The problems with asking banks to police financial abuse

From The Conversation.

The Australian Law Reform Commission wants to give banks the responsibility to protect vulnerable customers from financial abuse. But there are a number of issues with this approach. Its success depends on the good faith of the banks, and could leave some customers uncovered and the banks with no one to report abuse to.

In a new report on elder abuse, the commission recommends that the Code of Banking Practice be amended so that banks take “reasonable steps” to prevent financial abuse.

But the code is voluntary and some banks have been lax in the past, meaning some customers won’t be covered. “Reasonable steps” still needs to be defined, to ensure all banks meet a standard. And we need transparency to know what financial abuse banks are dealing with, how and when.

Around 9% of older people living in the community are financially abused. It is likely the number is even higher among those with cognitive impairment or who live in institutions. Financial exploitation of older people is increasing and mostly perpetrated by those close to the victim, including family members.

The amendments to the code will include measures such as enhanced staff training to recognise elder financial abuse, an obligation to report suspected abuse, and recommendations to tackle the problem of forced guarantees for mortgages and other loans to relatives.

Can the banks protect vulnerable people?

Elder financial abuse is difficult to detect. However, banks and financial institutions are in a unique position to see it. Banks have face-to-face contact with customers, play a role in providing third-party authorisations, monitor electronic transactions and oversee lending.

But the Code of Banking Practice is voluntary, and many in the industry are not signed on. This could lead to troubling gaps in coverage. Institutions that do not sign up to the code will be under no obligation at all.

Although some have imposed protocols to address elder financial abuse, a recent interview with Kirsty Mackie, chairwoman of the Elder Abuse Committee of the Queensland Law Society, noted that training of front-line banking staff, collaboration between institutions, understanding of the bank’s legal position, and preparedness to act in the customer’s best interest were all lacking.

The commission also settled on a standard that requires banks to take “reasonable steps” to prevent financial abuse, despite Legal Aid NSW recommending that a higher standard be adopted. The proposed alternative was to require banks to “take all steps” to prevent financial abuse.

A standard based on what is “reasonable” is problematic as context matters; what one bank may regard as a reasonable response to suspicions of elder abuse may differ from what a court or the general public thinks.

In the United States, some states impose mandatory reporting of elder financial abuse, but Australia looks set to make reporting voluntary. This leads on to the issue of transparency.

We need to know under what circumstances banks will keep matters “in house”, to decide if these are appropriate. Criteria for reporting suspected financial abuse need to be established, as well as a body to report to. The commission has recommended the implementation of an adult guardian to which complaints could be referred. All these issues remain unclear and will require more discussion.

A related concern is the potential ramifications for people who make reports. In Australia, whistle-blower protection remains inadequate. Indeed, the Australian Banking Association submission to the Australian Law Reform Commission suggested that immunity be granted to banks that report instances of elder financial abuse.

Finally, given that banks will deal internally with most instances of elder financial abuse, it is important that we ensure the bank’s response balances the autonomy of older people while addressing elder financial abuse.

Where to from here?

The commission recommendation is welcome and will bolster the safeguards already in place. More discussion will be needed in the aftermath of the inquiry to ensure the recommendations are implemented and their potential realised.

The reality is that success will rest largely on the good faith of the banks. There must be willingness to build a collaborative and consistent approach to acting on elder financial abuse and to ensure rigorous internal procedures are put in place and followed. Employees who make reports of elder abuse must also have adequate protection.

This, in turn, must feed into an appropriately resourced entity where the most serious matters can be directed.

Author: Eileen Webb, Associate Professor, Curtin Law School, Curtin University

Banks and brokers in remuneration talks

From The Adviser.

Representatives from the mortgage broking industry have met with the Australian Bankers’ Association to discuss proposed remuneration reforms.

The ABA, which instigated the highly contentious Sedgwick review, met with the Mortgage and Finance Association of Australia (MFAA), the Finance Brokers Association of Australia (FBAA) and the Customer Owned Banking Association (COBA) on Friday, and held a discussion forum with key industry participants including bank and non-bank lenders, aggregators and brokers to progress reform.

The forum, held on Friday, 9 June in Sydney, was recognised by participants as an opportunity for the industry to understand the key issues in response to ASIC’s proposals for mortgage broking; the potential impact to aggregators and lenders; and the overlap with the Sedgwick review.

While the ABA has given little information about what was discussed, the association’s executive director of retail policy Diane Tate said the meeting was “an important step” for the industry to work together on options for an industry-based response to calls for changes in the mortgage industry.

“We have heard these calls to change incentives and governance arrangements and we look forward to working with the industry, in consultation with the government and subject to all competition law obligations, on reforms to support good customer outcomes,” she said.

The FBAA’s Peter White said the forum was “a unique step forward” for the third-party channel.

MFAA chief executive Mike Felton said the discussions are a “crucial step” in the process of determining how the industry responds to the challenges of addressing ASIC’s proposals on broker remuneration, ensuring the sustainability of the industry going forward.

