KPMG’s take on ‘simple banks’

The end of year analysis by KPMG has shown the need for the major Australian banks to become leaner and simpler to benefit customers, via InvestorDaily.

The KPMG 2018 financial year results analysis showed that in 2018 major banks cash profit after tax decreased by 5.5 per cent to $29.5 billion.

One element that caused loss was the increase in compliance and remediation costs as a result of a challenging and changing operating environment for the majors.

The report found that regulatory, compliance and customer remediation costs had increased the cost to income ratios across the majors from 43.1 per cent to 46.6 per cent.

KPMG predicted that banks would become leaner and simpler in the 2019 financial year as a response to these rise of costs.

KPMG Strategy banking partner Hessel Verbeek said banks needed to simplify their approach as complexity was keeping them from meeting expectations.

“The Australian banking industry is facing a confluence of factors, making simplification vital, but also complex. Without change, incumbent banks will struggle to meet shareholder, customer and regulatory expectations,” he said.

Mr Verbeek said simplifications would be different for each bank depending on its strategic objectives but all of them would have same overall goal.

“The target state for bank simplifications is a ‘connected enterprise’, which is entirely organised around customer needs and is omni-channel, but with a digital focus.

“The bank is streamlined from front-to-back, with every process putting the customer at the core,” he said.

Mr Verbeek gave five steps towards bank simplification:

  • Clarify the bank’s strategic focus and make clear choice around competitive positioning
  • Choose a director for the bank’s business architecture
  • Determine which activities are strategic and provide a competitive advantage, given the bank’s agreed focus in the first step
  • Assess the simplification options for the bank’s activities, in line with its strategic focus
  • Develop the simplification roadmap, taking into account various dependencies

Mr Verbeek said there were three potential journeys for banks to follow; one such journey was to operate a full-service bank with a focus on affluent customers and small business.

“The full-service bank in its simplification journey is likely to focus on extending existing centres of excellence, as well as transformation of existing capabilities,” he said.

Another option was for a mainstream bank to be value-focused bank with a focus on efficiency.

“A value-focused bank is more likely to develop-to-replace (including through a neobank) or adopt third-party solutions,” he said.

The final journey said Mr Verbeek would be for a major bank to reposition itself as an embedded finance institution.

“The embedded finance bank will open itself to an eco-system of partners and partnering will be a strategic activity. It is likely to replace rather than transform many of its banking modules,” he said.

Mr Verbeek said that banks needed to plan for simplification immediately as it required management and board focus to achieve.

“It starts with agreeing on the bank’s long-term strategic focus. This could be done concurrently with a maturity assessment of the bank’s existing activities,” he said.

The KPMG end of year analysis found that of the big four banks the worse performer was NAB who came last in the rankings on all but one measure and the top performer was CBA, followed by Westpac with ANZ close behind.

In the 2018 financial year CBA made over $9.2 million in cash profit after tax, while NAB made just over half of that with $5.7 million.

The report said it was clear that the royal commission and the APRA and AUSTRAC inquiries into CBA were felt by all the banks with various compliance and remediation costs all increasing.

The report said that, looking forward, competition was predicted to remain robust as non-bank players and challenger banks were entering the market.

However, business and corporate banking could not expect to pick up all the mortgage market slack and, as a result, total net interest income will be subdued.

MLC sale ‘complicated and messy’

NAB says all options are still on the table for the sale of its wealth business after rival CBA secured a buyer for Colonial First State Global Asset Management, via InvestorDaily.

 Following the announcement of its full-year financials on Thursday (1 November), which saw NAB’s profit slide by 14 per cent to $5.7 billion, the bank provided an update on its MLC sale.

“On the wealth separation, it is progressing well, including the appointment of Geoff Lloyd as CEO of MLC,” NAB group executive of finance Gary Lennon said. “We continue to target a public market exit by the end of the 2019 calendar year.

“All exit options including demerger, IPO and trade sale are still on the table.”

Rival CBA announced the sale of Colonial First State Global Asset Management (CFSGAM) days before the release of NAB’s results. The surprise $2.9 billion sale to Japanese bank Mitsubishi UFJ Financial Group was over 17 times CFG’s annual profit.

