ASIC accepts enforceable undertaking from Barclays entities

Yesterday, ASIC accepted an enforceable undertaking (EU) from three Barclays foreign financial service providers (FFSPs):

  • Barclays Capital Inc. (BCI) domiciled in the United States of America
  • Barclays Capital Asia Limited (BCAL) domiciled in Hong Kong, and
  • Barclays Capital Securities Limited (BCSL) domiciled in the United Kingdom,

collectively ‘the Barclays entities.’

As part of the terms of the EU, the Barclays entities will contribute $500,000 to The Ethics Centre for research and development into the provision of financial services to Australian clients.

The EU was accepted by ASIC following concerns about significant breaches of the conditions of the ASIC class order licensing exemptions relied on by the Barclays entities, including the failure to notify ASIC of breaches within the required time.

The Barclays entities failed to disclose to clients that they were exempt from holding an Australian Financial Services licence (AFSL) and are regulated by the relevant overseas regulatory authority. BCI and BCAL are not able to demonstrate that the requisite disclosure was made to clients since first commencing reliance on the ASIC class order licensing exemption, in 2004 and 2006 respectively. BCSL is not able to demonstrate that the requisite disclosure to clients had been made across a 10 year period from 2004 to 2014. BCI also failed to notify ASIC of certain offshore investigation and enforcement matters within the time required of FFSPs.

ASIC was particularly concerned that the Barclays entities failed to report these material breaches within the 15-day time frame and as a consequence excluded themselves automatically from the benefit of the ASIC class order licensing exemptions.

To maintain the availability of the services provided by the Barclays entities to the Australian wholesale sector ASIC has granted the Barclays entities conditional individual relief from the obligation to hold an AFSL.

The duration and number of breaches together with the failure to report breaches in time demonstrated serious, systemic weaknesses in the compliance controls implemented by the Barclays entities to meet their Australian regulatory obligations.

Under the terms of the EU the Barclays entities must engage an ASIC approved independent expert to, among other things:

  • review and test the compliance framework implemented by the Barclays entities following the reporting of breaches, to meet the relevant conditions of the ASIC licensing exemption; and
  • report any deficiencies and make recommendations on how to rectify those deficiencies to ensure effective and enduring compliance with the relevant conditions of the ASIC licensing exemption.

ASIC Commissioner Cathie Armour said, ‘Foreign financial services providers relying on a class order licensing exemption must have effective and enduring measures to ensure compliance with the conditions set out in these instruments, including the fundamental obligations relating to disclosure and reporting.’

‘Entities that fail to self-report a breach of their obligations to ASIC within the required time will be subject to automatic and indefinite exclusion from the licensing exemption provided by these instruments.’

ASIC releases findings of CommInsure investigation

ASIC has released a public report today on its investigation into the life insurance business of CommInsure (the trading name of The Colonial Mutual Life Assurance Society Limited).

ASIC has been conducting an extensive investigation and examination of CommInsure’s practices, including reviewing over 60,000 documents and interviewing staff. ASIC obtained files from dispute resolution schemes, spoke to consumer advocacy organisations, and obtained independent medical and legal advice.

Key outcomes of ASIC’s investigation are:

1. CommInsure had trauma policies with medical definitions that were out of date with prevailing medical practice, specifically for heart attack and severe rheumatoid arthritis. However, this was not against the law. This is because the law allows an insurer to set out the level of cover its policy provides, including out of date medical definitions as long as these are clearly disclosed in the policy.

It is important to recognise that a consumer can end up with a life insurance policy that has out of date medical definitions in two ways (both of which we found applied to CommInsure)

  1. Insurers can sell consumers policies which already have outdated medical definitions. Although this is not against the law, it is clearly out of step with community expectations, given that consumers cannot be expected to know whether a medical definition is already outdated when they purchase life insurance. The life insurance industry has recognised this, and under the new life insurance code of practice will take steps to minimise the risk that medical definitions are out of date when policies are sold.
  2. As life insurance is a long term product, a consumer can end up  with a life insurance policy where previously current medical definitions have become out of date over time. This occurs because life insurers are legally required to maintain a consumer’s cover, and cannot easily update a policy or change its terms. While this is an important consumer protection, it creates a ‘legacy products’ issue in the life insurance industry. The Government is considering this industry-wide issue further in response to a recommendation of the Financial System Inquiry.