“This meeting demonstrates that our industry is serious about self-regulation and has the maturity to work together across different stakeholder groups to effect the required change and ensure customer outcomes continue to remain front of mind,” Mr Felton said.

Both the FBAA and MFAA were scathing in their reponse to the Sedgwick review, which included a number of proposed changes to the way brokers are paid.

Following the release of the report, Mr Felton said the association was “frustrated” by Sedgwick’s proposals, which he said were essentially recommending a consolidation of power to lenders, giving them complete oversight of mortgage brokers.

“This would lead to a reduction in independence, would do little to enhance competition and tip an already precarious power balance further towards the big four and away from consumers’ interests,” he said.

Meanwhile, the Mr White said the release of the ABA-funded Sedgwick review was making recommendations to banks, which “seem to be taking it as gospel”, and influencing regulators before any decision has been made by ASIC, Treasury or the minister.

“The banks and the ABA unquestionably must stop this attempted regulatory manipulation through the Sedgwick report and allow the works of ASIC and Treasury, and then the minister, to make the appropriate determinations without manipulation driven by self-interest, greed and poor consumer and industry outcomes,” he said.

The FBAA, MFAA and ABA will hold further discussions in the coming months, with all participants committing to work in consultation with Treasury and government stakeholders on an industry-led response.

Why You Still Can’t Trust Your Financial Adviser

From Bloomberg.

Your new financial adviser has a well-decorated office, a firm handshake, and a bright smile. After an hourlong meeting, you leave with what you think is a state-of-the-art investment portfolio. You feel financially secure, taken care of.

It’s also possible you’ve made a huge mistake. The White House under President Barack Obama estimated that Americans lose $17 billion a year to conflicts of interest among financial advisers. Wall Street lobbying groups dispute that math—and they’re right to do so. The actual dollar amount is probably much higher.

The Fiduciary Rule, finalized under Obama and originally set to take effect earlier this year, seeks to cure this disconnect. All advisers were to be required to put clients first when handling retirement accounts, where the bulk of everyday Americans’ savings reside. But then Donald Trump won the election, and on his 15th day in office, the Republican president ordered the Department of Labor to reconsider the rule. His advisers echoed Wall Street arguments that tying the hands of advisers would limit investor choices, raise the cost of financial advice, and trigger a wave of litigation.

This Friday, the rule will take partial effect. Its future, though, remains deep in doubt. Many Republicans in Congress oppose it, and Labor Secretary Alexander Acosta has suggested that at the very least it be revised. Then last week, Trump’s newly appointed chairman of the Securities and Exchange Commission, Wall Street lawyer Jay Clayton, announced his agency would also seek comment on the topic, a process that could further threaten the rule’s survival.

While Washington wrestles with the fate of the Fiduciary Rule, the financial advice landscape remains supremely dangerous. Three professors recently analyzed a decade of disciplinary data on 1.2 million financial advisers. What they found is decidedly unpleasant:

  • At the average firm, 8 percent of advisers have a record of serious misconduct.
  • Nearly half of those 8 percent held on to their jobs after being caught. About half of the rest got jobs at other financial firms. In other words, a year after serious misconduct, about three-quarters of advisers found to have wronged clients are still working.
  • It gets worse: Some 38 percent of those misbehaving advisers later go on to hurt even more clients.
  • You might think bigger firms would be more diligent, but you’d be wrong. At some large firms, more than 15 percent of advisers have records of serious misconduct. The highest was Oppenheimer & Co., where 20 percent had such black marks. Oppenheimer responded to the study, first published a year ago, by saying it replaced managers and made changes to hiring, technology, and compliance procedures.
  • Predators typically seek out the weak, and financial advisers are no different: The study shows that those with misconduct records are concentrated in counties with fewer college graduates and more retirees.

Offering financial advice is enormously profitable, with U.S. investment firms achieving operating profit margins as high as 39 percent, according to the CFA Institute. And once advisers collect enough client assets, they can get huge bonuses for switching firms (and bringing their customers with them). Until recently, the going rate was a bonus of more than three times the annual fees and commissions the adviser brings in the door; an adviser with $200 million under management could expect a bonus of $6.6 million. (The threat of the Fiduciary Rule, however, caused bonus offers to plunge.)

Meanwhile, the total cost of bad advice to consumers—in higher fees and lower performance—is probably much higher than the $17 billion estimated by Obama’s Council of Economic Advisers. The CEA figured investors are losing an extra 1 percent annually on $1.7 trillion in individual retirement accounts controlled by conflicted advisers. But IRAs represent just an eighth of the $56 trillion in financial wealth Americans control, according to Boston Consulting Group.

Industry bodies join forces against EDR scheme

From Investor Daily.

A number of membership associations from across the financial services spectrum have combined efforts to oppose the government’s single dispute resolution scheme as recommended in the Ramsay report.