The deal has thrown a new light on NAB’s plans to offload MLC and who a potential buyer could be. In 2016, Japanese group Nippon Life acquired 80 per cent of NAB’s life insurance business for $2.4 billion.

“NAB confirms good progress in work to separate MLC, but we see the process as very complicated and messy and delays will not surprise,” Morningstar analyst David Ellis said.

“The operating environment for all major banks is tough, with legal, regulatory, political and public scrutiny escalating, at the same time earnings growth is slowing,” he said.

“The combined effects of a royal commission, increased regulatory oversight, a weakening housing market, slowing credit growth, softer Chinese economic conditions, rising global interest rates, investment market jitters and the escalating debate around culture, governance and trust in the banking sector means the major banks’ earnings power is under pressure.”

NAB will provide an MLC investor briefing before May 2019.

More jobs to go at major bank as profit slides

ANZ saw its cash profit fall by 5 per cent over in FY18 to $6.5 billion. The bank’s ROI fell 67 basis points to 11 per cent over the year, via InvestorDaily.

Under the leadership of CEO Shayne Elliott, ANZ is focused on become a simpler bank. Part of this strategy has involved selling off non-core assets in Asian markets and the announced sale of its wealth business to IOOF.

Collectively, the announced asset sales are expected to release $7.2 billion of CET1 capital. Meanwhile, “institutional reshaping” is poised to free up $4.5 billion, according to the group’s full-year result presentation.

One significant outcome of ANZ’s strategy will be the reshaping of its workforce, or full-time equivalent staff (FTE). Staff numbers have already fallen dramatically from just over 50,000 in 2015 to under 38,000 today.

ANZ has reduced its FTE numbers by 5151 over the last 12 months, from 43,011 in September 2017 to 37,860 today.

Chief executive Shayne Elliott said that while the bank does not have a target to reduce its FTE numbers, staff cuts will be a natural result of simplifying the bank.

“The outcome of our strategy of doing less things means less branches, fewer products to service and less need for contact centre and operational staff,” he said.

“It is an outcome rather than a target.

“There will be more. We have been really transparent with our staff about why we are changing and the need to change. While it is early days, we do keep in touch with former staff and most of them haven’t struggled to find alternative employment,” he said.

When he appeared before the House of Representatives inquiry in Canberra on 12 October, Mr Elliott said more than 200 staff from across the group had been dismissed over misconduct over the last year.

ANZ this week revealed that it has reduced variable remuneration paid to staff across the company by $124 million.

Royal commission costs

The major bank paid $55 million in legal costs for the royal commission in FY18, one of a number of expenses that the Hayne inquiry has generated.

Earlier last month, ANZ announced a $374 million hit to profits as part of its refunds to customers and related remediation costs.

“Clearly there will be a short-term impact on financials. You are seeing that now,” Mr Elliot said.

“It may continue a little bit more. We are hiring people in compliance and investing in systems to make sure we are compliant. But in the long-run I don’t believe it will lead to an increase in costs, I actually believe the opposite.

“I believe that the way to meet our obligations regarding the law or community expectations is by being simpler. So by doing less things and doing them well, taking out all the complexity, that will be lower cost, better for compliance and better for customers.”

However, RBA assistant governor Michelle Bullock believes the royal commission will have longer term impacts on costs for the big banks.

Ms Bullock observed that while the royal commission has brought to light some poor behaviour by the Australian banks, the direct financial impact on them has been relatively modest so far.

“The fines to date are relatively small compared with the major banks’ combined profits of around $30 billion per annum. But there are also costs from remediation of past behaviour, which have been reflected in banks’ profit announcements in recent times, and there is also the possibility of class actions,” she said.

“And there are also likely to be increased costs of compliance, which will be ongoing. More broadly, there has been very little share price growth over recent years, which has had an impact on shareholder returns. And changes to business models to address the risk of future misconduct could more permanently impact banks’ financial performance. These changes, however, are likely to increase the resilience of the financial sector in the medium term, even if at the expense of lower returns.”