2. CommInsure has since updated its medical definitions, including for heart attack and severe rheumatoid arthritis. CommInsure had previously announced that it would apply its updated heart attack definition back to May 2014. In response to ASIC’s concerns that its heart attack definition was out of date from at least October 2012, CommInsure has now voluntarily agreed to apply its updated heart attack definition back to October 2012. This is the date at which global cardiology bodies published an updated consensus on the appropriate clinical marker for heart attack. CommInsure will now commence the process of identifying affected consumers and making payments as appropriate. ASIC welcomes CommInsure’s revised position on this matter.

3. Following a thorough investigation, ASIC found no evidence to support allegations that CommInsure claims managers applied undue pressure on doctors to change or alter their medical opinions.

4. In the course of the investigation, ASIC identified a number of areas where CommInsure needs to make improvements to its claims handling processes. Areas of improvement were also identified by Deloitte in their independent review of CommInsure’s claim handling. Such improvements included, for example, better and more timely communications with consumers and enhanced training and assistance for claims managers. ASIC will work with CommInsure to make sure these improvements are implemented as quickly as possible. ASIC has requested CommInsure to undergo a further implementation review by an independent expert in mid-2018, to test the effectiveness of the changes, and provide additional assurance that CommInsure is making the necessary improvements to its business. CommInsure has agreed to this request.

5. ASIC is continuing to investigate concerns that CommInsure’s advertising and promotion of life insurance policies to consumers contained potentially misleading or deceptive information in the period before March 2016. We will provide a further update on this aspect of our investigation when appropriate.

ASIC’s investigation also examined CommInsure’s surveillance processes and looked at whether there was any compromise of a CommInsure database. No breaches of the law were uncovered, but areas for improvement were identified, and further details of these issues are set out in the investigation report.

The investigation

As part of our investigation, ASIC:

  • obtained approximately 60,000 documents for consideration, including significant amounts of emails
  • interviewed a range of individuals, including customer representatives (financial and legal advisors, at the request of the customers)
  • conducted compulsory examinations
  • reviewed client files from CommInsure, the Financial Ombudsman Service (FOS) and the Superannuation Complaints Tribunal (SCT)
  • obtained external legal advice
  • obtained independent expert medical advice
  • engaged extensively with APRA
  • engaged extensively with CommInsure and its independent reviewers, and
  • liaised with FOS and the SCT and consumer law groups in relation to CommInsure matters to understand the issues faced by consumers.

In October 2016, ASIC released Report 498, Life insurance claims: An industry review.

Wider industry reforms to insurance claims handling

ASIC also conducted an industry wide review of life insurance claims handling with a report in October 2016 (refer: 16-347MR). A range of the concerns ASIC has identified in relation to Comminsure were also identified as industry-wide issues in ASIC’s report, and there are measures being undertaken by ASIC and industry to address these issues, including better public reporting on claims outcomes.

Following ASIC’s industry wide review, the Government agreed in October 2016 with ASIC’s recommendation that the exemption for insurance claims handling under the Corporations Act be reviewed as well as reviewing the penalties available for miscoduct in relation to claims handling and the coverage under Unfair Contracts Terms legislation.

Mortgage Brokers Are Essential To The Home Loan Industry

It has been interesting reading the media coverage of the recently released ASIC report. Some suggest brokers have been “slammed”, others suggest its  more a touch on the tiller in terms of commission models. Having read the ASIC report in full – more than 240 pages, I think there are three points worth making.

First, around half of mortgages are originated via the broker channel, it varies by lender of course, but consumers get more responsive assistance and access to industry knowledge via a broker, and our surveys indicate much higher satisfaction ratings than those going direct to a bank. Because brokers look across lenders, they should have access to a wider range of options, and (perhaps) better pricing. Different types of customers use brokers differently.  But there is a valid and important role for brokers.

