Yet again this week, the Hayne Royal Commission has brought disturbing news of misconduct toward customers of our largest financial institutions. This time super accounts have been plundered for the benefit of shareholders.
Recent research from economists at the United States Federal Reserve suggests this problem is not unique to Australia. If true, this supports the argument that larger financial institutions should be broken up or face more regulatory scrutiny.
The researchers found that larger banking organisations are more likely than their smaller peers to experience “operational losses”. And by far the most significant category (accounting for a massive 79%) within operational losses was “Clients, Products and Business Practices”.
This category captures losses from “an unintentional or negligent failure to meet a professional obligation to specific clients, or from the nature or design of a product”. When a bank is caught out engaging in misconduct toward customers, it is required to make good to customers – the so-called process of remediation.
It’s a category that perfectly captures the issues under review in the royal commission. Operational losses also include things like fraud, damage to physical assets and system failures.
In recent weeks we have heard a lot about Australian banks having to compensate customers. The cost to the bank is, however, far greater than the dollar value received by customers.
The administrative costs of such programs are significant, and then there are legal costs and regulatory fines.
While no-one feels sorry for banks having to suffer the consequences of their misconduct, regulators monitor these losses due to the possibility that they may increase the chance of bank failure.
Another aspect of the Federal Reserve’s study is the size of the losses. One example is where the five largest mortgage servicers in the United States reached a US$25 billion settlement with the US government relating to improper mortgage loan servicing and foreclosure fraud.
In another example, a major US bank holding company paid out over US$13 billion for mis-selling risky mortgages prior to the 2008 crisis. Settlements of this size have simply not occurred in Australia.
Why larger banks?
One might assume that economies of scale – reduced costs per unit as output increases – also apply to risk management. The larger the organisation, the more likely it has invested in high-quality, robust risk-management systems and staff. If this holds, then a large bank should manage risk more efficiently than a smaller one.
The possibility of unexpected operational losses should then be reduced. Larger financial institutions might also attract greater regulatory scrutiny, which might help to improve risk-management practices and reduce losses.
For every 1% increase in size (as measured by total assets) there is a 1.2% increase in operational losses. In other words, banks experience diseconomies of scale. And this is particularly driven by the category of Clients, Products and Business Practices.
In this category losses accelerate even faster with the size of the bank.
This could be the result of increased complexity in large financial institutions, making risk management more difficult rather than less. As firms grow in size and complexity, it apparently becomes increasingly challenging for senior executives and directors to provide adequate oversight.
This would support the argument that some financial institutions are simply “too big to manage” as well as “too big to fail”. If bigger financial institutions produce worse outcomes for customers, there is an argument for breaking up larger institutions or intensifying regulatory scrutiny.
Is the same thing happening in Australia as in the United States? The case studies presented by the royal commission suggest it could be, but it’s difficult for researchers to know exactly.
Australian banks are not required to publicly disclose comprehensive data on operational losses. APRA may have access to such information, but any analysis the regulator may have done of it is not in the public domain.
Perhaps this issue is something Commissioner Hayne should explore.
Author: Elizabeth Sheedy Associate Professor – Financial Risk Management, Macquarie University
AMP’s superannuation funds are permitted to underperform for five years before the investment committee is obliged to inform the relevant fund’s board, the royal commission has heard, via InvestorDaily.
The royal commission has been told that a consistently underperforming AMP fund could be underperforming for five years before the board of directors becomes notified.
The royal commission hearings into superannuation continued on Thursday, with AMP Superannuation Limited chairman Richard Allert in the witness box.
Mr Allert faced questioning by counsel assisting Michael Hodge about how AMP management and board addresses poorly performing investment funds.
The royal commission was told that ‘quarterly investment management reports’, which contain information about the performance of AMP’s funds in a given quarter, are put together by AMP’s Group Investment Committee.
However, the board of AMP Superannuation does not receive this report. Instead, it goes to AMP trustee services.
Mr Hodge confirmed with Mr Allert that the report would only be raised with the board if trustee services found an issue with the report, or if there was an “exception”.
“Unless an exception was triggered, then you wouldn’t expect this report to be provided to the board?” Mr Hodge asked.
“Correct,” Mr Allert said.
The royal commission heard that such an ‘exception’ would have three criteria: the first was the ‘identification’ criteria, which meant pinpointing “significant under-performance against peers/benchmarks over rolling 36 month period”.
