The Commission has announced that the fifth round of public hearings will be held in Melbourne at the Owen Dixon Commonwealth Law Courts Building at 305 William Street from Monday 6 August to Friday 17 August 2018.
Looks like it will be another interesting ride! The evidence of the regulators will be interesting.
This round of public hearings will consider how RSE Licensees fulfil their duties to members of regulated superannuation funds and the extent to which structural or governance arrangements may affect the fulfilment of those duties. The hearings will also consider related issues such as selling practices in relation to superannuation, the relationship between trustees and financial advisers, the current legal regime and the effectiveness of regulators.
The Commission presently intends to proceed by reference to the categories of issues set out below. Entities are named in alphabetical order and not the order in which evidence of those entities will be heard.
Topic
Case Studies
1.
Duties of RSE Licensees (including structural and governance arrangements, the relationship between trustees and financial advisers and selling practices)
AMP Super and NM Super (AMP)
Australian Super
Catholic Super (CSF)
Colonial First State (CBA)
Electricity Supply Industry Superannuation (Qld)
Host-Plus
IOOF
Mercer
NULIS (MLC/NAB)
Onepath and Oasis (ANZ)
Suncorp
Sunsuper
United Super (CBUS)
2.
Superannuation funds and Aboriginal and Torres Strait Islander members
QSuper
3.
Effectiveness of superannuation regulators
APRA
ASIC
In addition, Counsel Assisting will tender statements from RSE Licensees not named above during the hearings. Further categories of issues, or entities for categories, may be included and the list above will be updated accordingly before the hearings commence.
Many entrenched motivations for misconduct in the banking sector have been uncovered by the ongoing royal commission. Not least are the conflicts of interest inherent in the major Australian banks providing financial, insurance and mortgage advice and selling related products.
The banks, most recently the Commonwealth Bank (following the lead of ANZ and NAB), are already separating their wealth-management arms – services such as mortgage broking, insurance and financial planning and advice – in a bid to resolve these conflicts of interest.
These restructures are a step in the right direction. But they are not enough to overcome the fundamental problem: the banks’ sales-driven culture. This goes much deeper and seemingly pervades all of their operations, as the royal commission has highlighted.
The nature of this problem lends weight to an Australian Securities and Investments Commission (ASIC) proposal to embed regulatory staff in the major banks to help change the culture.
Bankers’ priorities laid bare
The evidence made public by the forensic analysis of Rowena Orr QC, counsel assisting the commission, has revealed many instances of the banks’ “toxic” culture. It’s one that puts profits and growth – in particular their associated incentive systems – above customers’ interests.
This has been evident from the outset. The first round of hearings in March 2018 revealed allegations of significant cash bribes, forged signatures and manipulation of incentives within NAB’s “Introducer Program”. This generated billions of dollars in home loans for the bank, with introducers paid 0.4-0.6% of home loan totals.
We have had belated “apologies” to customers who were treated unfairly or, worse, fell victim to unscrupulous or wrongful behaviour; admissions that the banks breached their own codes of conduct; and assurances that changes in governance systems aimed at improving culture have been made or will be. Yet the banks are still in denial that systemic cultural issues have been at play or persist in their organisations.
A stark example is provided in the evidence of Rabobank executive Bradley James at the most recent hearings that dealt with issues of farming finance. Orr questioned James about a A$3 million loan made on the advice of a manager of this rural lender to a Queensland grazing family, the Brauers. They had no ability to repay it. The motivation for the manager was to meet his lending KPIs to earn a bonus.
Asked whether he saw any difficulty with that from a customer perspective, James’s response was: “Absolutely not!” This shows a complete failure to understand the bank’s incentive structure – linking staff bonuses to the number of loans brought in – and the culture that goes with it as a potential source of misconduct.
James defended the bank’s system, saying it enabled the business to grow. This demonstrates that, in putting profits and growth ahead of customers’ needs, banking culture is out of touch with community expectations and societal values.
Regulators must step in
Little wonder, then, that trust in the financial sector is at an all-time low. ASIC chair James Shipton speaks of a “trust deficit”.
Shipton is seeking government funding to embed specialist ASIC supervisors in the major banks to help drive cultural change and rebuild trust. This should be done, signalling as it does a new, more intrusive regulatory style.
However, ASIC should do more. It needs to take enforcement action. Most notably this would include prosecution in cases of criminal wrongdoing by the banks and their top executives. The latter have been conspicuously absent at the royal commission, raising important questions about bank accountability.