‘Crisis of trust’: 80% of Aussies think banks are unethical

Deloitte has measured how Australians feel about the banks after their dirty laundry was aired by the Hayne royal commission. The results aren’t pretty, via InvestorDaily.

This week Deloitte launched its Australian Trust Index, which measures levels of customer trust and general trust influence factors. In this Inaugural Index – Banking 2018, the professional services firm surveyed banking customers to identify the way forward to rebuild reputation and trust.

Over 2,000 randomly selected demographically representative Australians were surveyed in August of this year. The vast majority of Australians (80 per cent) believe that banks are unethical. The index found that only 20 per cent believe that banks in general are ethical – that they do what is “good, right and fair”.

“The banking sector has undergone a rigorous and exposing investigation through the Royal Commission into Misconduct in Banking, Superannuation and Financial Services,” Deloitte Trust Index author Willem Punt said. “It highlights the depth of the crisis of trust in the sector in Australia.

“We specifically designed the index to measure levels of customer trust and general trust influence factors so that we could deepen our understanding of the factors influencing trust. This enables us to point to actions banks can take to restore reputation and trust,” he said.

The index also gives a weighted national benchmark to use to compare individual organisational performance. It considered what is most important to the average Australian customer when it comes to trusting their bank and ‘banks in general’.

“The index indicates the greatest driver of perceptions of trustworthiness among bank customers is a mindset of consistently keeping promises,” Mr Punt. “Trust improves when it comes to my own bank as opposed to banks in general.”

Only 36 per cent of the 2,000+ Australian banking customers surveyed believe their bank has their best interests at heart, whereas only 21 per cent believe banks in general have their customers’ best interests at heart. Also, 49 per cent trust their own bank to keep its promises compared with 26 per cent in general.

“These results and those of the full index are particularly valuable given that culture and conduct will both get a very hard edge in the strengthened regulatory environment mooted by Commissioner Hayne, who has signalled a greater role for the judiciary in ensuring accountability for significant and systemic poor conduct,” Mr Punt said.

The way forward to rebuild reputation and trust in today’s business world is far more about communities and relationships and far less about transactions, said Andy Bateman, Monitor Deloitte Strategy Partner and a key author of the Deloitte Trust Management Model.

“The companies that get this, at the deepest level, are exhibiting the kinds of behaviours that genuinely build trust,” he said.

Banks should be ashamed of themselves: Labor

The opposition has called on the coalition government to extend the Hayne royal commission after listening to victims of the banks, via InvestorDaily.

Labor leader Bill Shorten made the comments after a town hall meeting with Victorians in the federal seat of Deakin.

“We’ve heard today from victims of the banks, we’ve heard from small businesses, we’ve heard from women trapped in domestic violent relationships. We’ve heard from people who were the victims of crime and then became victims of crime again reinjured through the processes of careless greedy negligent banks,” he said.

The opposition leader said it was clear from the royal commission that the banks were guilty of ripping off ordinary Australians.

“The banks should be ashamed of themselves. In Australia if you steal from the banks you go to jail but if the banks steal from you they get a bonus and a promotion and a bigger profit,” he said.

Mr Shorten said he thought the Hayne Royal Commission was doing a great job and that what they had exposed would wake up the industry.

“This is the biggest wake-up call that we’ve seen in Australian corporate history,” he said.

Mr Shorten said that Labor called on the government to extend the royal commission and demanded an apology from the guilty parties.

“I think the people in power and regulators owe a big apology to the tens of thousands of victims of banking in Australia. We want to see Mr Morrison extend the royal commission,” he said.

Mr Shorten said that Scott Morrison’s track record on the royal commission called into question his ability to implement any changes.

“On 26 occasions the current Prime Minister, when he was Treasurer, voted against the royal commission. The action of him rejecting the banking royal commission 26 times speaks far louder than the words in our mouths.

“I’ve got my doubts that this government and this prime minister can be trusted to implement what comes out of the RC,” he said.

Mr Shorten acknowledged that Labor potentially should have called for a royal commission years ago but reiterated the parties support for the victims.