A statement arguing against the proposed external dispute resolution (EDR) scheme has been signed off and jointly released by a consortium including the Mortgage and Finance Association of Australia, Customer Owned Banking Association, Australian Collectors & Debt Buyers Association, Association of Securities and Derivatives Advisers of Australia, Australian Timeshare and Holiday Ownership Council and Association of Independently Owned Financial Professionals.

Jointly these bodies claim to represent “80 per cent of all financial firms in the Australian market”, including those that are members of FOS and of the Credit and Investments Ombudsman.

The joint statement takes issue with the single EDR scheme outlined in the federal budget, and argues that the government embarked on insufficient consultation with key stakeholders.

“The associations are also disappointed in the way the Ramsay review was conducted,” the statement said.

“The panel only held two public consultations with industry, during which it refused to articulate the reasons for proposing a single monopoly scheme and failed to engage with the credible arguments put forward by the associations.

“The associations believe the ‘one-stop shop’ will undermine the fabric of external dispute resolution in the financial services sector because, as the weight of evidence submitted by industry suggests, the continued and separate existence of FOS, CIO and the SCT is vital in ensuring accountability, innovation and cost control in EDR.”

The statement suggests that “large financial firms” will be the beneficiary of the government’s proposed scheme, while “smaller and more innovative financial firms” will be disadvantaged.

It calls on the government to “abandon” its plan to establish a single “monopoly” scheme.

The statement comes as Prime Minister Malcolm Turnbull has strongly defended the EDR scheme, telling Parliament yesterday that this policy, alongside the levy on big banks, is proof the government is providing “real action” and not just talk when it comes to ensuring financial institutions act in a more pro-consumer manner.

The Property Imperative Weekly – May 20th 2017

The latest edition of our weekly roundup of property, finance and economics review is available. We discuss the latest economic news, recent developments in the bank tax debate and the latest mortgage pricing and volume data.

Watch the video or read the transcript.

This week, the latest updates from the ABS showed that the trend unemployment rate stuck at 5.8%, thanks to a large rise in part-time employment. In fact, employment was up by a very strong 37,400 in April after increasing by a massive 60,000 in March but the total hours worked was reported to have fallen by 0.3% in April and was down by 0.1% over the past two months. This may be because of changes in the ABS sampling. Many commentators suggest the true position in worse, but we do know that unemployment was above 7% in South Australia, and the number of older people seeking work also rose.

The latest wages data, showed that the seasonally adjusted Wage Price Index rose 0.5 per cent in the March quarter 2017 and 1.9 per cent over the year, according to ABS figures. This makes a bit of a joke  of the strong wages growth rates predicated in the recent budget.

The seasonally adjusted, Wage Price Index has recorded quarterly wages growth in the range of 0.4 to 0.6 per cent for the last 12 quarters. However, private sector wages rose 1.8 per cent whilst public sector wages grew 2.4 per cent, so public servants are doing better than the rest of the population.

The pincer movement of higher inflation and lower wage growth now means that average wages are falling in real terms, especially for employees in the private sector.  Not good for those with mortgages as rates rise flow though. This aligns with our Mortgage Stress data.

There was further heated debate about the Bank levy, with the Treasurer saying on ABC Insiders that the impost was a permanent measure and linked to the strong profits and competitive advantage the big four have thanks to the “too-big-to-fail” implicit guarantee from the government. He again said the costs of the tax should not be passed on to customers.

On the other hand, the banks put their own slant on the issue, saying that the costs would be passed on, and the levy was bad policy. Ex Treasury Boss Ken Henry, now the Chairman of NAB, suggested there should be an inquiry into the proposed tax and said it looked like something from the eighties, before all the free market reform.

The banks made submissions to the Treasury complaining about the short timeframes, and seeking a delay in implementation.  ANZ suggested a delay till September 2017 to allow sufficient time for design of the legislation and also recommended the tax should be applied to the domestic liabilities of all banks operating in Australia with global liabilities above $100 billion. They concluded “There is no ‘magic pudding’. The cost of any new tax is ultimately borne by shareholders, borrowers, depositors, and employees”.

But the real debate should be framed by the excess profits the big banks make, and the unequal position the big four have thanks to the implicit government guarantee, meaning they can out compete regional and smaller lenders. In fact, the value of this subsidy is significantly higher than the 6 basis points being imposed. These are the very high stakes in play, and the outcome will significantly impact the future shape of banking in Australia.  In fact, you could argue the big four receive the largest subsidies of any industry in the country – way more than, for example, the entire car industry.

In addition, the Australian Bankers Association is caught trying to represent the interest of the big four, and other regional players, including some who have supported the tax on the basis of it helping to level the competitive landscape. The ABA issued a statement to say there was no division, but there clearly is. Not pretty. Some have suggested the smaller players should create their own separate lobby group.