Another corporate regulator, the Australian Competition and Consumer Commission (ACCC), last month brought criminal proceedings against ANZ and several other companies and individuals over an alleged cartel arrangement. Commentator Nathan Lynch observed that, irrespective of the outcome, one message reverberates: senior management accountability:
Governments and regulators have had enough of financial services firms that are still talking about improving culture and conduct. A decade on from the financial crisis … they now want to see a healthy dose of fear and respect in the market.
Regulators are now at the point where they’re saying, ‘It’s impossible for things of this magnitude to happen without the people right at the top knowing what was going on.’
If ASIC also took such action, it would go a long way to overcoming concerns about an accountability deficit for the scandals and wrongdoing. This could be a catalyst for real cultural change in the industry to reduce misconduct in the future.
Why isn’t restructuring enough?
As for the current bank restructures, certain aspects are problematic.
In the first place, not all will result in a full separation of their businesses. The CBA will split off its wealth management, mortgage broking and insurance businesses, but retain its financial advice business. ANZ has sold its wealth management business to IOOF, but will not sell its life insurance business.
In addition, the banks remain keen to distribute products to retail customers. For example, ANZ’s sale to IOOF includes a 20-year deal to make IOOF super and investment products available to its retail customers.
These moves raise concerns that, despite these demergers, conflicts of interest and the banks’ failure to act in customers’ interests will continue.
At a minimum, Shipton’s plan to put ASIC agents in banks is more important than ever when the indications are that the banks cannot be left to self-regulate.
Author: Vicky Comino Lecturer in Corporations Law and Regulation of Corporate Misconduct, The University of Queensland
And insurance agents were able to exploit and target Aboriginal people because the industry isn’t fully regulated.
The cultural, economic and political arrangements that allow this to happen are called “practice architectures”. They include the complex language used to deceive consumers into buying unsuitable products, incentivised high pressures sales tactics, and a lack of care and concern for vulnerable consumers.
All of these aspects are within the scope of financial regulators. The funeral insurance industry can push dodgy products because no one is watching. Predatory financial practices will continue until governments and/or regulators do something about it.
Changing exploitative and predatory financial practices
To change predatory financial practices requires regulatory action to constrain the ability to exploit vulnerable consumers. Educating consumers about predatory financial practices and fostering critical thinking skills is also needed.
But financial literacy education alone is not enough when deliberate deception in financial products and services is permitted.
Research shows Indigenous Australians are too trusting in the role of government to regulate financial matters and can fall prey to predatory lenders. For example, the researchers found there was a belief the Australian Securities Investment Commission would check the accuracy of all prospectuses and that personal loan interest rates are legislated.
To ensure vulnerable consumers are protected requires a lot more than financial education. It requires regulation.
This meant an applicant going to a broker was more likely to end up with a larger mortgage over a longer term than one who dealt directly with their bank, a finding that was revealed in a review of the industry.
Consumers best interest must put be above those of the agents when it comes to insurance products and mortgages.
Much like how certified financial planners are now mandated under the corporations act to work in the best interest of their clients.
The royal commission has also revealed funeral insurance agents gave the appearance of being an Aboriginal organisation, while deliberating exploiting Aboriginal people.
Fixing the problem requires the Australian Securities Investment Commission to change the predatory financial practices so the financial landscape can operate ethically.
In the case of mortgage brokers, exploitative practices were encouraged based on the way brokers are remunerated. So how brokers are remunerated has been changed to align with the best interest of the client.
Selling insurance similarly has a number of cultural, social and financial elements that can be acted upon. There are the cultural aspects of what it means to be a broker, the economic incentives to push clients towards certain products, and social elements that encourage agents to put their own needs ahead of those wanting insurance to protect and cover their loved ones.
Together, these arrangements form practice architectures which make it possible to constrain the practices used in mortgage broking and the insurance industry. Different practice architectures are required to make possible other, non-predatory, methods of mortgage-broking and selling insurance.
Once what it means to be an ethical mortgage broker or an ethical funeral insurance agent becomes the norm, then the social and cultural concern for others’ well-being may be realised.
Predatory financial practices will not go away without effective regulation. The finance and insurance industry needs more effective regulation that forces higher ethical standards to be met in order to establish new financial practices.