“Labor just wants to say to all the victims of the banks, we hear you and sure maybe things should have been done a lot longer ago but for the last 2 years we’ve stood up for the victims and today we are putting a submission into the royal commission just drawing attention to our knowledge and the voices we hear,” he said.

There would be challenges ahead in regulating banks as it was hard to legislate against being a bully said Mr Shorten.

“Some of the conduct we have heard is illegal and you shouldn’t have to pass a law to say don’t charge dead people for services that they are not getting. Some things are allowed within the law and they just exploit,” he said.

Blame was also to be put on the regulators who gave out the equivalent of corporate speeding tickets to banks, said the opposition leader.

“The regulators have found this royal commission to be highly embarrassing as they should. Having said that it does go back to the banks. The system is broken when it comes ethical protections of consumer and customers,” he said.

It is not enough to come to parliament to apologise said Mr Shorten and he said executives at banks should think about how they show they mean it.

“If the boards of banks and CEOs were to hand back some of the bonuses they’ve received whilst they were in charge of banks whilst they were exploiting ordinary Aussies. It doesn’t change where the victims are but it would be a good down payment,” he said.

This town hall meeting was the first of many as the Shadow Minister for Financial Services Clare O’Neil is currently undertaking a series of roundtables with victims in towns that have not been visited by the Royal Commission.

The move by labor was announced following the release of the interim report with Mr Shorten outlining that despite over 9000 submissions, the hearing had only heard from 27 customers.

“All of the hearings of the commission have been in just three capital cities; regional and rural customers have not had a sufficient chance to have their say in this process.

“Misconduct in the financial services sector is a national issue, and Australians across the country deserve their chance to be heard.”

However, federal Treasurer Josh Frydenberg has censured Mr Shorten for “threatening the independence, the authority of our royal commission”, stating earlier this month: “Bill Shorten first thought that he knew better than the royal commissioner saying there must be an extension of time, when the royal commissioner has yet to ask for it. Now he thinks he is the royal commissioner by conducting his own hearings and running a parallel process around the country.”

However, when asked whether the government would extend the commission further, should Commissioner Hayne ask for one, the Treasurer has previously said: “If he asks for more time, he has got it”.

Major bank accused of ‘window dressing’ bonus culture

Westpac CEO Brian Hartzer faced the firing line of a parliamentary committee where he was asked to explain why branch staff are still required to meet sales targets; via InvestorDaily.

Most of the questions directed at Brian Hartzer by the House of Representatives standing committee on Thursday were about the royal commission.

Labor MP Matt Thistlewaite read from the witness statement of Carol Separovich, Westpac’s head of performance & rewards, who appeared before the Hayne inquiry in May.

“She said there is still a variable reward and an opportunity for employees to gain financial advantage from elements that are at risk and related to certain targets,” Mr Thistlewaite said. “What proportion of frontline staff salary is at risk?”

Mr Hartzer confirmed that for Westpac personal bankers it’s about 10 to 15 per cent.

“If you’ve got someone who is in a very focused sales role like a home finance manager, it’s probably around 20 per cent,” he added.

Mr Thistlewaite moved on to Westpac’s key performance indicators (KPIs), as outlined in Ms Separovich’s witness statement.

“For personal bankers, this includes things like total branch first-party net home loan and deposits growth, total net growth percentage of branch customers, referrals to specialist business partners such as wealth business premiums,” he said “Those referral opportunities and growth KPIs are still there.”

“In terms of credit card products, one KPI is cards systems growth. It appears to me that you’ve done a bit of window dressing but there is still that notion within branches, within banks that an element of your job is to push these products onto customers and if you do it and do it well you’ll be rewarded for it.”

Mr Hartzer rejected this characterisation of the bank.

“I certainly wouldn’t characterise it as window dressing. We are a commercial organisation. We want to grow. The strategy here is around encouraging people to consolidate their business with us.

“We are trying to get that balance of rewarding people who do a great job and look after customers and allow them to benefit from that success. But at the same time not create perverse incentives that cause them to push a product onto someone who doesn’t need it. We have changed the structures so that people are agnostic about the products they are talking to customers about.”