The latest lending data from the ABS showed that the mix of lending is still too biased towards unproductive home lending, at the expense of lending for commercial purposes. Overall trend finance flow in trend terms rose 1.3% to $70 billion, up $691 million. The total value of owner occupied housing commitments excluding alterations and additions rose 0.1% in trend terms, to $20.1 billion, up $26 million. Within the fixed commercial lending category, lending for investment housing fell 0.3%, down $44 million to $13.2 billion, whilst lending for other commercial purposes fell 2%, down $416 million to $20.3 billion. 39% of fixed commercial lending was for investment housing and this continues to climb.  Most of the investment in housing was in Sydney and Melbourne.

The more detailed housing finance data showed that the number of owner occupied first time buyers rose in March by 20.5% to 7,946 in original terms, a rise of 1,350.  In original terms, the number of first home buyer commitments as a percentage of total owner occupied housing finance commitments rose to 13.6% in March 2017 from 13.3% in February 2017.

The DFA surveys saw a small rise in first time buyers going to the investment sector for their first property purchase. Total first time buyers were up 12.3% to 12,756, still well below their peak from 2011 when they comprised more than 30% of all transactions. Many are being priced out or cannot get finance.

Lenders continued to tighten their underwriting standards for interest only loans, with CBA, for example, ending discounts, fee rebates and dropping the LVR to 80%, having in recent months imposed no less than three rate rises on the sector. ANZ tightened their lending parameters too, with the maximum interest only period reduced from 10 years to five years, tightening LVRs and imposing other restrictions.

Overall we think the supply of investor loans will reduce, and that smaller lenders and non-banks will not be able to meet the gap, so we are expecting loan growth to slow further, and the price of loans to rise again.

We also saw auction clearances stronger last weekend, so this confirms our survey results, that households still have an appetite for property, despite tighter lending conditions. Recent stock market falls and greater market volatility will play into the mix now, so we think there will be a tussle between demand for property, especially for investment purposes and supply of finance.

Brokers may well get caught in the cross-fire, and the recent UBS report suggesting that brokers are over-paid for what they do, will not help.  Others have argued UBS got their sums wrong, and denounced the report as “ridiculous”.

It is still too soon to know whether home price growth is really likely to turn, but the strong demand still evident in Sydney and Melbourne suggests momentum will continue for as long as credit is available at a reasonable price. So I would not write off the market yet!

And that’s it from the Property Imperative Weekly this time. Check back for next week’s summary.

Macquarie Bank to address inadequacies within their wholesale FX businesses

ASIC has today accepted an enforceable undertaking (EU) from Macquarie Bank Limited in relation to the bank’s wholesale foreign exchange (FX) businesses, following an ASIC investigation.

ASIC is concerned that the bank failed to ensure that its systems and controls were adequate to address risks relating to instances of inappropriate conduct identified by ASIC.

ASIC Commissioner Cathie Armour said, ‘The wholesale spot foreign exchange market is one the world’s largest financial markets and the proper functioning of this market is of vital importance to the Australian economy.’

‘ASIC has now accepted undertakings from some of Australia’s largest market participants to put in place forward looking processes and controls to ensure that their foreign exchange businesses provide financial services honestly, efficiently and fairly.’

‘ASIC will continue to ensure that there can be ongoing confidence in how our financial institutions conduct themselves now and into the future,’ Ms Armour said.

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

  • On a number of occasions, Macquarie employees disclosed to external third parties confidential details of pending client orders including identification of a client;
  • On a number of occasions, Macquarie employees inappropriately disclosed to external third parties confidential and potentially material information about Macquarie’s trading activity associated with large pending AUD orders; and
  • On a number of occasions, when the market approached the trigger price of a stop loss order, Macquarie spot FX traders responsible for managing the order traded in a manner that may have been intended to cause the trigger price to trade when it might not have traded at that time.

ASIC is concerned that Macquarie did not ensure that its systems, controls and framework for supervision and monitoring 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.

Macquarie 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:

  1. inappropriate disclosure of confidential information to external market participants; and
  2. inappropriate order management and trading in respect of stop loss orders.

ASIC will appoint an independent consultant to assess the program and its implementation. The program will incorporate changes already made by Macquarie as part of ongoing reviews of its businesses.

Upon implementation of that program, for a period of three years, Macquarie will conduct an annual internal review of the program, which will be independently assessed, and provide an annual attestation from its senior executives to ASIC.

Macquarie will also make a community benefit payment of $2 million to The Smith Family to support The Smith Family’s financial services program aimed at improving young people’s understanding of money management.

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 international regulatory counterparts in progressing the investigation.

Background

Prior to accepting these EU from Macquarie, ASIC’s FX investigation has seen ASIC accept enforceable undertakings from each of the Westpac Banking Corporation, Australia and New Zealand Banking Group Limited, National Australia Bank Limited and the Commonwealth Bank of Australia (refer: 17-065MR and 16-455MR). The institutions also made voluntary contributions totalling $11 million 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, Macquarie 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.