This change can begin by asking whether the financial practices that have already been exposed are rational, reasonable, productive, sustainable, socially just or inclusive. And since they aren’t, what action can be taken to change the unjust financial practices? More and better regulation to protect consumers.
Author: Levon Ellen Blue Lecturer, Queensland University of Technology
The banking and financial services Royal Commission has unearthed the unethical practices and incentives of life insurers selling policies over the phone at the expense of the most vulnerable customers living in remote communities; via Financial Standard.
ASIC Indigenous Outreach Program senior policy analyst Nathan Boyle highlighted the rampant practice of signing up customers by being forced into policies they allegedly didn’t need or unwittingly signed up for.
Based on listening to several phone calls from ClearView Life Insurance, Boyle alleged staff coaxed customers into providing bank details and enough personal information which then entered them into a contract without knowing, he said.
This is the way “gratuitous concurrence can play out in practice,” he added.
Boyle was referring to ASIC’s review of ClearView in February, which used unfair and high pressure sales tactics when selling life insurance direct to consumers over the phone between 1 January 2014 and 30 June 2017.
Of 32,000 life insurance policies sold, 1166 were to consumers residing in areas with high indigenous populations that unlikely spoke English as their first language.
ClearView has since ceased selling life insurance directly to consumers and refunded $1.5 million to thousands of customers as a result of poor sales practices.
The Commission heard the story of Kathy Marika, an indigenous woman who was convinced into buying a funeral insurance policy with Let’s Insure (which is owned by Select AFSL) even though she was already covered.
Marika said she couldn’t fully understand the representative, who spoke over her and at great length and initially believed was calling about a survey. Ultimately, she said the representative was “forcing” her to sign up to a policy that deducted $60 per month from her account.
“I told them that I didn’t want it. I told them I’ve already had one, but he seemed to be really pushing or asking me to say ‘yes,'” she said.
When Marika eventually decided to cancel the policy, she said Let’s Insure was relentless with the phone calls.
Senior Counsel Assisting Rowena Orr asked: “And in your statement you say that sometimes they called you day after day and sometimes once a week?”
“Well, they never left me alone,” Marika said.
She eventually ran into financial difficulty and sought the assistance of Legal Aid. She told them she could no longer afford the funeral insurance.
In a written response, Let’s Insure said it disputes the allegations it didn’t act properly and in accordance with the law when it sold the policy.
“However, as an act of goodwill, we will refund all premiums paid on the above policies, currently 40 totalling $1,890.34, subject to your client’s authorisation for us to cancel their policies,” Let’s Insure said.
Select AFSL managing director Russell Howden admitted that in hindsight “we pushed our agents” and this practice was “regrettable.”
Some staff members were incentivised with a Vespa scooter and a cruise – which he conceded drove the wrong behaviour.
“We have evolved our commission structure. It was designed to make agents productive but, at all times, the intended outcome was compliant sales,” he said.
A Roy Morgan survey released in January found the phone was the most popular means of purchasing life insurance policies.
A number of factors have contributed to this, including instability in the market value of farms, policy changes that make farms more reliant on financial instruments, and shifts in the global positioning of farm land relative to other forms of property.
The commission has heard that local lending brokers were not qualified to value farm properties, and that farm valuations have become fluid and unpredictable.
Sometimes farms and farmland were deliberately overvalued. Higher values enable farmers to borrow more money for farm improvements, and the local lending branch manager to earn higher commissions.
Not only do the central administrators in banks lack the information and expertise to question these assessments, their business models have encouraged overvaluation and overborrowing as a means to grow their businesses.
Across the Murray Darling Basin banks have taken the separation of water from land – a precursor to the marketisation of water – as a cue to devalue land.
This has provided a reason to void existing loan agreements and to offer refinancing under more arduous conditions. Farmers have no option to refuse, and so borrow with the expectation that a couple of good years will put them back on track.
And if the good years don’t materialise, farms fall into financial stress.
This confronts a third issue, which is that in the bad years farms are harder to sell so their market value plummets. This compounds the problem.
Farmers are more reliant on banks
Policy changes have made farms more reliant on banks.
Since Australia adopted open-market policies in the 1980s and agricultural markets have become global, farmers have been exposed to global price changes.
Drought assistance has also been reoriented to rely on market-based instruments, such as loans from banks rather than grants from governments. In the wake of the deregulation of the financial system, and the post-financial crisis consolidation of the farm lending sector, many farm-specific loan products have disappeared. So banks tend to treat farms as businesses like any other.