Commissioner Hayne’s interim report, released last month, questioned the role of incentive remuneration and bonus cultures within financial services: “If customer facing staff should not be paid incentives, why should their managers, or those who manage the managers? Why will altering the remuneration of front-line staff effect a change in culture if more senior employees are rewarded for sales or revenue and profit?

The chief executives of ANZ and NAB will appear before the inquiry on Friday, 12 October and Friday, 19 October, respectively.

ASIC may just be the best deal maker in town

From InvestorDaily.

Are you a major financial institution looking to profit from misconduct? The corporate regulator is open to negotiations.

There are very few surprises in Hayne’s interim report. Fortunately, the document backs up what I’ve long suspected – that ASIC is a toothless tiger of a regulator when it comes to the big end of town; always happy to hit small business where it hurts but equally glad to negotiate bargain basement prices on infringement notices for the big corporates.

Seventy per cent of all of ASIC’s enforcement outcomes come from the Small Business Compliance and Deterrence Team, which focuses very heavily on the prosecution by in-house ASIC legal teams of strict liability offences, primarily in relation to the failure of directors to assist liquidators.

When it comes to regulating the big four banks, however, it’s a different story. Negotiation, rather than prosecution, is the strategy.

As Hayne states in his report: “ASIC issued infringement notices to the major banks as the outcome agreed with the bank.”

We have already seen plenty of evidence of this during the royal commission hearings throughout the year.

Hayne pulls no punches in his interim report, blasting the nonchalant regulator: “When deciding what to do in response to misconduct, ASIC’s starting point appears to have been: How can this be resolved by agreement?

“This cannot be the starting point for a conduct regulator. When contravening conduct comes to its attention, the regulator must always ask whether it can make a case that there has been a breach and, if it can, then ask why it would not be in the public interest to bring proceedings to penalise the breach. Laws are to be obeyed. Penalties are prescribed for failure to obey the law because society expects and requires obedience to the law.”

But the big banks were clearly too big to obey the book and ASIC was unwilling to throw it at them.

If ASIC has a reasonable prospect of proving contravention, Hayne said, then the starting point must be that the consequences of contravention should be determined by a court.

But the courtroom is an unfamiliar environment for the corporate watchdog. It does its best work around the negotiating table.

Over the 10 years to 1 June 2018, ASIC’s infringement notices to the major banks have amounted to less than $1.3 million. By contrast, in a single year (the year ending 30 June 2017) CBA declared a profit about 7,000 times greater – $9.93 billion (net profit after tax on a statutory basis).

Between 1 January 2008 and 30 May 2018, ASIC commenced 1,102 proceedings, an average of about 110 per year. Of those, more than half (587) were administrative proceedings, which include disqualification or bans on individuals from the industry; revocation, suspension or variation of a licence; and public warning notices.

“That is, they were outcomes carried out in-house by ASIC and not through the courts, though they may be appealed to the Administrative Appeals Tribunal,” Hayne states in his interim report.

“In that time, ASIC commenced 238 criminal proceedings and 277 civil proceedings, and accepted 194 enforceable undertakings. Of those proceedings, just 10 were against major banks.”

Hayne found that in a number of cases where ASIC acted against major banks in the form of infringement notices, the regulator included the following disclaimer in its media release: ‘The payment of an infringement notice is not an admission of guilt in respect of the alleged contravention.’

Crikey!

Another important point in Haynes report supports the arguments I made in an earlier editorial, that it is the banks, not the regulator, who really call the shots.

“Too often, entities have been treated in ways that would allow them to think that they, not ASIC, not the Parliament, not the courts, will decide when and how the law will be obeyed or the consequences of breach remedied,” Hayne states.

“Attitudes of this kind have not been discouraged by ASIC’s approach to the implementation of new provisions of financial services laws. Too often, ASIC has permitted entities confronted with new provisions, of which ample notice has been given (such as the unfair contract terms provisions), to take even longer to implement the provisions than the legislation provided.”

ASIC has been aiding the misconduct in financial services by its own weak and possibly even corrupt preference for deal making. If things are to change, ASIC will need to litigate rather than negotiate.

Of course, ASIC, like any other government agency or department, will cry for more resources. Hayne is across this too.

