a limited time commission increase and then lost 5.1% when it stopped.

Orr went on to ask Comyn about emails sent to former CEO Ian Narev, where Comyn had suggested a fee for service model as seen in the Netherlands.

He said it would work the same in Australia, where to level the playing field and “preserve” mortgage brokers, banks would also need to offer a fee to customers for the execution of a mortgage.

He said, “I think it would put a material disadvantage to the brokers if customers paid a broker but they didn’t have to pay a similar amount to a financial institution. I think that would create a distortion.”

Comyn said CBA had been looking at moving to a flat fee model back in April 2017, but was concerned other institutions would not follow.

He said, “We were struggling or grappling with how to implement, and I’m sure we will return to it, we felt there was a genuine first mover disadvantage.

“We didn’t think it would be replicated, absent regulatory intervention. Therefore, we didn’t think we would improve customer outcomes because, effectively, no one else would change their model. We would just originate fewer loans through that channel.”

Confirming Comyn’s stance on the broker remuneration model Orr said, “So you would like to change to a flat fee model?”

Comyn said, “I can certainly see advantages in that model, yes. I would add that that view would not be supported by other participants in the industry but my personal…”

Interrupting, Orr said, “I am asking you about your view, Mr Comyn?”

Comyn replied, “Yes, that is my view.”

Orr said, “You would prefer to move to that sort of model?”

To which Comyn said, “Yes, I would.”

Looking specifically at trail commission, Orr asked Comyn about the services brokers continue to provide after the loan is complete if that was the argument for trail.

Commissioner Hayen interjected and asked if there were any ongoing services supplied by a mortgage broker.

Comyn replied, “I think they would be limited, Commissioner.”

When asked if that meant “limited or none”, Comyn said, “Much closer to none”.

When Orr asked Comyn if he thought trail commissions needed regulatory change, he said “Yes”.

The emails to Narev also discussed how much revenue the broker would lose on an average loan. The broker revenue on an average loan at the time of the email written was $6627 and would be expected to reduce to $2310, in line with the “acceptable band for the price of financial advice”.

CBA Stands Firm on Bonuses

On Monday (19 November), the seventh and final round of the royal commission hearings kicked off with CBA chief executive Matt Comyn being grilled over the group’s remuneration structures, via InvestorDaily.

Counsel assisting Rowena Orr questioned the major bank boss about frontline staff receiving ‘short-term variable remuneration’, or STVR.

“Short-term variable remuneration is what many people would think of as an annual bonus, is that right?” Ms Orr asked.

“Yes,” Mr Comyn confirmed. “We do not refer to it in that way, but it is a bonus.”

While he admitted that the bank has made a number of changes to its remuneration structure, including work towards the Sedgewick recommendations, Mr Comyn explained why CBA is standing firm on bonuses.

“We believe it is important to have an element of remuneration which is not fixed. We believe it is a well-designed set of metrics or a way for them to earn their short-term variable remuneration; it is both a way of eliciting discretionary effort and a way beyond termination as a form of consequences. It is also a way to make consequences clear to individuals,” he said.

After being prodded by Ms Orr for clarification, the CBA chief explained that “discretionary effort” is the difference between what staff might have otherwise have done if they were paid a fixed salary.

Ms Orr asked why staff can’t be motivated simply by being paid a fixed salary.

Mr Comyn used an offshore example to try and illustrate his response, alluding to a female employee at one financial institution in the United Kingdom that decided to stop paying bonuses.

“I’m talking specifically about a home lender. What they were in effect paid was 98.5 per cent of their prior year’s fixed remuneration and short-term variable reward. So they were guaranteed that remuneration,” he said.

“When I asked her what had changed, her answer was simply ‘I probably work 30 per cent less’. She was one of their best performing lenders.”

Mr Orr offered alternative ways of motivating staff instead of a bonus: “positive feedback for their performance; encouraging them to take pride in their work; encouraging them to have a sense of satisfaction in helping one of your customers; giving them additional responsibilities as a reward for performance; promotion; a higher base salary.”