The second criteria was a period of ‘further investigation’, and the third and final criteria was an exceptions report that was issued “if an investigation remains under investigation … for a period of eight or more quarters”.
“So it would seem as if it would be necessary for an investment to underperform for five years before it would be reported to the board,” Mr Hodge put to Mr Allert.
“No, I couldn’t accept that,” he responded.
After a protest from AMP legal counsel Robert Hollo, who called the question “a little unfair”, Royal Commissioner Kenneth Hayne AC QC interceded and Mr Hodge rearticulated his question.
“Is it possible for an exceptions report to come to the board about investment performance any earlier than where the underperformance has occurred over a five-year period?”
Mr Allert said it was possible. “If there was something that was really bothering the Group Investment Committee and relaying it to the Trustee Services or was bothering our trustee services representative on the GIC, they would alert the board to that fact.”
But this would occur outside of the exceptions framework, the royal commission was told.
One instance where Mr Allert could recall AMP trustee services raising an issue with the board this year was “in relation to products that had a cash element”.
Earlier this year the chief of a financial planning firm collapsed in the witness stand during Australia’s ongoing royal commission into misconduct in the financial services industry. He had to be taken to hospital in an ambulance – some would say a fitting metaphor for the state of the industry.
Fortunately for him the health care system doesn’t operate like the financial planning industry. If it did he might have been “treated” according to what was most profitable for the ambulance service rather than what was best for his well-being.
The Financial Services Royal Commission is exposing abundant evidence of unethical misconduct. Customers are being charged fees for services they never get or ever need, getting inappropriate advice, being offered irresponsible loans and sold worthless insurance contracts. It shows up an industry riddled with conflicts of interest and obsessed with extracting profits from customers in any way conceivable.
Sound familiar? The 2007-09 Global Financial Crisis was in large part caused by the same “profit at all costs” culture. It fuelled high-risk home lending to ordinary people who couldn’t afford it. Why haven’t things changed?
Despite the lessons of the GFC and a regulatory crackdown, the central problem with the global financial services industry is that, unlike the health industry, it has long stopped caring about its customers’ well-being.
Financial services, such as payments and basic forms of credit and insurance, are now essential for the economy and society to function. For this reason, the large financial services firms often receive privileges such as market protection and implicit government guarantees worth billions of dollars, underwritten by taxpayers. So how has the bar been allowed to sink so low?
The mindset behind the scandals
At the heart of the problem lies the mental model that the finance industry applies to itself and the world around it.
This thinking is dominated by the neoclassical model of economics in which people are “rational actors” who always do what is best for them. And they supposedly interact with each other through perfect markets, leading to the efficient allocation of resources.
While everyone understands this as an idealised abstraction, the impact of this working assumption is profound. It has led to an “input-oriented” model. Banks and other financial services companies are exclusively concerned with providing whatever inputs – financial products and services – their customers demand.
Bewildering arrays of products are sold using state-of-the-art marketing techniques, irrespective of whether the customers actually need them.
Undesired outcomes are often considered to be the customer’s responsibility. If the customer ends up with too much credit card debt, possibly as a result of aggressive marketing, don’t blame the bank.
Regulatory and public policy responses are also premised on this model. The dominant approach in financial regulation focuses on disclosure, requiring firms to provide more and more information about their financial products.
Product disclosure statements are now often hundreds or thousands of pages long. These are littered with legal and financial jargon that is often incomprehensible even to experts. Rather than clarifying the nature of financial products, disclosure requirements have only made them more opaque.
This rationalist approach has led the industry and regulators to promote financial literacy education as a solution to the problem. The idea is to educate consumers about financial products and services to help them navigate the financial system and make good decisions.
The Australian government spends tens of millions of dollars on financial literacy programs such as its MoneySmart program. The Bank of England recently launched econoME, a program with very similar aims.
This approach ignores a core aspect of finance. Many financial problems that consumers face are highly complex. For example, determining a person’s optimal lifetime saving and investment strategy to provide an adequate income in retirement is a formidable problem, even for a finance expert with a supercomputer.
It is beyond the capability of the average person to work out many financial decisions on their own, and we shouldn’t expect people to do so – just as we don’t expect the average person to perform brain surgery.
Focus needs to shift to financial well-being
If we accept that many aspects of finance are hard, we will need to give up on the rationalist model. Instead we need to switch to an outcome-focused model in which, as with the health care system, the primary concern is for people to reach a set of outcomes or goals – a certain level of financial well-being, for example.