“I do not accept that the appropriate response to the problem of allocating scarce resources is for a regulator to avoid compulsory enforcement action and instead attempt to settle all delinquencies by agreement,” he said.

Hayne knows that ASIC needs to change its ways but is yet to be convinced that this can happen. For several reasons.

“First, there is the size of ASIC’s remit,” he said.

“Second, there seems to be a deeply entrenched culture of negotiating outcomes rather than insisting upon public denunciation of and punishment for wrongdoing.

“Third, remediation of consumers is vitally important but it is not the only relevant consideration. Fourth, there seems no recognition of the fact that the amount outlaid to remedy a default may be much less than the advantage an entity has gained from the default.

“Fifth, there appears to be no effective mechanism for keeping ASIC’s enforcement policies and practices congruent with the needs of the economy more generally.”

UBS Sounds IO Mortgage Alarms

According to UBS’ Australian Banking Sector Update on 19 September, which involved an anonymous survey of 1,008 consumers who took out a mortgage in the last 12 months, 18 per cent stated that they “don’t know” when their interest-only (IO) loan expires, while 8 per cent believed their IO term is 15 years, which doesn’t exist in the Australian market, via InvestorDaily.

The research found that less than half of respondents, or 48 per cent, believed their IO term expires within five years.

The investment bank said that it found this “concerning” and was worried about a lack of understanding regarding the increase in repayments when the IO period expires.

The Reserve Bank of Australia (RBA) earlier this year revealed that borrowers of IO home loans could be required to pay an extra 30 per cent to 40 per cent in annual mortgage repayments (or an additional “non-trivial” sum of $7,000 a year) upon contract expiry. The central bank noted that the increase would make up 7 per cent, or $120 billion, of the total housing credit outstanding.

According to the RBA, 2020 is the year that most of the 200,000 at-risk IO loans will reset.

UBS’ research, which was conducted between July and August this year, revealed that more than a third of respondents, or 34 per cent, “don’t know” how much their mortgage repayments will rise by when they switch to principal and interest (P&I) contracts.

More than half, or 53 per cent, estimated that their repayments will increase by 30 per cent once their IO term ends, while 13 per cent expected their repayments to rise by more than 30 per cent, which is the base case for most IO borrowers.

“This indicates that the majority of IO borrowers remain underprepared for the step-up in repayments they will face,” UBS stated in its banking sector update report.

Further, nearly one in five respondents to the UBS survey, or 18 per cent, said that they took out an IO loan because they can’t afford to pay P&I.

“With a lack of refinancing options available and the banks reluctant to roll interest-only loans, these mortgagors will have to significantly pull back on their spending, sell their property, or [they] could potentially end up falling into arrears,” the investment bank stated in its report.

UBS also found it concerning that 11 per cent of respondents said they expected house prices to rise and planned to sell the property before the IO period expires.

“This is a risky strategy given how much the Sydney and Melbourne property markets have risen, and have now begun to cool,” the investment bank said.

Overall, the top two motivations for taking out an IO loan, according to UBS survey participants, were “lower monthly repayments gives more flexibility on my finances” (44 per cent) and “to maximise negative gearing” (43 per cent).

The second motivation was selected by 32 per cent of owner-occupier borrowers who cannot benefit from negative gearing as the tax incentive applies to investors, 53 per cent of which cited this benefit.

Most banks yet to implement tighter expense checks

The investment bank reiterated in its banking sector update that it expects mortgage underwriting standards to tighten further in the next 12 months. It claimed that, contrary to comments by regulators that “heavy lifting on lending standards is largely done”, most banks are yet to fully verify a customer’s living expenses and a large number of customers are still not submitting payslips and tax returns.

“As a result, we believe there is likely to be much work required for the banks to comply with the royal commission’s likely more rigorous interpretation of responsible lending and improve mortgage underwriting standards. We expect this is likely to play out over the next 12 months,” UBS stated in its update report.