Mr Comyn said all of these were appropriate ways of driving staff. However, he maintained that CBA has decided for now to continue using short-term variable rewards, or bonuses, to motivate fits sales force

Why The Big Four Banks Soon Mightn’t Exist

It will be worth watching the final round of hearings at the banking royal commission, which begins today. The chief executives of each of the big four will be recalled for reexaminations, via The Conversation.

 

It might be the final time they appear in the same room. It might even be the last time there’s even such a thing as the big four.

Not only are the so-called four pillars under attack from the Commissioner Kenneth Hayne, but there are also enormous economic and technological pressures that are already beginning to undermine their special status.

Together, these pressures have the potential to radically change the banking landscape over the coming decades and bring an end to the Four Pillars policy under which Westpac, the Commonwealth, the ANZ and the National Australia Bank have been effectively protected from takeover and prevented from merging.

Although never a formal law, the understanding that none of the big four can merge has been an accepted rule in Australian business since the late 1980s, when the then treasurer Paul Keating made it clear he would block takeovers.

Eggs in one basket

Since then the big four banks have changed in two important, but related, ways.

Over the past few years they have retreated from their overseas banking ventures, largely divesting themselves of their sometimes ill-judged foreign acquisitions.

And they have recently sold off most of their local wealth management (insurance and investment) subsidiaries.

These divestments mean we are left with four enormous retail-oriented banks that dominate both the banking system (with almost 80% of banking assets) and the stock market (four of the top six companies on the S&P/ASX 200).

Their profitability is heavily dependent on lending for housing, which in turn is heavily dependent on the housing market.

That market is already beginning to contract, meaning the big four are going to find it increasingly hard to maintain their stellar profits.

No longer unique

What’s more, the near monopoly they have had on processing payments is under threat.

In Britain around 1,000 bank branches are closing per year in the wake of a technologicial revolution that makes it possible to process payments away from branches and away from banks. The rate of these closures is climbing.

Mobile banking means that many basic transactions that used to require a visit to a branch can be done online. Australia’s New Payments Platform means that payments to people such as tradies can be made anywhere, any time, in real time and at minimal cost. Use of the platform isn’t limited to the big four.

The Reserve Bank reports that after only eight months of operation the number of payments on the platform already exceeds the number of cheques.

Too many branches

Compared with other countries, we have a lot of bank branches.

Australian banks operate more than 5,000 branches, most of them owned by the big four, as well as 30,000 automatic teller machines, and more than 900,000 EFTPOS terminals at supermarkets and Post Offices.

In the United States, just one bank, the Bank of America, has 67 million customers.

Here more than 140 banks (technically, authorised deposit-taking institutions compete to serve a population of just 25 million.

Inevitably at least one of the big four will come under pressure to fold, be taken over, or merge with one of the others.

Vanishing support

The four pillars policy is “aimed at ensuring that whatever other consolidations occur in retail banking, the four major banks will remain separate”.

In 1997, the Wallis Financial Systems Inquiry recommended it be scrapped.

On the other hand, the 2014 Murray Inquiry into financial services recommended that the policy be retained.

But the Murray inquiry, probably due to its narrow terms of reference, found little of the egregious misconduct that has been uncovered by the royal commission. This calls into question the inquiry’s conclusion that there is adequate competition in the banking system.

Indeed, this conclusion was rejected in a recent Productivity Commission report, which stated bluntly that “the Four Pillars policy is a redundant convention”.

An end in sight

The end of the four pillars policy needn’t mean the end of competition. Smaller, cheaper competitors will be doing more of what the big four did.

A shakeout of bank branches is long overdue, however painful that may be in many small towns, where despite the serious problems raised at the royal commission, a bank branch is still an important part of the community.

Undoubtedly, such a major disruption, unless managed carefully, will be harrowing for many customers and staff.

But for the long-term stability of the economy, it is incumbent on governments to address the inevitability of a smaller, more technologically driven banking system – one that hopefully, after the royal commission, will operate ethically for the benefit of customers.

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

Thinking About Banking From The Inside

I discuss the current state of banking in Australia with businessman John Dahlsen, who was a director at ANZ for many years.

He brings his extensive experience to the issues facing the sector, and lays out an approach which would create more customer centric, efficient and lower risk banks.