The open-market policies also create an imperative to expand landholdings (“get big or get out”) and to invest in the latest equipment and technologies. Since this requires borrowing, it thrusts farmers onto a credit treadmill.
Of course, low interest rates have also stimulated borrowing for farm expansion.
Increasing corporate control of farm inputs (seeds, fertiliser etc.) and outputs is squeezing farmers’ capacity to earn enough to service their loans.
To make matters worse, the declining terms of trade impel farmers to increase productivity just to stand still.
The farmers before the royal commission have mostly managed to stay on the treadmill, but only until the banks’ rule changes cranked up the speed to throw them off.
It’s clear that despite their crucial role, many banks still don’t really “get” the vagaries of farming. They don’t understand how different farm lending is – or should be – to commercial and housing lending. Neither do they seem to appreciate the broader social and economic dimensions of the role they have in managing farm risks.
Dramatic revisions to land valuations, as discussed in numerous cases described in the commission, can undermine an entire farming region’s equity.
The accelerated thinning out of the farming population impacts on local economies and sporting teams, among others. In the lead-up to and during the whole process of deregulation, farmers were continually reassured – in reports by the Productivity Commission, for example – that the credit market would evolve to meet their needs.
The evidence that the commission has heard in many respects represents a case of market – and regulatory – failure.
Since the global financial crisis, farm land has become an attractive investment for wealthy families and institutional investors, and for governments worried about food security.
As this pushes up land values, banks can be more aggressive towards failing farms. Foreclosures free up land for deep-pocketed investors.
It would be a mistake, then, to conclude that the stories coming out of the commission are an isolated issue relating to the one bank’s heavy-handed mopping up after the failure of a specialised rural lender – as was the case with ANZ and Landmark.
On the contrary, there are many stories of different banks imposing financial risk frameworks on farmers that are ill-equipped to accommodate the vagaries of farming production and pricing.
When farmers jest about being owned by the banks, they aren’t joking.
We should ask why the government took so long to acknowledge the problems of rural finance and the effects on farming communities.
After the commission concludes, it is likely that banks and regulators will tighten the risk parameters on farm lending and make it harder for smaller family farmers to access finance.
Vulnerable farms will not be able to borrow as much money as in the past. This might be prudent from a financial risk perspective.
However, if city bankers don’t understand farming and don’t make allowances for the volatile and uncertain economies of farming, there’s still no guarantee that tighter rules will translate into better decisions and more positive outcomes.
Rather, tighter rules are likely to have uneven consequences, further disadvantaging smaller family farms relative to deep-pocketed agribusinesses. So, in effect, restricting credit is likely to accelerate the transfer of farmland from family farms to more corporate entities including transnational corporations.
Author: Sally Weller Reader, Australian Catholic University; Neil Argent Professor of Rural Geography, University of New England
The aborted Prospa IPO raises questions not just about the online SME lender’s compliance with UCT but also ASIC’s role in applying and enforcing this law which came into effect in November 2016 says TheBankDoctor.
In its prospectus Prospa said “we have reviewed our loan contract in relation to UCT in July 2015 and again in September 2017. We will continue to review our loan contract as and when required in light of relevant case law and regulatory guides that may be issued”. Then the day before the IPO, Prospa received a letter from ASIC which is thought to have raised queries about whether its standard form contract contains clauses that may breach UCT.
Following a hastily arranged meeting with ASIC the following day, Prospa announced the IPO would be deferred for 48 hours. It said after this meeting “ASIC has been wonderful and very positive in their engagement” and the company felt “it does not need to make additional disclosures about its compliance with UCT regulations”. Prospa noted ASIC had not raised questions about the company’s disclosure or prospectus. And ASIC made no comment about what was in its 5th June letter or what was discussed or resolved at the meeting.
The IPO is now on hold yet we are none the wiser as to whether Prospa believes it is compliant or whether ASIC thinks Prospa may not be compliant. Until this uncertainty is cleared it’s hard to imagine how the IPO can proceed and in the meantime, ASIC’s collaborative approach to the application and enforcement of this law will come under closer scrutiny.
Prospa’s equivocal prospectus statement on UCT hasn’t helped its cause. It would be surprising if the Prospa directors did not seek and obtain written advice from their lawyers prior to signing off on the prospectus. Other fintechs that are not looking to list, have obtained written opinions from their lawyers stating their standard form contracts are UCT compliant.