UBS went on to maintain its belief that Australia is at risk of experiencing a “credit crunch” in the next couple of years, but it is waiting on a number of “signposts” to make a more calculated judgement. These include the Hayne royal commission’s interim and final report, major bank policies around living expenses, details from the Australian Prudential Regulation Authority on debt-to-income caps, the federal election, changes in property prices, and sentiments from the RBA.

“We remain very cautious on the Australian banks,” the investment bank concluded in its update report.

“After a prolonged 26 years of economic growth, many excesses have developed in the Australian economy, in particular the Sydney and Melbourne housing market.

“We believe the royal commission creates an inflection point and credit conditions are tightening materially. Whether Australia can orchestrate an orderly housing slowdown remains to be seen, and we think the risks of a credit crunch are rising given the significant leverage in the Australian household sector.”

AMP knew it was charging dead people years ago

AMP was aware that it was charging dead customers life insurance premiums as far back as 2016 but failed to report the matter to regulators, the royal commission has heard, via InvestorDaily.

On Monday (17 September), the Hayne royal commission learned of a number of emails between AMP staff members dating back to 2016 raising the issue of insurance premiums being charged to dead people.

A 2016 email from an AMP staff member, Luke Wilson, regarding a claim being paid to a dead person observed that “this has been going on well before I started in the team”.

Counsel assisting Mark Costello questioned witness and AMP chief customer officer Paul Sainsbury about what Mr Wilson meant by this.

The AMP executive told the royal commission that, as he understood it, the “problem” had been going on for some time.

That problem, the commission learned, was AMP’s practice of charging dead people insurance premiums.

In another email, AMP staffer Luke Wilson wrote:

The issue is that [corporate superannuation] continued to charge premiums for the insurance even after AMP has been notified of the member’s passing. We have raised this with [sic] corp in the past and asked them why they continue to charge the insurance premiums once they are notified of a customer’s death. Back in 2016 I believe that they were of the understanding that premiums are refunded when the policy is paid, which is incorrect.

However, AMP only opened an investigation into the matter in April 2018, which was prompted by similar events at CBA, Mr Sainsbury told the commission.

“It was as a result of the CBA’s circumstances around premiums on deceased members. A question was asked in AMP ‘could this happen to us?’” Mr Sainsbury told the commission.

Counsel assisting Mark Costello asked: “Stopping the premiums being charged when you’ve been notified that the person is dead seems like a rather obvious step, doesn’t it?”

“Yes it does,” Mr Sainsbury said.

Costello: “But it wasn’t taken in 2016?”

Sainsbury: “No. The system was coded to refund it when the claim was admitted.”

Costello: “Why was that?”

Sainsbury: “I couldn’t tell you.”

The royal commission then heard about a case in which a customer had died on 24 February 2015 but premiums were still being deducted at June 2016. There was a request for the charged premiums to be reversed. The issue was not reported to ASIC.

“I can only assume the claim wasn’t admitted at that time. It’s a process as I’ve described. A refund occurs automatically by the system when a claim is actually finalised,” Mr Sainsbury explained.

Commissioner Hayne then sought further clarification of what Mr Sainsbury meant by a “refund”: “A refund of what is deducted? A refund plus the earnings it would have earned? A refund of what?”

“Commissioner, I believe it is a refund of the premiums,” Mr Sainsbury said.

“So the time value of money goes to AMP’s benefit?” the commissioner asked.

Mr Sainsbury replied: “Potentially.”

“Charging premiums for life insurance to someone who’s dead. That’s the position isn’t it?” Mr Hayne said.

“Yes,” said the AMP executive. “That’s the way the system is treating it today for a portion of our business.”

The royal commission heard that neither APRA nor ASIC were told that AMP was aware that it was charging life insurance premiums to dead people in 2016.

AMP charged 4,645 deceased persons life insurance premiums totalling approximately $1.3 million, the commission heard.

Lehman Brothers 10 Years On

I was in London in 2008 when Lehman Brothers collapsed, 10 years ago. The sense at the time was that the financial system was teetering on the brink as stocks crashed, and liquidity dried up. Banks and other Financial Instructions just stopped trusting each other.  We perhaps escaped the worse possible outcomes, but looking back, in fact the financial system is even today still under pressure, and some would say we have not really learnt the hard lessons of the great recession as it’s called.