$200m+ Refunds Due From Major Financial Advisory Firms – ASIC

ASIC says AMP, ANZ, CBA, NAB and Westpac have so far repaid more than $60 million of an expected $200 million-plus total in refunds and interest for failing to provide general or personal financial advice to customers while charging them ongoing advice fees.

These institutions’ total compensation estimates for these advice delivery failures now stand at more than $204 million, plus interest. As foreshadowed in ASIC’s Report 499 Financial advice: fees for no service (REP499), ASIC can now provide an update on compensation outcomes to date.

Background

In October 2016 the Australian Securities and Investments Commission (ASIC) released REP499. The report covered advice divisions of the big four banks and AMP and described systemic failures to ensure that ongoing advice services were provided to customers who paid fees to receive these services, and the failure of advisers to provide such services. The report also discussed the systemic failure of product issuers to stop charging ongoing advice fees to customers who did not have a financial adviser.

At the time of the publication of the report compensation arising from the fee-for-service failures reported to ASIC was approximately $23.7 million, which had been paid, or agreed to be paid, to more than 27,000 customers.

Since REP 499 a further $37 million has been paid or offered to more than 18,000 customers. In addition, the institutions’ estimates of total required compensation for general and personal advice failures have increased by approximately 15% to more than $204 million, plus interest.

The table provides, at an institution level, compensation payments and estimates that were reported to ASIC as at 21 April 2017. Since that date compensation figures have continued to increase.

Group Compensation paid or offered Estimated future compensation   (excludes interest) Total (estimate, excludes   interest)
AMP $3,816,327 $603,387 $4,419,714
ANZ $43,818,571 $8,613,001 $52,431,572
CBA $5,850,827 $99,786,760 $105,637,587
NAB $4,641,539 $385,844 $5,027,383
Westpac $2,670,479 Not yet available $2,670,479
Total (personal advice   failures) $60,797,743 $109,388,992 $170,186,735
NULIS   Nominees (Australia) Ltd (1) Nil $34,720,614 $34,720,614
Total (personal and general   advice failures) $60,797,743 $144,109,606 $204,907,349

Source: Data is based on estimates provided to ASIC by the institutions and will change as the reviews to determine customer impact continue.

(1) For details, see the section on NAB below.

Key compensation developments

AMP

  • AMP’s total compensation estimate decreased from $4.6 million to $4.4 million as AMP reviewed customer files and data to determine compensation required, and revised its previous estimates.

ANZ

  • The total compensation estimate has increased from $49.7 million to $52.4 million due to the expansion of existing compensation programs and the identification of further failures by authorised representatives of two ANZ-owned advice businesses:
    • Financial Services Partners Pty Ltd; and
    • RI Advice Group Pty Ltd.
  • The largest component of ANZ’s compensation program relates to fees customers were charged for the Prime Access service, where ANZ could not find evidence of a statement of advice or record of advice for each annual review period.
  • In addition, ANZ found that further compensation of approximately $7.5 million is required to be paid to ANZ Prime Access customers for ANZ’s failure to rebate commissions in line with its agreement with customers. This compensation has not been included in the figures in this media release because it does not relate to a failure to provide advice for which customers were charged, but is noted for completeness and transparency.

CBA

  • There has been no substantial change in CBA’s compensation estimate, which remains at approximately $105 million, plus interest, the majority of which relates to Commonwealth Financial Planning Ltd (CFPL). The compensation estimate for CFPL results from a customer-focused methodology whereby, as well as providing refunds where the adviser failed to contact the client to provide an annual review, CFPL will provide fee refunds to customers where:
    • the adviser offered the customer an annual review and the customer declined, or
    • the adviser tried to contact the customer to offer a review, but was unable to contact the customer.
  • Some of the other licensees or banks covered by the ASIC fees-for-no-service project have not, at this stage, adopted a similar customer-focused approach to the situation in which a service was offered but not delivered.  ASIC continues to discuss the approach to this situation with these banks and licensees.

NAB

  • Since the publication of REP 499, by 21 April 2017, NAB reported to ASIC the further erroneous deduction of adviser service fees for personal advice from more than 3,000 customers of the following licensees:
    • Apogee Financial Planning Ltd: $11,978, from 11 customers;
    • GWM Adviser Services Ltd: $179,446, from 290 customers;
    • MLC Investments Ltd: $9,755, from six customers;
    • National Australia Bank Ltd: $2,777, from seven customers; and
    • NULIS: $173,120, from 3,310 customers.
  • In addition, the table shows the expected compensation of approximately $34.7 million by NAB’s superannuation trustee, NULIS Nominees (Australia) Limited (NULIS), for two breaches involving failures in relation to the provision of general advice services to superannuation members who paid general advice fees (other fees referred to in this release relate to personal advice). As announced by ASIC on 2 February 2017 ASIC has imposed additional licence conditions on NULIS following these and another breach: ASIC MR 17-022. The failure was by MLC Nominees Pty Ltd (and MLC Limited for the first of the two breaches).  Whilst on 1 July 2016 the superannuation assets governed by MLC Nominees were transferred by successor fund transfer to NULIS, and on 3 October 2016 NAB divested 80% of its shareholding in the MLC Limited Life Insurance business, accountability for this remediation activity (including compensation) remains within the NAB Group. The estimate of customer accounts affected has increased from approximately 108,867 to 220,460 since REP 499, reflecting the second of two breaches.