Services offered by banks and regulations imposed by governments would then be evaluated on the extent to which they offer to improve people’s financial well-being. Banks would only offer services that have been shown to improve one or more dimensions of their customers’ financial well-being, aligning their interests more closely with those of their customers.
Financial services and their regulation would look radically different. For example, fewer decision options and simpler products would be more effective in improving financial well-being. New technologies such as artificial intelligence could likely play an important role in this new world of finance.
Importantly, both the development of services and their regulation should be based on evidence and delivered under a set of professional standards monitored by an independent standards-setting body. This would be similar to the processes and institutions used in the health system. Providers of financial services would then be subject to both a fiduciary duty and product liability.
The future of finance doesn’t lie in ever more regulation, or ever more sophisticated technology to squeeze higher margins out of legacy products. The future of finance lies in the rediscovery of what finance is for – to improve the financial and economic well-being of society.
Authors: Paul Kofman Professor of Finance, University of Melbourne;
Carsten Murawski Associate Professor in the Department of Finance and co-director of the Brain, Mind & Markets Laboratory, University of Melbourne.
CBA defied a request from APRA to accelerate the transfer of 60,000 members to MySuper in order to placate the bank’s aligned advisers, the royal commission has heard, via InvestorDaily.
Appearing before the royal commission hearings into superannuation yesterday, Colonial First State (CFS) executive general manager Linda Elkins was questioned about CBA’s handling of the MySuper transition.
From 1 January 2014, employers could only make default contributions to a registrable superannuation entity (RSE) offering a MySuper product.
Counsel assisting Michael Hodge established in his questions to Ms Elkins that CBA had breached the law 15,000 times by receiving default contributions into high-fee-paying accounts after 1 January 2014.
RSEs were also given a deadline of 1 July 2017 to transfer existing accrued default accounts (ADAs) to an approved MySuper product.
In June 2014, Mr Hodge established, the board of CFS was told by management that “APRA has requested that you accelerate the transition for 60,000 [ADA] members”.
“This suggestion has significant business implications as the original transition date is 2016,” the CFS board was told in June 2014.
Mr Hodge asked Ms Elkins: “Was one of the issues of which you were aware that immediately moving these ADAs over to MySuper would affect the relationship between Colonial and its advisers?”
“I was aware that advisers were impacted by this, yes,” Ms Elkins replied. “I don’t know that it follows it would affect our relationship with the advisers but we were aware that advisers were – were concerned, yes.”
Moving the 60,000 into lower-fee MySuper products would have the effect of turning off grandfathered commissions for advisers, the royal commission has heard.
CFS, like other retail super providers, was eager to have ADA clients make an “investment decision” so that they would be considered a ‘Choice’ member and therefore ineligible for transfer to a MySuper product.
“And that was why you were taking active steps for the benefit of advisers to obtain investment directions from members?” asked Mr Hodge.
“We were taking active steps to ensure the members had information to – to assist them with the choices they had,” replied Ms Elkins.
Hodge continued: “The purpose of obtaining those investment directions, or a purpose, I’m sorry, for obtaining those investment directions was to benefit advisers?
Yesterday’s royal commission hearings began with a ruling by commissioner Kenneth Hayne on NAB’s application to prevent seven documents from being published.
The ruling came after a fiery exchange on Wednesday afternoon in which an angry commissioner Hayne warned NAB counsel Neil Young not to “direct” NAB witness Nicole Smith.
One of the seven documents ruled on yesterday was a document from ASIC entitled ‘Outline of Suspected Offending by the NAB Group’.
“The parts of the document for which the direction is sought concern ascertaining the extent of the charging of fees for no service and what approach should be adopted for compensating those who have been charged,” said the commissioner.
Mr Hayne said he would need to weigh up the “balance” between the interest of an individual, the public interest, and NAB’s legitimate desire to protect private commercial interests.
“In attempting to strike the balance that is to be drawn between those competing elements, it is to be noted that it would be in the interests of NAB to pay the least sum available by way of remediation,” Commissioner Hayne said.
“It would be in the interests of persons charged fees, in circumstances where no service has been provided, to be provided with adequate compensation.
“It is in the public interest that there be an open and transparent inquiry about how both the regulator and the regulated deal with the issue of remediation,” he said.