Broker originated loans may be more “risky” but this is more to do with the types of consumers who choose to use them.

Second, the current commission models are complex and not transparent, especially as it relates to soft commissions, incentives and other elements. In addition, the ownership of brokers is unclear. As a result consumers cannot be sure they are getting unbiased advice, and it may be the ownership structures and commissions get in the way.  As ASIC says:

Remuneration and ownership structures can, however, inhibit the consumer and competition benefits that can be achieved by brokers.

ASIC also says:

Brokers almost universally receive commissions paid by the ‘supply side’ of the market (i.e. the lender or aggregator), rather than by the consumer. Our review identified significant variability and complexity in remuneration structures between industry participants. The common element across all remuneration structures for brokers, however, was a standard commission model made up of an upfront and a trail commission.

ASIC are not suggesting the removal of the commission model, but they are suggesting significant changes to it. There will be ongoing consultation on the nature of those changes. But I think the enhanced requirements for disclosure of ownership structures is as important. Transparency is good. Better transparency is better.

We did a piece on brokers on our video blog (in 2016) – in the Truth About Mortgage Brokers.

But third, there is something which continues to bug me. Financial Advisors have a requirement to provide “best interest” advice (see ASIC’s report today), whereas Brokers and Lenders dealing with often the largest transaction a household will undertake have a lower hurdle of “not unsuitable”. This bifurcation of the supervision regime makes no sense.

Both advisors and brokers should be clearly working in the best interest of the clients. So why not create a standard and unified regulatory framework, covering all product and financial advice?  Now, I understand ASIC has two departments, separately looking at financial advice and mortgage lending but this is not a good enough reason. Time to put all advice, whether for wealth or lending, under the same regime. Not least because investment property loans are actually about wealth building, and should be considered as part of a wealth management strategy.  One third of mortgages are for investors, and our research highlights investors are more likely to access brokers.

The requirement for transparency, quality of the advice, and consumer outcomes should be the same. Far fetched? No.

The Financial Markets Authority in New Zealand says:

Financial advisers are people who give advice about investing and other financial services and products as part of their job or business. They include financial planners, mortgage and insurance brokers and people working for insurance companies, banks and building societies that provide advice about money, financial products and investing.

They do not have this bifurcation.

All financial advisers must exercise the care, diligence and skill that a reasonable financial adviser would exercise in the same circumstances. In determining what a reasonable financial adviser would do, the following matters must be taken into account:

  • the nature and requirements of the financial adviser’s client or clients
  • the nature of the service and the circumstances in which it is provided
  • the type of financial adviser

See more in section 33 of the Financial Advisers Act 2008. See examples below of how these obligations apply to advice on insurance and credit products.

How large financial advice firms have dealt with poor advisers

ASIC has today released the findings of its review of how Australia’s largest financial advice firms have dealt with past poor advice and non-compliant advisers, including how these firms have dealt with affected customers.

The review—which forms part of ASIC’s broader Wealth Management Project—was focussed on the conduct of the financial advice arms of AMP, ANZ, CBA, NAB and Westpac. It arose out of serious concerns about past adviser misconduct, and had the broad objective of lifting standards in major financial advice providers.

The review looked at:

  • how the firms identified and dealt with non-compliant conduct by their advisers between 1 January 2009 and 30 June 2015
  • the development and implementation by the firms of large-scale review and remediation frameworks to remediate customers impacted by non-compliant advice, and
  • the processes used to monitor and supervise the firms’ advisers, focussing on background and reference-checking, the adviser audit process and use of data analytics.

ASIC Report 515 Financial advice: Review of how large institutions oversee their advisers (REP 515) covers the key findings of this review and also provides an update on ASIC’s actions against the advisers who have been identified as raising serious compliance concerns, as well as the institutions’ progress in developing review and remediation programs.