Westpac

  • REP 499 noted that Westpac had identified a systemic fees-for-no-service issue in relation to one adviser only, with compensation of $1.2 million paid in relation to those failures.
  • Following further ASIC enquiries, Westpac subsequently clarified that it has paid further compensation of approximately $1.4 million to 161 customers of that adviser and 14 further advisers, in respect for fee-for-no-service failures in the period 1 July 2008 to 31 December 2015.

Next steps

ASIC will continue to monitor these compensation programs and will provide another public update by the end of 2017.  In addition ASIC will continue to supervise the institutions’ further reviews to determine whether any additional instances are identified of fees being charged without advice being provided.

MoneySmart

Customers who are paying ongoing advice fees for services they do not need can ask for those fees to be switched off. Customers who have paid fees for services they did not receive may be entitled to refunds and compensation, and should lodge a complaint through the bank or licensee’s internal dispute resolution system or the Financial Ombudsman Service.

ASIC’s MoneySmart website has a financial advice toolkit to help customers navigate the financial advice process and understand what they should expect from an adviser. It also has useful information about how to make a complaint.

Is The ABA Split?

Not according to the ABA’s press release.

Deputy Australian Bankers’ Association Chairman and Bendigo and Adelaide Bank Chief Executive Mike Hirst has today described rumours of a split in the ABA as “complete rubbish”.

“From time to time there are occasions where banks have different views and different commercial interests. However, 99 per cent of the time we agree,” Mr Hirst said.

“As individual members we each have the strength and respect for each other that allows us to have robust discussions on a variety of issues.

“Together we are a strong industry with a strong industry association working to provide better banking for Australia’s customers,” he said.

ABA Chief Executive Anna Bligh has been in regular contact with non-major bank CEOs, including a teleconference with all regional bank CEOs as recently as yesterday afternoon, and has several scheduled meetings with non-major bank executives in the coming days.

Meantime Aggregator AFG has also released a strongly worded statement about the weakness of the recent ABA Remuneration review.

AFG has today asked the regulator to keep a watchful eye on the big banks to ensure they do not use the Government’s recently announced major bank levy and their own Australian Bankers’ Association (ABA) Retail Banking Remuneration Review as a justification to implement changes designed to reduce the financial viability of providing broking services and marginalise large portions of the lending sector, leaving them without a distribution network.

“The ‘big bank levy’ announced by the Treasurer on budget night recognises the artificial taxpayer subsidy the four major banks and Macquarie have received through their lower borrowing costs since the GFC,” said AFG CEO (Interim) David Bailey.  “The government is finally seeking to level the playing field.

“History suggests the big banks will undoubtedly pass this new cost on.  The extent to which they are able to pass this levy on will depend on how strong our regulators are with the new supervisory powers also announced on budget night.

“Supervision of mortgage pricing has been tasked to the ACCC and the Productivity Commission will be conducting an Inquiry into competition in the sector.  AFG welcomes this news.

“We will be telling the Productivity Commission that the four major banks dominate the Australian lending market and a viable mortgage broking market is crucial for retaining competitive pressure,” he said.

The Australian Securities and Investments Commission (ASIC) has recently completed an exhaustive review of the remuneration of mortgage brokers and the overriding conclusion was that brokers are good for competition and as such have delivered good consumer outcomes.

“ASIC identified some areas where the industry could be strengthened but it did not recommend wholesale changes to the current remuneration structure as incorrectly reported in some quarters,” said Mr Bailey.

“It is incumbent upon the industry as a whole to respond to the regulatory process and our industry is doing so.  AFG will continue to play a leading role in this response representing our 2,800 mortgage brokers.

“One very vocal industry participant, the Australian Bankers’ Association (ABA), conducted their own review into remuneration structures, principally about their own sales channel, which is entirely appropriate. However, at the time the scoping document was released AFG questioned why, given the width and breadth of the ASIC review the ABA would choose to incorporate the broker channel in their scope.

“For the ABA Review to be regarded as a significant analysis of the broking industry is quite frankly outrageous.  We continue to assert that it is nothing more than the opinion of a single interest group, the banking lobby group.

“All major lenders came out within hours of the ABA review being released and committed to implementing all of the changes recommend.

“For anyone to suggest that the ABA should be the one driving remuneration change when there is already a consultative process underway with ASIC and Treasury is ridiculous.

“Tweaks are needed, not wholesale change; we would urge the regulators and government to ensure the ASIC Review is not used as a lever to drive an even better outcome for the big banks.”