Given the statement that it would “wait for case law or regulatory guides to inform it of any non-compliance with UCT” perhaps Prospa is of the view ASIC will tell them if it has contrary views and until or unless they receive input from ASIC nothing further is required?
There has been speculation ASIC’s last minute intervention may have been influenced by the Royal Commission’s questioning of ASIC’s Michael Sadaat on June 1st when counsel assisting Kenneth Hayne queried the collaborative approach adopted by ASIC and the Australian Small Business & Family Enterprise Ombudsman to get the big four banks to amend terms and conditions in their standard form contracts. At one stage, Mr Hayne asked Mr Sadaat “why say, in a media release, we will work with those who are not complying rather than saying, those who are not complying with the law should do so?”
In response, ASIC defended its approach saying that it “has been appropriate and moulded to addressing the risk of contravention of those provisions”. ASIC pointed out that since November 2016 it is has not initiated any legal action to enforce the law. This is more likely a reflection of ASIC’s priorities than the number of potential breaches. In addition, ASIC says it has received only one complaint about potential UCT concerns in a small business loan contract. The reason ASIC has received only one complaint is not that this is not a problem, it is because SMEs are not complaining. They are either too busy, don’t want to be exposed publicaly, don’t see any benefit for themselves or, as often as not, just don’t know ASIC is interested in their concerns.
In due course there is every likelihood the Royal Commission will make findings about the need for ASIC to tighten up enforcement of UCT laws particularly in the burgeoning non-bank SME lending market. But ASIC and lenders cannot and should not await the Royal Commission. SMEs who need access to funding offered by these lenders are entitled to know whether lenders comply with the law.
If Prospa believes its standard form contracts comply with UCT why doesn’t it just say so?. Similarly, if ASIC believes Prospa might not compliant why doesn’t it say so and then take whatever action it deems appropriate. Proving in court that a standard form contract term is unfair would not be easy although there are several clauses in Prospa’s standard form contract that, at the very least, raise questions about UCT compliance. These include:
1. Material Adverse Effects. Any event which in the lender’s reasonable opinion has had or may have a material adverse effect constitutes an event of default. Five types of events are defined as a Material Adverse Effect. They are not linked to non-payment. In such circumstances, no notice is required to demand repayment in full, use the direct debit authority as many times as the lender so desires or appoint a receiver.
2. Entire agreement. The loan agreement supersedes and overrides any other agreement, verbal or in writing.
3. Broad indemnification clauses. The loan agreement makes the borrower and any guarantors liable to the lender for losses, costs, liabilities and expenses suffered or incurred by the lender including, it seems, those that may arise outside the control of the borrower or guarantor.
4. Voluntary repayment. A borrower may at the discretion of the lender repay a loan early but this does not reduce the amount of interest payment unless the lender agrees. That is, if a borrower wants to repay early, they can be required to pay all the interest for the unexpired period of the loan.
This is not a “penalty” because the borrower accepts this clause when signing the loan agreement. Meanwhile in the Frequently Asked Questions section of the Prospa website, potential borrowers are advised, “there are no additional fees for early repayment”.
The voluntary repayment clause has caught out a number of unsuspecting borrowers. Last weekend’s AFR reported the case of a Perth based businessman with an existing Prospa loan who accepted an offer to borrow more but rather than simply increase the existing facility, Prospa sold him a second loan which was in part used to pay off the original loan. But despite paying that loan out early, the borrower says he was still required to pay the full interest and other fees as if the loan had run to its full term.
It may be that in recent times Prospa has made changes to its standard form contract although this seems unlikely given the prospectus states the last review was conducted in September 2017.
Compliance with UCT is an issue for the entire non-bank SME lending sector, not just fintechs or Prospa. But as the dominant player in the rapidly emerging fintech space, Prospa has an opportunity, arguably a responsibility, to demonstrate that fintechs can become a trusted alternative source of finance for the thousands of SMEs that cant get funding from banks. SMEs, who are generally time poor and financially unsophisticated, are entitled to expect that laws designed to protect them are enforced.
It remains unclear what the Prospa board and ASIC think about Prospa’s compliance with UCT law and until this is clarified, the cloud overhanging the company will persist and the IPO will remain in limbo. And hopefully ASIC will take the steps necessary to ensure UCT law is applied and enforced without unnecessary delay.