As of 31 December 2016, ASIC had banned 26 advisers identified in this review who demonstrated serious compliance concerns, and has ongoing investigations or surveillance activities in relation to many others.

A total of approximately $30 million has been paid to 1,347 customers who suffered loss or detriment as a result of non-compliant conduct by advisers during the period of this review. (This amount is in addition to the compensation being paid by the institutions as part of the ‘fee for no service’ compensation payments set out in Report 499 Financial advice: Fees for no service (REP 499)).

ASIC Deputy Chairman Peter Kell said, ‘ASIC’s report sets out the significant work that has been done by the major financial advice institutions to implement large-scale review and remediation programs to identify and remediate customers impacted by poor advice given in the past. ASIC is working closely with these institutions as they deal with customers who have been affected by the past non-compliant advice. The programs all have third-party oversight and assurance.’

‘ASIC acknowledges the work undertaken by the financial advice institutions to improve their practices, and broader compliance approach, since the period of conduct under review, supported by recent legislative and regulatory reforms.

‘However, there is further work to be done to assist in re-building consumer trust and confidence in the financial advice industry,’ he said.

ASIC identified a number of areas of concern where further improvements need to be made, including:

  • failure to notify ASIC about serious non-compliance concerns regarding adviser conduct
  • significant delays between the institution first becoming aware of the misconduct and reporting it to ASIC
  • inadequate background and reference-checking processes, and
  • inadequate audit processes to assess whether the advice complied with the ‘best interest’ duty and other obligations.

Mr Kell said, ‘Failure or delay in notifying ASIC of suspected serious non-compliant conduct significantly affects our ability to take appropriate enforcement or other regulatory action. More importantly, it may also result in an increased risk of customer detriment as so-called ‘bad apple’ advisers continue to work in the industry.’

‘Strengthening breach reporting requirements will be an important issue in the current review of ASIC’s enforcement powers announced by Government in October 2016,’ he said.

ASIC acknowledged the Australian Bankers’ Association’s recently announced Reference Checking and Information Sharing Protocol. ‘There will be considerable focus on the operation of this protocol, and we encourage the industry to take a rigorous approach to ensure it is effective so that we see rapid improvements in the checking and provision of adviser references,’ said Mr Kell.

ASIC also welcomes the development of data analytics and key risk indicator tools by all of the advice institutions to improve the early identification of potentially non-compliant advice.

ASIC has developed a number of checklists for all advice licensees and compliance consultants to consider when:

  • conducting background and reference checks before appointing a new adviser (refer Appendix 2 of REP 515)
  • auditing  advisers to assess their compliance with the best interests duty and related obligations when providing personal advice (refer Appendix 3 of REP 515), and
  • developing and implementing Key Risk Indicators to identify high-risk advisers (refer Appendix 4 of REP 515).

‘It is critical that customers are able to get financial advice they can trust. ASIC expects internal processes to support core values of putting the customer first and where there are failings, for advice firms to act quickly to provide a response in the interests of their customers. This is a message for both large and small advice firms,’ Mr Kell said.


ASIC Review of Mortgage Broker Remuneration Released

The Treasury has released the ASIC review on mortgage broker remuneration, together with two info-graphics on the industry. The findings will shape the future of the mortgage industry, and are now open for consultation.

Importantly, ASIC says the standard model of upfront and trail commissions creates conflicts of interest.

There are two primary ways in which these conflicts may become evident. Firstly, a broker could recommend a loan that is larger than the consumer needs or can afford to maximise their commission payment. This may also involve recommending a particular product or strategy to maximise the amount that the consumer can borrow (e.g. through the choice of an interest-only loan). In this report, we have referred to this as a ‘product strategy conflict’. Alternatively, a broker could be incentivised to recommend a loan from a particular lender because the broker will receive a higher commission, even though that loan may not be the best loan for the consumer. We refer to this as a ‘lender choice conflict’.