For those reasons, said the commissioner, “the application for non-publication is refused”.
Counsel assisting Michael Hodge then stood up at the bench to reject comments by Mr Young on Wednesday afternoon that “might be taken to be an implicit criticism of the staff of the royal commission”.
“You were also told, commissioner, in relation to the outline of contraventions from ASIC that I was taking Ms Smith to, that the National Australia Bank had not been notified that this document would be the subject of publication. That is incorrect,” Mr Hodge said.
“There was no fault on the part of the staff of the commission or the solicitors assisting the commission, and that everything has occurred in accordance with the practice guidelines that have been published by you in February of this year,” he said.
Mr Hodge went on to describe the tardiness with which NAB had supplied documents requested by the royal commission.
NAB produced 31 documents on 9 July 2018 following a request by the commission for documents relating to NULIS and ‘fees for no service’, said Mr Hodge.
“After that date, the National Australia Bank produced in excess of three and a half thousand documents regarding the ‘fees for no service’ issue, of which in excess of 3000 were produced to the commission last week,” he said.
In respect of the seven ASIC documents commissioner Hayne ruled on yesterday morning, four were produced to the royal commission on the afternoon of 3 August 2018 and three were never produced by NAB, said Mr Hodge.
“It may be that, unfortunately, that particular manner of responding to your compulsory notice has contributed to some of the difficulties that the National Australia Bank has faced in dealing with these confidentiality claims,” Mr Hodge said.
Mr Hodge uncovered at least 100 instances of potentially criminal breaches by NAB in his subsequent examination of the seven ASIC documents and his questioning of Ms Smith.
NAB chief executive Andrew Thorburn made a public apology for NAB’s “failure to act with honour” via a video posted on Twitter late on Thursday afternoon.
MLC and its trustee, NULIS, failed to tell superannuation members they could dial back their “plan service fees” to zero, the royal commission has heard, via InvestorDaily.
The royal commission’s public hearings into the superannuation sector began yesterday, with NAB executive Paul Carter standing in the witness box.
Counsel assisting Michael Hodge pursued a line of questioning about MLC MasterKey’s plan service fee (PSF), which the company announced it would be “turning off” on 27 July.
Mr Hodge established that once a member was transferred from MasterKey Business Super (MKBS) to MasterKey Personal Super (MKPS), they could call up their adviser to agree on a different fee.
“The member has the ability to negotiate that fee directly with their linked adviser in the personal plan,” Mr Carter said.
After establishing that the agreed-upon fee could be “zero”, Mr Hodge asked what happened if the adviser didn’t agree.
“The member is in control, and so the member if they deem that they would like the fee to be zero, the fee will be zero,” Mr Carter said.
However, Mr Hodge said there was an “issue” with the product disclosure statements (PDSs) produced by NAB/MLC — namely, that they failed to explain to members the fee could be reduced to zero.
“One of the issues that we identified was that the disclosure to members about their ability to dial that fee all the way to zero should have been clearer,” Mr Carter said.
“It had language along the lines of this fee can be negotiated between the member and the adviser.”
To which Mr Hodge responded: “You’ve used the word ‘negotiated’, but there’s no negotiation, is there? The member can just say, ‘I don’t want to pay this any more.’”
NULIS, the trustee for MLC/NAB, announced on 27 July that it would stop charging PSFs from September 2018.
“Do you know why it can’t stop charging those fees until September of this year?” Mr Hodge asked.
Kenneth Hayne has delivered a sharp rebuke to IOOF for failing to produce documents ahead of the royal commission’s public hearings into superannuation, which commence next week.
In a ruling published by the royal commission yesterday, commissioner Kenneth Hayne laid out a timeline of correspondence with IOOF subsidiary Questor Financial Services.
Questor was issued with Notice to Produce NP-962 on Wednesday 11 July 2018, which required the company to produce documents prepared for Questor board meetings (‘board packs’) for each meeting of the board held since 1 July 2011.
The notice required the production of the documents by 4pm Tuesday 17 July.
At 3:30pm on Tuesday 17 July, IOOF solicitors King and Wood Mallesons produced documents in response to the notice, stating: “IOOF believes that the documents being produced constitute complete production in response to the Notice to Produce.”
On examining the documents, solicitors assisting the commission noted that while complete board packs had been produced for the years between 2011 and 2014, for subsequent years only agendas had been produced.