“We all need to come back to the central conclusions of the ASIC Review – brokers are good for competition and for consumers.  If consumers were not satisfied with the broker channel they would have abandoned it.  In fact, recent statistics show that that broker market share is growing.

“A significant change to the broker remuneration model impacts the ability of the broking industry to survive which mean the non major lenders, who rely on the broker channel to distribute their products across the Australian market becomes compromised,” said Mr Bailey.

“This means less choice for consumers and higher home loan rates.  This is not a good consumer outcome but does provide more strength to the Big Four banks.

“AFG has worked hard at providing choice for our brokers’ customers and with 45 lenders on our panel more than 30% of our flow now goes to non-major lenders. This is a great consumer outcome.  We would like to think the non-majors are supportive of the current remuneration structure,” he concluded.

 

ASIC’s Michael Saadat on the remuneration review

From Mortgage Professional Australia.

As brokers, lenders and consumers go head-to-head over ASIC’s remuneration review, the man behind it gives MPA editor Sam Richardson an insider’s view

ASIC launched its review of broker remuneration in November 2015, and since then brokers have talked about little else. It’s very possible you’ve at some point criticised ‘those bureaucrats at ASIC’; if so, Michael Saadat is your man. You won’t find Saadat’s name in the review, but ASIC’s senior executive leader played a huge role in its production, staying behind the scenes. Now, two years later, he’s finally free to talk about the review and how it could change your business.

What ASIC wants
Over two years ASIC collected 200 million data points from 1.4 million home loans, before boiling that data down to 243 pages. “It was a very time-consuming process,” Saadat recalls. “Not only did we look at the raw data and provide conclusions, but we also controlled the data for customer characteristics.”

In their quest to achieve an ‘apples for apples’ comparison of broker and non-broker customers, Saadat and his team broke down comparisons into, for instance, the difference in loan amounts taken out by low-income customers going to brokers and to banks.

Now ASIC is explaining its methodology and the data it has collected to the industry.

“We’ve had a few roundtable discussions with stakeholders; we’re planning on having more, and when we speak at industry events or conferences we will definitely be discussing the report and taking questions from people who are interested in hearing more about it,” Saadat says. At the time of writing he was confirmed to speak at the Annual Credit Law Conference in October.

These discussions will chiefly concern ASIC’s six proposals. Firstly, ASIC wants to change the standard commission model to take into account factors other than loan size (1). It also recommends moving away from bonus commissions (2) and soft-dollar benefits (3). ASIC believes there should be clearer disclosure of ownership structures (4) and proposes establishing a new public reporting regime on consumer outcomes and competition in the home loan market (5). Finally, ASIC wants to improve the oversight of brokers by lenders and aggregators (6).

Now that the review has moved into the consultation phase, Saadat is effectively powerless. Under Minister for Revenue and Financial Services Kelly O’Dwyer, the Treasury will be managing the process, in which industry associations, lenders, aggregators, consumer groups and individuals can have their say on the proposals before the end of June. Saadat, however, will not be taking part: “We wouldn’t put in a submission to our own report.”

On the sidelines
ASIC is now consigned to the role of spectator, left on the sidelines, observing the furore surrounding the separate Sedgwick review, which published its final report a few weeks after ASIC’s.

Stephen Sedgwick’s Australian Bankers Association-sponsored review ran concurrently with ASIC’s, but Saadat insists there was no collaboration between the two. “[ASIC] did not share any data with him that has not been made public by ASIC,” he says.

Nevertheless, in its final report ASIC did repeatedly refer to Sedgwick’s review and was condemned for doing so by the MFAA and FBAA.

ASIC was right to refer to the Sedgwick review, Saadat insists: “We know the Sedgwick review only covers the banks, and that’s why we said in our report that the banks need to work with the rest of the industry in responding to [ASIC’s] recommendations.”

When writing his report, Saadat had no idea what Sedgwick’s recommendations would be; in fact Sedgwick’s final report was published just 30 minutes before Saadat talked to MPA.

Sedgwick’s recommendations go much further than ASIC’s, urging banks to decouple commission from loan size. ASIC had recommended a change to the standard commission model to avoid incentivising brokers to write larger loans, while recommending that banks work with brokers to develop a response.

Instead the major banks, on the day Sedgwick published his recommendations, all agreed to implement them in full by 2020. This unilateral decision bypassed brokers, ASIC and the Treasury’s consultation process.

Despite this, Saadat says he is “pleased that industry is working to improve remuneration structures to create better outcomes for consumers, and improved trust in the sector”.

Acknowledging the review and the banks’ response, he “encourage[s] all industry stakeholders to provide feedback to Treasury as part of the current consultation process”. Commissions, in Saadat’s view, “are obviously commercial arrangements, and it’s up to both individual banks, aggregators and brokers businesses to work out what those commercial arrangements should be”.