The Royal Commission has announced that the fourth round of public hearings will be held in Brisbane at the Brisbane Magistrates Court, 363 George Street, Brisbane from Monday 25 June to Friday 29 June, and in Darwin at the Supreme Court of the Northern Territory, Supreme Court Building, State Square, Darwin from Monday 2 July to Friday 6 July.
The fourth round of public hearings will focus on issues affecting Australians who live in remote and regional communities, which relate to farming finance, natural disaster insurance, and interactions between Aboriginal and Torres Strait Islander people and financial services entities.
The Commission presently intends to deal with these issues for the purposes of the public hearings by reference to the case studies set out below.
Topic
Case Studies
1.
Farming finance
CBA (Bankwest)
Rabobank
NAB
CBA
Bendigo and Adelaide Bank (Rural Bank)
ANZ (Landmark)
2.
Natural disaster insurance
Youi
Suncorp
The case studies will consider issues arising from:
Tropical Cyclone Debbie in March 2017;
the hail storm in Broken Hill in November 2016;
the bushfires near Wye River in December 2015; and
the floods in the Hunter Valley in April 2015.
3.
Interactions between Aboriginal and Torres Strait Islander people and financial services entities
Select AFSL, trading as Let’s Insure
ACBF Funeral Plans
ANZ
During the hearings, evidence will also be given by consumers of their particular experiences. The entities that are the subject of consumer evidence will be informed by the Commission.
Further topics may be included and the list above will be updated accordingly before the hearings commence.
The Small Business Ombudsman has called for another set of royal commission hearings to investigate more cases of inappropriate practices pertaining to small business loans.
Speaking with The Adviser, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), Kate Carnell, said that the “dilemma” with the third round of royal commission hearings (which focused on the provision of credit to small businesses) was too short, resulting in only a limited number of cases being investigated.
“The royal commission was called on because of a huge amount of agitation from many small businesses, a joint parliamentary inquiry, a range of cross-benches that indicated they might cross the floor because they had small business constituents, who believed that they hadn’t had an opportunity to have their cases heard,” Ms Carnell told The Adviser.
“I believe that they need to do another two weeks [of hearings] or another set of cases.”
She added that the few cases heard in the third round of hearings is “[not] representative of the breath of cases that exist”, though noted that the next round, which will focus on the provision of finance to customers in regional and remote areas, could bring to light further issues experienced by small businesses.
Ms Carnell cited cases where the banks had dragged out a loan’s sign-off process, then decided against the loan as little as 24 hours before it was expected to roll over, thereby not giving enough time for the business to find an alternative solution.
“Small businesses [are] getting very mixed messages… In a number of the cases that we saw, the bankers were telling [the small businesses] ‘no problem, we’ll refinance you’ and then two weeks (or in one case, 24 hours) before the rollover was due to happen, the bank said they changed their mind,” the ASBFEO said.
“There’s no capacity to refinance, to find another bank… and so the business ends up going into default, at which stage their interest rates double or even triple in some circumstances.
“The [cases] where banks actually told people one thing and then did something totally different and where timelines for businesses were just far too short to allow [them] to reorganise their operations… I don’t think were brought out nearly enough.”
Another issue that Ms Carnell argued didn’t get enough airtime at the last royal commission hearings is the nature of the relationships between banks and third-party valuers, administrators, and liquidators, which she said are frequently problematic.
“The small business pays for the liquidator or the valuer or the investigative accountant… but they have no input into the appointment in many cases,” the ASBFEO said.
“In our inquiry, we found it interesting and concerning that regularly the investigative accountants that gets sent in to have a look at the business to determine what should happen is then appointed as a liquidator, [which we thought] certainly didn’t look right.
“You could argue [that] an investigative accountant ends up financially benefitting from recommending a liquidation if they’re going to end up with the job… [This] isn’t an occasional scenario; it’s very regular.”
She also questioned whether banks are getting “friendly valuations” that work in both the bank’s and valuer’s favour.
“I’m not suggesting valuers and administrators aren’t professional people, but if their livelihood depends on bank work, there are some questions to be asked,” Ms Carnell said.
“Is [the] motivation for what you do in the interest of the consumer, who is paying you, or is it in the interest of the bank, who you rely on for work?
“In situations like that, transparency is really important… You’ve got to really know whether there are any kickbacks, any real incentives for people to act in particular ways [such as] provide a low valuation or a high one, or recommend a liquidation or not, recommend a particular loan product or not.”