In response to an urgent request from solicitors assisting, Questor’s solicitors said the absence of the files was “inadvertent” and “a result of a technical error”.
Questor continued to fail to produce the documents until 9:48pm Sunday 22 July, with its solicitors noting that Questor “makes privilege claims in relation to parts of the documents produced”.
An affidavit in support of the claims for privilege was eventually supplied by Questor’s solicitors at 1:11am on Wednesday 25 July.
Commissioner Hayne has examined un-redacted versions of the documents, noting that “the claims for privilege appeared large”.
“I reject many of the claims that were made. Many of the documents in respect of which privilege is claimed are not documents that record or refer to communications made for the dominant purpose of IOOF or Questor obtaining legal advice; they do not record or refer to communications of that kind; and, they are not documents created for the dominant purpose of obtaining legal advice,” Mr Hayne said.
He noted that the claims made in respect of board packs dated after 2015 were in “sharp contrast” with the fact that no claims were made about the board packs for 2011–2014.
“Prompt and proper compliance with Notices to Produce is required by law and is essential to the proper execution of the commission’s work. Delays of the kind that have occurred in this case impede the proper work of the commission. Ill-based claims for privilege further impede its work,” Mr Hayne said.
Questor was the subject of parliamentary and senate committee scrutiny in mid-2015 after a number of allegations were aired in the Fairfax press against then IOOF head of research Peter Hilton.
IOOF will be one of the topics discussed at the royal commission public hearings into superannuation which commence on Monday 6 August.
For those who do not know, a mugwump is “a bird who sits with its mug on one side of the fence and its wump on the other.”
That came to mind as I read the Treasury submission to the Royal Commission into Financial Services misconduct which was released recently on three matters:
the culture and governance of financial (and other) firms and the related regulatory framework;
the capability and effectiveness of the financial system regulators to identify and address misconduct; and
conflicts of interest arising from conflicted remuneration and integrated business models.
They say these three issues were drawn from the case studies to date that point to: numerous failures by firms to adhere to existing regulatory obligations and deal openly and honestly with the regulators; an indifference by a number of firms to delivering good consumer outcomes, as well as a lack of investment by some firms in systems and processes to monitor product performance and staff conduct; and at times an unsatisfactory attitude and approach to remediation where issues have been identified.
These outcomes reflect instances of failures of leadership, governance and accountability at an industry, firm and business unit level. Where misaligned incentives and conflicts of interest have been present, the underlying failings and the poor outcomes have been exacerbated.
Competitive forces have been unable to fully temper these problems and hold firms to account. In part this is due to the advantages of incumbency and continuing barriers to entry for new firms. It also reflects a lack of effective demand-side pressure. Consumers, when interacting with the financial system, face products and services that are inherently (or by design) complex, opaque and typically have long durations; conflicted advice can worsen the problem. With ineffective competition, profitability can remain high for financial firms even if consumer outcomes are poor. Their shareholders (both retail and institutional) can remain largely complacent about governance and culture, and consequently poor conduct can persist.
The evidence suggests that while financial system regulators have been alert to the problems and have taken action, they have not yet been able to change the underlying behaviours of many of the firms and industries involved.
In our view, the financial system and the regulatory framework cannot perform efficiently when there is a disregard by financial firms to adherence to the law and broader community standards and expectations regarding their trustworthiness. Fundamentally, responsibility for complying with the law rests with those to whom the obligations apply.
Turning the the Mugwump in Action.
They say that ASIC and APRA are world class regulators, and they were across the issues. The problem lies within the culture of the firms. And, by the way, the Council of Financial Regulators (of which Treasury is a member) is acting just fine. “At a structural level, Australia’s ‘twin peaks’ model of financial regulation – where responsibility for conduct and disclosure regulation lies with ASIC and responsibility for prudential regulation with APRA – has clearly served the financial system and economy well and remains appropriate. Similar architecture has been adopted in other jurisdictions and ASIC and APRA are well-regarded by peer-regulators in other countries and by international standard setting
bodies and organisations.
They do say it is clear that the current regulatory framework and its enforcement are not delivering satisfactory outcomes and that shareholders’ interests do not necessarily coincide with customers’ interests, particularly in the short-term; indeed much of the misconduct has generated significant returns to the firms that have flowed through to healthy dividends. But the problem is accountability in firms and the complexity of the law. Extending the BEAR, or a like regime, to a wider range of entities may be one way to lift standards of behaviour and conduct across the financial sector. But the fundamental limitation of such reform is that it relies on shareholders to agitate when remuneration policies do not serve consumer interests — and they may not do so.