Dave Lafferty, who is Natixis Investment Managers chief market strategist penned an really interesting piece which discusses the lessons investors might have learned 10 years after the collapse of Lehman Brothers, via InvestorDaily. I want to take you through his commentary and add my own points as we go though.

He starts by saying that It’s often said that you should never let a good crisis go to waste. As we approach the 10 year anniversary of the seminal event of the global financial crisis – the collapse of Lehman Brothers – investors may wonder if we’ve learned anything from past mistakes. Through the varying lenses of policymakers, investors and markets, the answer is decidedly mixed.

Without question, policymakers around the globe have made some headway, particularly in the area of bank vulnerability. While concentration risk among the major global banks has actually grown since the crisis, broadly speaking, leverage and trading risk are down while equity and capital ratios are up. Large bank failures remain a risk, particularly in the European periphery and emerging markets, but the gradual de-risking of banks should make the system less vulnerable to contagion in the next Lehman-like crisis.

Where policymakers have made less progress is on the monetary front. Other than the US Fed, the other major central banks remain in crisis mode today, unable to lift rates or unwind their massive quantitative easing programs. Balance sheets are bloated to the tune of $15 trillion with still close to $8 trillion in negative-yielding sovereign bonds, reducing the stimulative firepower of the major central banks to counteract the next recession or crisis. In the end, it may be fortunate that banks have ramped up their ability to absorb losses because central banks certainly have less power to prevent them.

Coming on the heels of the tech and telecom bust of 2000-2001, the plunge in risk assets during the GFC represented the second bear market in eight years for many investors. In addition to rethinking their equity expectations, Lehman’s collapse highlighted a new risk: that systemically important institutions might be too big, too interconnected, or too complex to save. Millennial investors coming of age in the 2000s may never look at equities the way the Baby Boomers did growing up in the bull market of the 1980s and ’90s. The common refrain in the wake of Lehman was that investors cared more about the “return of their capital, not the return on their capital”. While some scar tissue has built up, investors have been forever altered.

Ten years of Zero Interest Rate Policy and Negative Interest Rate Policy have pushed them grudgingly out the risk spectrum and back into equities, but there is little doubt investor risk tolerance has been fundamentally altered. Investors are more skittish and therefore more likely to bail when volatility rears its head again. “Buy and hold” has gone from a trusted maxim to a sad platitude that many investors can no longer embrace.

Finally, as investors have changed, so have the markets. Because the failure of Lehman was equal parts credit crisis and liquidity crisis, investors have come to demand both better protection and more liquidity in their investments. Wall Street, asset managers and global banks have been more than willing to develop new products and strategies promising to reduce volatility, manage downside exposure, or reduce correlation to falling markets. Assets in these products number in the trillions and include all manner of strategies that either use volatility as an input to reduce exposure or short volatility outright.

The common theme of these strategies, to one degree or another, is to reduce risk into falling markets, which may exacerbate the sell-off – as seen in February’s volatility tantrum. While we believe these strategies play an important role in tailoring appropriate client portfolios, it represents a modern-day tragedy of the commons whereby investors’ demands for better downside protection actually creates selling pressure and downside volatility when the crisis finally comes.

Historical analysis of any crisis is likely to be inconclusive and provide few solutions. There can only be so much learned from looking back when every new crisis is sewn from different seeds. All participants and policymakers can do is hope that the system is more flexible and therefore less fragile when the next crisis hits.

On this score, we can only conclude that things have changed very little from the days of Lehman. While consumers are in no worse shape, corporate and sovereign debt levels have only risen since the crisis, sustained solely by artificially low interest rates. Banks have found some religion with respect to building equity capital, but much of the leverage has simply moved to the bond markets. Meanwhile, old fashioned value investors who were willing to catch the falling knife are few and far between, replaced by quants and algos who will sell (or go short) at the first sign of trouble. The Lehman collapse brought about many positive changes, but in the end, the global financial system appears no less brittle today than a decade ago.

My view is the it will be US corporate bonds which will be the point of failure as the FED lifts rates in the months ahead. So history may not repeat, but it may well rhyme!