ASIC has put forward six proposals to improve consumer outcomes and competition in the home loan market:
(a) changing the standard commission model to reduce the risk of poor consumer outcomes;
(b) moving away from bonus commissions and bonus payments, which increase the risk of poor consumer outcomes;
(c) moving away from soft dollar benefits, which increase the risk of poor consumer outcomes and can undermine competition;
(d) clearer disclosure of ownership structures within the home loan market to improve competition;
(e) establishing a new public reporting regime of consumer outcomes and competition in the home loan market; and
(f) improving the oversight of brokers by lenders and aggregators.
ASIC consider that these proposals should be implemented before a further review of the market is conducted in three to four years to determine whether additional changes are required.
They also propose to conduct a targeted review of the suitability of advice
provided by brokers (including through a shadow shopping exercise)
commencing in 2017.

Here is the Treasury release.

As part of the Government’s response to the Financial System Inquiry (FSI), Improving Australia’s Financial System 2015, the Government requested ASIC undertake an industry-wide review of mortgage broker remuneration.

The Review found that the current mortgage broker remuneration and ownership structures create conflicts of interest that may contribute to poor consumer outcomes.

The Review outlines a number of proposals for industry aimed at improving consumer outcomes, including:

  • improving the standard commission model for mortgage brokers;
  • moving away from bonus commissions and soft-dollar benefits;
  • increasing the disclosure of mortgage broker ownership structures; and
  • improving the oversight of mortgage brokers by lenders and aggregators.

The proposals outlined in this paper are intended to elicit specific and focused feedback, and should not be viewed as a statement of the Government’s final policy position.

The Government invites all interested parties to make a submission on the proposals outlined in this paper. Closing date for submissions: Friday, 30 June 2017

ASIC briefs O’Dwyer on remuneration review

From Australian Broker.

The Australian Securities and Investments Commission (ASIC) has briefed Financial Services Minister Kelly O’Dwyer about its broker remuneration review, suggesting a shift away from volume-based commissions and soft dollar incentives.


As reported by the Australian Financial Review, the regulator also recommended increased disclosure by banks with vertically integrated business models.

ASIC handed the report over to O’Dwyer on Wednesday (15 March).

The regulations are likely to eliminate volume-based incentives from the industry as they have the potential to encourage brokers to write more loans then necessary.

Soft incentives such as sponsorships, overseas trips and prestigious industry events for high end brokers will also be on the chopping block.

Despite these recommendations, AFR said that the ASIC report endorses the core commission-based remuneration system used by brokers.

ASIC accepts enforceable undertakings from Westpac and ANZ to address inadequacies within their wholesale FX businesses

ASIC says it has today accepted enforceable undertakings (EUs) from Westpac Banking Corporation (Westpac) and Australia and New Zealand Banking Group Limited (ANZ) in relation to the banks’ wholesale foreign exchange (FX) businesses.

As a result of ASIC’s investigation, ASIC is concerned that between 1 January 2008 and 30 June 2013, both banks failed to ensure that their systems and controls were adequate to address risks relating to instances of inappropriate conduct identified by ASIC.

ASIC Commissioner Cathie Armour said, ‘The foreign exchange market is a systemically important market that depends on all participants acting with integrity and fairness. ASIC is committed to ensuring that major financial institutions have the systems in place to ensure that financial services are provided fairly, honestly and efficiently.’


ASIC identified the following conduct by employees of Westpac in its spot FX business between 1 January 2008 and 30 June 2013:

  • on several occasions, Westpac employees disclosed confidential details of pending client orders to external traders in the spot FX market, including on a few occasions identification of the client by use of code names;
  • on at least one occasion, a Westpac employee acted together with an external party to share confidential information and enter and cancel offers on a trading platform other than in the ordinary course of hedging or market making;
  • on several occasions, Westpac employees inappropriately received and/or disclosed confidential information about Westpac’s or another institution’s orders in the course of fix order management and execution;
  • on one occasion, a Westpac employee altered a proprietary position prior to the fix upon receipt of confidential and potentially material information in relation to other institutional fix orders; and
  • on at least one occasion, a Westpac employee inappropriately disclosed confidential Westpac fix order information to an external party to inform their joint personal account trading strategy.