But they also warn that over time, a financial system that is overburdened by regulation will fail to deliver on its objectives of meeting the financial needs of the community and facilitating a dynamic, stable and growing economy. Thus reforms to ensure consumer confidence through strong respected regulators must balance the efficiency and ability of the financial system as a whole to succeed.
With regards to conflicted remuneration, again they acknowledge that wrong incentives can lead to bad customer outcomes, yet fall short of supporting the idea of, for example, removing broker commissions and trails, warning darkly of unintended consequences.
All remuneration structures and business models can give rise to conflicts of interest, even if its form differs or the parties concerned vary. When markets function well, commercial practices evolve to best manage the multiplicity of interests and potential conflicts. Hence, overly prescriptive interventions —not taking account of all the trade-offs involved — can give rise to costs and unintended consequences.
Our judgment — subject to evidence in future hearings — is that recent structural changes in the industry, recently introduced or soon to be introduced reforms, other potential reforms the Commission could recommend, and heightened attention by firms and ASIC, should be sufficient to mitigate the systemic risks involved — subject to further ongoing scrutiny by regulators. Structural separation would also be complex and disruptive, and could have unintended consequences.
That said, There is clear evidence from the hearings and ASIC that vertically integrated firms have often not appropriately managed these conflicts, despite general legal obligations to do so.
Brokers are currently paid by lenders (via aggregators) using a standard commission model. This model includes upfront and trailing commissions which are proportional to the size of the loan, and subject to clawback arrangements which allow lenders to recover some or all of upfront commissions if a loan goes into significant arrears or is terminated within a specified period. These commissions have also been supplemented by volume and campaign-based bonuses, as well as non-monetary benefits that are predominately determined by volume targets. These features of the standard model give rise to conflicts of interest for brokers that could lead directly to poor consumer outcomes and reduce competition.
There is a risk that brokers working under vertically integrated aggregators may recommend specific in-house loan products that may not provide the best outcome for a consumer. Again, they are also suggestive of a potential negative effect on competition in the mortgage market at the expense of customers more generally.
Proposals for upfront, flat fees can involve up to three distinct changes to current industry practices:
a move away from remuneration set by reference to loan size, to one of a fixed dollar amount per loan (possibly still varying with loan or lender type or characteristics);
ending the practice of trail commissions; and
requiring the payment to be made by the consumer and not the lender.
The first of these would directly target the incentive to encourage customers to take out larger loans, though in practice the consequence of this incentive may be quite limited. It would create some other misaligned incentives that would also need to be managed, such as the need to limit the splitting of a loan into multiple loans to generate additional broker fees.
The industry argues that a larger loan size correlates with greater complexity and hence effort on the part of the broker. If this is correct, brokers could have an incentive under a flat fee to service only those customers with straightforward needs, disadvantaging those with more complex needs such as first home buyers. The correlation between loan size and broker effort is, however, not obvious and commissions can already vary according to product and lender characteristics and flat fees could also do so.
The second change, of removing trail commissions, would have the potential advantage of removing incentives for brokers to inappropriately recommend larger loans that take longer to pay back (though, again, how significant this incentive is in practice is unclear), and brokers would have greater incentives to assist customers to refinance.
The removal of trails would, however, also reduce incentives for brokers to guard against arranging non-performing loans and to not unnecessarily switch consumers to alternative loans that do not provide for a better deal. Refinancing is not a costless exercise, with real costs for both lenders and borrowers. In the United Kingdom, where trails are not used, concern over churn has led lenders to pay retention fees to brokers to encourage consumers not to switch lenders but refinance at a different rate.
Services provided by brokers to customers after a loan has been arranged could also be affected if trailing commissions were removed.
The third change, of requiring consumers rather than lenders to pay the broker, would be the most radical. Without any significant remuneration from lenders, brokers’ loan products and lender recommendations are more likely to align with the consumers’ best interests or be more transparent if they do not. Some specific payments from lenders to brokers may, however, need to be retained if they were to continue to provide specific services to the lender.
The standard commission structure represents a balancing of commercial interests and responsibilities between lenders, aggregators and brokers, as well as the interests of consumers. Too prescriptive and fixed a model risks being commercially inefficient, particularly as the market develops over time and technological and other innovations arise, and negatively affecting competition. While the online and technology based mortgage broker start-ups remain nascent, they are also innovating with remuneration structures (such as rebating commissions to customers) as a point of competitive advantage.