Expanding ASIC
Regardless of whether Saadat or Sedgwick get their way, ASIC’s remit looks likely to expand. Sedgwick and the banks want ASIC to enact regulation to facilitate a move to a new commission structure, while ASIC will play a role in implementing whatever rule changes the government decides to introduce after June. wFurthermore, Saadat explains, “ASIC’s ability to intervene may also be bolstered by law reform proposals that are currently being considered by government, including those recommended by the Financial System Inquiry”.

Already Saadat has more immediate work on his plate: a shadow-shopping of brokers by consumers, which he will start planning by the end of 2017. “It is early days,” Saadat says. “We’re planning on commencing that work before the end of this calendar year, and are still working through the detail.” Shadow shopping will take place, Saadat confirms, regardless of the Treasury’s ongoing consultation process on the remuneration review, and “once it kicks off it’s going to be a pretty significant piece of work”.

ASIC’s work will not end with commissions. Instead Saadat and his team are faced with a Sisyphean task. The role of referrers was flagged by the review for further investigation, while consumer groups have demanded more oversight of cross-selling. And, says Saadat, the data that was published was just the tip of the iceberg.

For now it’s up to the industry to make changes, he says. “It was more about us trying to get the industry to respond without being forced by legislation to have change imposed upon them. We think the industry has an opportunity to respond and to take positive steps to make changes that will deliver wimproved consumer outcomes without necessarily needing the government to legislate for changes.”

ASIC and ASBFEO hold banks to account on unfair contract terms

ASIC says following intervention by the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) and the Australian Securities and Investments Commission (ASIC), the big four banks are taking action to protect small businesses from unfair terms in loan contracts.

Following a round table hosted by ASBFEO and ASIC, the big four banks have committed to a series of comprehensive changes to ensure all small business loans entered into or renewed from 12 November 2016 will be protected from unfair contract terms.

ASBFEO and ASIC have publicly raised concerns that lenders, including the big four banks, needed to lift their game in meeting the unfair contract terms legislation.

The big four banks have committed to:

  • Removing ‘entire agreement clauses’ from small business contracts. These are concerning terms that absolve the lender from responsibility for conduct, statements or representations they make to borrowers outside of the contract.
  • Removing financial indicator covenants from many applicable small business contracts. For example, loan-to-valuation ratio covenants that give lenders the power to call a default when the value of secured property falls, even where a small business customer has met financial repayments, will be removed.
  • Removing material adverse event clauses from all small business contracts. These are concerning terms that give lenders the power to call a default for an unspecified negative change in the circumstances of the small business customer.
  • Significantly limiting the operation of indemnification clauses. These are concerning terms that aim to broadly protect the lender against losses, costs, liabilities and expenses that arise even outside the control of the small business borrower.
  • Significantly limiting the operation of unilateral variation clauses. In addition to providing applicable small business customers with a minimum of 30 days notice for any contract changes, banks will clearly limit the circumstances in which unilateral variations can be made.

The banks have agreed to contact all small business customers who entered into or renewed a loan from 12 November 2016, about the changes to their loans. In many cases, banks have agreed to implement the changes so that they apply to all existing applicable small business customers.

The banks have agreed to significantly limit the operation of potentially concerning contract clauses (such as financial indicator covenants) to loan products where such clauses are essential to the operation of the product (such as margin lending contracts). Where such clauses continue to exist, banks will re-draft them to ensure that they are clear, transparent and limited to the appropriate circumstances.

ASBFEO and ASIC have made it clear to the banks that simply including the word ‘reasonable’ in contracts does not go far enough.

The ASBFEO, Kate Carnell, said that her role was to consider the interests of small business and to ensure that the unfair contract term legislation was working across all industries. She said it was clear what “unfair” means – to protect the interests of the advantaged party, in this case it is the banks, against the interests of small business.

Ms Carnell said: “The banks have been given every opportunity, including a one-year transition period from November 2015, to eliminate unfair contract terms from their loan agreements and their response has been unsatisfactory.”

ASIC Deputy Chairman Peter Kell said: “We made it clear that lenders had to significantly improve their lending agreements to small business to ensure they meet the new rules.”

“It is important that the banks have committed to improving
their small business loan contracts. ASIC will be following up with the big four banks – and other lenders – to ensure that small business contracts do not contain unfair terms.”

Background

From 12 November 2016, the unfair contract terms legislation was extended to cover standard form small business contracts with the same protections consumers are afforded. In the context of small business loans, this means that loans of up to $1 million that are provided in standard form contracts to small businesses employing fewer than 20 staff are covered by the legal protections.

In March 2017, ASBFEO and ASIC completed a review of small business standard form contracts and called on lenders across Australia to take immediate steps to ensure their standard form loan agreements comply with the law (refer: 17-056MR).

ASIC has released Information Sheet 211 Unfair contract term protections for small businesses (INFO 211) which gives guidance to assist small businesses understand how the law deals with unfair terms in small business contracts for financial products and services, and the protections that are available for small businesses.