ASIC is concerned that Westpac did not ensure that its systems, controls and supervision were adequate to prevent, detect and respond to such conduct, which had the potential to undermine confidence in the proper functioning and integrity of the market.

Under the EU, Westpac will develop a program of changes to its existing systems, controls, monitoring and supervision of employees within its spot FX business to prevent, detect and respond in relation to:

  • disclosure of confidential information to external market participants;
  • inappropriate order management and trading, including fix orders and the entry or cancellation of offers on an electronic trading platform other than in the ordinary course of hedging or market making activities; and
  • inappropriate personal trading.

The program and its implementation will be assessed by an independent consultant appointed by ASIC. The program will incorporate changes already made by Westpac as part of an existing review of its spot FX business.

Upon implementation of that program, for a period of three years, Westpac will provide to ASIC an annual attestation from a senior executive that the systems and controls in its spot FX business are appropriate and adequate to effectively prevent, detect and respond to specified matters. The program will also be subject to annual internal reviews and assessment by the independent consultant for a period of three years.

Westpac will also make a community benefit payment of $3 million to support the financial capability of vulnerable people including women experiencing family violence, the elderly and youth at risk.


ASIC identified the following conduct by employees of ANZ in its spot FX business between 1 January 2008 and 30 June 2013:

  • on a number of occasions, ANZ employees disclosed specific confidential details of pending customer orders to external third parties including the identification of the customer through the use of code names;
  • on at least one occasion, a former ANZ spot FX trader exchanged with an external market participant confidential and potentially material information about other institutions’ customer flow or proprietary positions, including information concerning likely directional flow at the WM/R London 4pm fix, which was potentially inconsistent with a proper approach to market making or hedging. Following the receipt of such information, the ANZ trader acquired a proprietary position in a currency prior to the WM/R London 4pm fix; and
  • on a number of occasions, ANZ employees who were responsible for managing particular client orders traded in a manner which was potentially inconsistent with a proper approach to market making or hedging.

ASIC is concerned that ANZ did not ensure that its systems, controls and supervision were adequate to prevent, detect and respond to such conduct, which had the potential to undermine confidence in the proper functioning and integrity of the market.

Under the EU, ANZ will develop a program of changes to its existing systems, controls, training, guidance and framework for monitoring and supervision of employees in its spot FX and non-deliverable forwards businesses to prevent, detect and respond to:

  • disclosures of confidential customer and potentially material information; and
  • inappropriate order management and trading while in possession of confidential and potentially material information.

The program and its implementation will be assessed by an independent consultant appointed by ASIC. The program will incorporate changes already made by ANZ as part of ongoing reviews of its businesses.

Upon implementation of that program, for a period of three years, ANZ will provide to ASIC an annual attestation from its senior executives that the systems and controls in its spot FX and non-deliverable forwards businesses are appropriate and adequate to effectively manage conduct risks relating to specified matters. The program will also be subject to annual internal reviews and assessments by the independent consultant for a period of three years.

ANZ will also make a community benefit payment of $3 million to Financial Literacy Australia.


ASIC encourages market participants to adhere to high standards of market practice, including those set out in the Global Code of Conduct for the Foreign Exchange Market, published by the Bank of International Settlements (BIS Global FX Code). The BIS Global FX Code provides a global set of practice guidelines to promote the integrity and effective functioning of the wholesale FX market. Phase 1 of the Code was published in May 2016, and Phase 2 is due for publication in May 2017.

ASIC is grateful for the assistance of our international regulatory counterparts in progressing our investigation, including the UK Financial Conduct Authority, the NZ Financial Markets Authority and the Monetary Authority of Singapore.


Prior to accepting these EUs from ANZ and Westpac, ASIC’s FX investigation has seen ASIC accept enforceable undertakings from each of the National Australia Bank Limited and the Commonwealth Bank of Australia (refer: 16-455MR). The institutions also made voluntary contributions of $2.5 million each to fund independent financial literacy projects in Australia.