As brokers act as trusted advisers for customers with respect to housing finance, there is an in-principle case for introducing a positive duty on brokers to act in the interests of their customers. While responsible lending obligations provide protection against customers being recommended loans that are too large or otherwise not suitable for them, the purpose of a positive duty would be to counteract incentives to, for example, recommend a particular lender and loan type because the commission available to the broker is higher or because the loan is an in-house or white label product.
Applying a positive duty to brokers would not, however, necessarily be best achieved by attempting to replicate the financial advice best interests duty given differences between brokers and financial advisers, and the existence of responsible lending and other obligations. If it was to be introduced, careful consideration would again need to be given to an approach that mitigates conflicts of interest risks while avoiding unnecessary compliance costs, and to what extent it can rely on industry efforts or providing ASIC with some discretion or rule-making power.
Finally, with regard to employee incentives, the Treasury paper says that given the impending introduction of new powers for ASIC and the efforts of the banking industry to undertake significant reform itself, it is not clear that further regulatory interventions are merited at this stage. While the policy focus has traditionally been around remuneration, it is also relatively easy for firms to reward staff that are high-sellers (or to penalise poor-sellers) without resorting to a direct link to remuneration. As general obligations already exist to manage such conflicts, the broader issue raised is that of firm culture and governance.
S0, reading the submission, I felt the Treasury was firmly sitting on the fence, acknowledging the issues raised (they could do no other), but falling back to incremental changes, warning of unintended consequences, and pointing the figure at cultural bad practice in financial firms. The regulators escaped scot-free.
Frankly I found the submission all rather embarrassing… and rather missed the point!
The banking royal commission has caused a massive erosion of consumer trust in financial services – and it’s up to the industry to stop it, according to a new survey, via InvestorDaily.
New findings from a survey by financial services marketing agency Yell and research firm Ipsos, conducted in June during the royal commission, has revealed that consumer trust in banks dropped by 8 per cent from 2017.
Similarly, trust in financial advisers also dipped by six per cent.
When asked to rank financial services organisations according to trust, banks slipped to third place from second place in 2017 and financial advisers fell from third place to fifth place.
“This year’s results showed an acceleration in the gradual erosion of consumer trust that’s still not being recognised by the industry as a whole,” said Yell founding partner Nigel Roberts.
The financial services industry would need to take responsibility for the declining trust and reorient its offerings to better serve the customer, he suggested.
“The challenge for all of financial services and especially the banking sector, is to halt the slide in trust or face real consequences.
“This can be achieved, but will involve much greater empathy and delivering solutions that truly meet customer needs, rather than meeting sales targets,” Mr Roberts said.
“The shift away from pushing product requires more than just having a view on the vast quantities of data currently being collected; it needs a human-centred approach as well.”
He also posed the question of whether incumbents would see a “significant commercial impact” as new market entrants entering the industry did not “carry the stigma of some of the established players”.
“We’ve seen the big four shifting away from wealth services ahead of and during the royal commission, maybe in anticipation of any potential findings, but the question is: will it be enough to protect them from the emergence of neo-banks and other viable alternatives in Australia?”
Bank customer satisfaction drops: Roy Morgan
Recent statistics from research house Roy Morgan have also pointed to declines in customer satisfaction as a result of the royal commission.
Bank customer satisfaction was at 82.3 per cent in January at the beginning of the year, but then fell to 78.5 per cent in May and then even lower to 78.3 per cent in June.
“This represents a decline of 4.0% points since January and is now at the lowest monthly satisfaction level since April 2012,” according to a Roy Morgan statement.
Furthermore, figures also demonstrated that dissatisfaction levels were increasing — and this represented a threat to retention, the statement said.
“The following chart shows that the level of dissatisfaction with banks has increased to 6.2 per cent from 4.6 per cent in January, just prior to the royal commission and is now at the highest level since April 2012.
“The combination of the 15.5 per cent of bank customers who are indifferent to their relationship with their bank (neither satisfied or dissatisfied) and those who are dissatisfied (6.2 per cent) means that more than one in five (21.7 per cent) bank customers pose a potential threat to customer retention, particularly considering that this has increased from 17.7 per cent in January 2018.”