Ms Carnell concluded that transparency around the banks’ relationships with third parties needs further exploration by the royal commission.
CBA has announced changes to its volume-based ‘diamond, gold, silver and bronze’ service model for brokers following advice from the Combined Industry Forum and intense questioning at the royal commission.
During the royal commission hearing on 15 March, Daniel Huggins, CBA’s executive general manager home buying, acknowledged that the bank decided to change the volume-based structure after acknowledging that it could create conflicts of interest with diamond brokers being awarded faster turnaround times and better service.
In a note to MPA on Wednesday, Huggins explained that the new two-tiered system is part of the bank’s “ongoing commitment to support and recognise brokers who are consistently delivering good customer outcomes”.
CBA’s previous model had 11 segments with the top being diamond. Those brokers who qualified had to write at least $15m and/or settle at least 75 CBA loans per year and achieve three out of five quality metrics.
Under the new regime, there will only be two categories: essential and elite.
The model moves away from volume-based requirements, as recommended by the Combined Industry Forum. Instead, a broker’s performance will be assessed on five key quality metrics and five complementary metrics. Their performance will be evaluated on a quarterly basis.
This should help even the playing field for regional brokers who generally have smaller average loan sizes and wouldn’t have made the top tier under CBA’s previous structure.
“We are really pleased to announce a simplified tiered service model with a focus on quality that seeks to recognise and reward our accredited brokers who deliver strong customer outcomes,” Huggins said.
CBA and accreditation
CBA also recently announced that instead of de-accrediting brokers who hadn’t written a loan with the major in 12 months, it would just require them to complete an e-learning training module to ensure they are updated on current products and criteria.
The bank said it will no longer require brokers to write a minimum number of loans to retain accreditation.
In the past, brokers who wanted to maintain CBA accreditation had to submit a minimum of four home loan applications and settle at least three every six months, although according to CBA this was not systematically enforced.
The royal commission revealed that in 2017 CBA revoked the accreditation of 710 brokers due to inactivity.
Misconduct exposed by the banking Royal Commission is the tip of the iceberg, with the catastrophic consequences of Australia’s broken financial sector yet to be revealed, according to a Deakin University corporate law expert.
Deakin Law School’s Professor Gill North, who has a background as a chartered accountant and financial analyst, as well as doctorate in law, said the Royal Commission would not fully address the broader impact of financial misconduct.
“Australians are horrified now by what they’re learning from the Royal Commission, but news on the finance sector is set to get much worse, with likely catastrophic consequences,” Professor North said.
“Systemic risks across the financial sector are already much higher than most people realise, and these risks are being exacerbated by the concentration of the sector, lax lending standards, high levels of household debt, and the heavy reliance of the economy on the health of the residential property market.
“As levels of household debt and financial stress rise, disparities between those who have considerable income, savings and wealth buffers and those who don’t will only become starker.
“The true resilience of the financial institutions, their consumers, and the broader economy will be tested and put under extreme pressure at some point – much of Australia is in for a bumpy and uncomfortable ride.”
Professor North is co-director of the analyst firm Digital Finance Analytics and has worked in senior executive positions at multinational corporations and investment banks in major financial centres including London, Tokyo, New York and Sydney.
She said the Royal Commission was shining a light on the most powerful corporations in Australia, but the investigation so far had been predominantly restricted to the most significant examples of non-compliance with the law by the largest financial institutions.
“The dirty linen of these entities and the practices they’ve gotten away with for many years are finally being effectively challenged,” Professor North said.
“The Commission is expected to have a profound and long-lasting impact on the sector, however the many governance and systemic concerns that flow from the identified misconduct are unlikely to be fully examined and addressed.”
Professor North said the Commission’s recommendations could include changes to consumer lending, while opening the door to future litigation.
“Changes to the consumer credit regimes under the National Consumer Protection Act are inevitable, including the way loan brokers can be remunerated and the processes used by lenders to verify information provided by consumers and intermediaries,” she said.
“The Commission has provided additional information and admissions that corporate regulator ASIC could use in actions against lenders, credit assistance providers, financial advisers, and directors.
“But future litigation in this space won’t be limited to regulators – actions by consumers who were issued loans or provided financial advice in breach of the law are likely to accelerate, and become a flood of litigation as the circumstances in Australia deteriorate and household financial stress levels climb to new records.”