The wholesale spot FX market is an important financial market for Australia. It facilitates the exchange of one currency for another and thus allows market participants to buy and sell foreign currencies. As part of its spot FX business, Westpac and ANZ entered into different types of spot FX agreements with its clients, including Australian clients.

Spot FX refers to FX contracts involving the exchange of two currencies at a price (exchange rate) agreed on a date (the trade date), and which are usually settled two business days from the trade date.

Non-deliverable forwards refer to FX forward contracts which, at maturity, are settled by calculating the difference between the agreed forward rate and a settlement rate (which is usually determined by reference to a benchmark published exchange rate). A FX forward contract is an agreement between two counterparties to exchange currencies at a future date at a rate agreed upon in advance.

Every Consumer of Financial Products Should Read This!

In a speech “The role of financial regulation in protecting consumers“, the Governor of the Central Bank of Ireland highlights the abundant empirical and theoretical research to show that consumers do not always act in their own best interest in making financial decisions and that biases can be exacerbated by the design of financial products.

This is a very important issue, especially given the current debates about the role of banking, and the cultural behaviour of bankers. In a word, without appropriate regulation and protection, consumers are at a significant disadvantage. More needs to be done to empower consumers in their dealings with financial services firms.  International financial literacy studies indicate that a majority of the world population do not have sufficient knowledge to understand even basic financial products and fail to make effective decisions to manage their finances and the risk associated with them.

A vast empirical literature shows that consumers tend to make poor financial choices, taking on too much debt, misunderstanding investment risk and choosing financial products that do not match their needs. Over recent decades, the formal economic theory to rationalise these patterns has been developed, with insights from economics and psychology blended in the vibrant fields of behavioural economics and behavioural finance.

The fast pace of financial innovation has created a complex world for consumers, where the range of available financial products is broad, and the consequences of financial choices are significant. Coupled with this, the typical household tends to have a limited personal track record in making financial decisions, since the purchase of financial products happens only infrequently. This is problematic, since the demands for financial sophistication and knowledge are sizeable if a consumer is to navigate safely through the options put forward by providers of financial services. Financial decisions often require consumers to assess risk and uncertainty, for example, and to consider trade-offs between the near term and the long term. A growing body of academic literature shows that, among the general population, the level of financial knowledge, skills and ability to consider such complexities is low.

There is also a growing body of evidence from the field of behavioural economics that consumers are subject to behavioural biases when making decisions. In other words, decisions are affected by emotions and psychological experiences, by rules of thumb and accepted norms. For example, consumers can exhibit present-biased behaviour, which leads them to over-value payoffs today relative to payoffs in the future, a bias which can be associated with self-control problems.  In addition, households can be overly attached to the status quo and suffer inertia bias, taking default options in financial contracts, failing to switch product or provider even when there are clear benefits to switching.  Retail investors also tend to follow naïve investment strategies rather than identifying superior options.  Consumers can also exhibit loss aversion bias, meaning that they care more about potential losses than making equivalent gains.

The design of financial products and services can serve to ease or exacerbate these biases.  In this context, behavioural economics shows that framing matters – put simply, firms can present the same information in different ways and this can lead to different choices by consumers.  A key insight from the recent experience with financial crisis and from the growing literature on behavioural economics, is that consumers do not always act in their own best interest. In addition, market forces do not always act to reduce consumer mistakes. Firms face their own incentives when designing and framing products, and these incentives may not align with the best interests of the consumer. For example, analysis by the Office of Fair Trading in the UK shows that firms can frame prices in a way that plays on consumer biases. Empirical research also suggests that firms can choose to market the salient features of products that appeal to consumer biases, while shrouding the less favourable aspects that could alter a consumer’s choice to purchase that product. The interactions between misaligned incentives and behavioural biases can adversely affect consumer welfare, and there are many examples of analytical work that highlight such costs.


Payday lenders fined $730,000 for diamond trading ‘sham’

ASIC says, following ASIC action, the Federal Court has today fined payday lenders Fast Access Finance Pty Ltd, Fast Access Finance (Beenleigh) Pty Ltd and Fast Access Finance (Burleigh Heads) Pty Ltd (the FAF Companies) a total of $730,000 for breaching consumer credit laws by engaging in credit activities without holding an Australian credit licence.

The FAF Companies operated under a business model where consumers seeking small value loans (of amounts generally ranging from $500 to $2,000) were required to sign documents which purported to be for the purchase and sale of diamonds in order to obtain a loan.

ASIC alleged in its claim that the purchase and sale of diamonds was a pretence, because there were no diamonds involved in the transaction and consumers had no intention of buying or selling diamonds. Rather, the diamond purchase and sale contracts were designed to camouflage what, in reality, were loan transactions to which the National Consumer Credit Protection Act 2009 (National Credit Act) applied.

The Court handed down today’s penalty following its decision on 30 September 2015 that the arrangements for the sale of diamonds ‘comprised a pretence or sham, brought into existence as a mere piece of machinery, to conceal the true nature of the transaction, which was the provision of credit. Neither side intended that the Sales Agreement should create the relationship of vendor and purchaser….’

The Court also found that that the FAF Companies ‘intended to conceal the true nature of the transaction from those responsible for enforcing the interest cap’ (refer: 15-278MR).

In handing down the penalty, the Federal Court stated that ‘Although the excessive interest paid by each customer may not have been large in absolute terms and by some standards, it was no doubt substantial for the customer in question. Such customers have little chance of recovering anything from any of the respondents. The most heinous aspect of the case is the deliberate and pre-meditated exploitation of these vulnerable people.’

In determining the appropriate penalties, the court took into account that:

  • the diamond model was designed to conceal the true nature of money-lending transactions. The underlying reason for such concealment was to circumvent the limit upon the rate of interest which was 48%.
  • FAF, and its controlling officers must have had at least a strong suspicion that the diamond model was contrary to the relevant legislation.
  • There had been little or no cooperation with ASIC.
  • As between FAF Beenleigh and FAF Burleigh Heads, any difference in penalty should reflect the small number of transactions which have been proven against FAF Beenleigh as compared to the number proven against FAF Burleigh Heads. FAF was the designer of the diamond model and encouraged its use by its franchisees. It must be seen as being more culpable for each of the contraventions in which it was involved, than was either FAF Beenleigh or FAF Burleigh Heads.

Deputy Chairman Peter Kell said, ‘ASIC will continue to crack down on lenders who use avoidance models in an attempt to deprive consumers of these important protections.’

NAB Fires Senior Managers For Poor Conduct

In his opening address to the Parliamentary Committee today NAB’s CEO Andrew Thorburn highlighted enforcement of behavioral standards in the the bank.

Accountability; accountability is a fundamental principle in our bank. It’s my role to make sure that executives know what they’re accountable for and what behaviour is expected of them. This is then cascaded all the way down through the bank.

We have four key accountability areas. These are consistent through our company. The four are: customers, risk management, financial performance and team or people.

In addition to that, wrapping around it is our company values and our code of conduct. Feedback is then provided to people on a monthly basis and then at the half way point and at the full year we wrap that all up in a rigorous, disciplined and serious way.

But there are consequences for people if our behavioural standards are not met.

Since I was here last, we’ve completed our financial year 2016 year and over that year there were 1138 people in our bank who were deemed to have not met our code of conduct.

This follows a discipline review in every case by a specialist team that we have. The consequences for those people ranged from a formal warning, through to dismissal. It also involves a reduction or elimination of any bonus.

Of the 1138 there were five senior managers – two were dismissed, and three faced other disciplinary action.

We also went back and looked at issues over the past two years, applied this standard and we’ve taken similar action against 48 additional people.

Also, since we were here last we’ve made it a formal policy in the bank, that any prudential breach must be investigated by a dedicated and specialist team.

The message here to all our people is that we are in a position of trust. We have high standards, they are expected to be met and if they are not there are consequences.