Big Bank Levy Is Permanent

ABC Insiders included an interview with Treasurer Morrison and subsequent discussion on the big bank levy announced in the budget last week.

The Treasurer confirmed this is a permanent change to the landscape, and linked it to competitive disadvantage smaller players have relative to the majors, thanks to the implicit government guarantee. He also underscored the excessive profitability of these banks relative to other markets, which speaks to the structural issues we have here.

Subsequent panel discussion centered on whether this was the thin edge of the wedge, and they suggested it was the poor bank culture, and unique situation the big four have which explains the move. These banks have few friends, and there are no community concerns about the impost.

Barrie Cassidy interviewed the Treasurer, Scott Morrison. On the panel: the Financial Review’s political editor Laura Tingle, The Australian’s Niki Savva and political commentator and author George Megalogenis.

Inquiry into the State of Competition in the Financial System Announced

Following reports over the weekend, the Treasurer has confirmed that the Productivity Commission will examine competition in Australia’s financial system. This includes a consideration of vertical and horizontal integration and access to banking services for small business.

The Government is committed to ensuring that Australia’s financial system is competitive and innovative.

That is why I have tasked the Productivity Commission to hold an inquiry into competition in Australia’s financial system. Competition is central to the Government’s plans to support innovation and economic growth, and deliver better outcomes for consumers and small businesses.

This delivers on the Turnbull Government’s commitment to task the Productivity Commission to review the state of competition in the financial system, made as part of the Government’s response to the Financial System Inquiry.

The Productivity Commission will look at how to improve consumer outcomes, the productivity and international competitiveness of the financial system and economy more broadly, and support financial system innovation, while balancing financial stability objectives.

In doing so it will consider the level of contestability and concentration in key segments of the financial system, including the degree of vertical and horizontal integration. It will also examine competition in the provision of personal deposit accounts and mortgages and services and finance to small and medium businesses.

The Government encourages all parties with an interest in competition in the financial system to consider making a submission to the Commission.

The Inquiry will commence on 1 July 2017 and is due to report to the Government by 1 July 2018.

Further information and the terms of reference will be available on the Commission’s website.

The Customer Owned Banking Association welcomed the news.

The customer owned banking sector welcomes today’s announcement by the Treasurer of a Productivity Commission (PC) inquiry into the state of competition in the financial system.

“The enduring solution to concerns about the banking market is action to promote sustainable competition so that poor conduct is swiftly punished by loss of market share,” said COBA CEO Mark Degotardi.

“Customer owned banking institutions – mutual banks, credit unions and building societies – are eager to build on their 4-million strong customer base, but we need a fairer regulatory framework.

“Fast-tracking this PC inquiry was our top policy priority for the 2017-18 Budget so we are delighted it has been unveiled a day early.

“Consumers stand to gain from a more competitive banking market where all competitors have a fair go.

“Currently, major banks benefit from unfair regulatory capital settings and a free subsidy from taxpayers in the form of an implicit guarantee that significantly lowers their cost of funding.

“These problems can be addressed by the PC as well as measures to empower consumers to more easily find the best deal for them on a savings account, credit card or home loan.

“This PC inquiry was recommended by the Financial System Inquiry because the current regulatory framework suffers from ‘complacency’ about competition.

“COBA believes one way to tackle this problem is to give the powerful banking regulator APRA an explicit ‘secondary competition mandate’ and an obligation to report annually against this mandate.

“We look forward to engaging with the PC inquiry, particularly on removing barriers to innovation and competition.”

The agile working style started in tech but it could work for banks

From The Conversation.

The purpose of the “agile” working style is to help businesses adapt to turbulent markets by adopting a fast and flexible approach to work. In one sense, it should come as no surprise that ANZ’s chief executive Shayne Elliot recently announced that ANZ will be shifting parts of its workforce to this style.

With the bank’s recent withdrawal from Asia and subsequent lower than expected revenues, this is part of ANZ refocus on its core business. In fact, each of Australia’s big four banks might be looking to become more efficient and responsive in the face of a tightly regulated market and slowly building retail banking competition from newer financial technology companies.

In another sense though, it’s surprising that one of Australia’s largest banks should signal such a profound change in work style. Finance is certainly not where agile got its start.

The origins of agile

The forerunners of agile stretch back as far as the Plan-Do-Study-Act method developed by Walter Shewart at Bell Labs in the 1930s and the Toyota Production System, based, in part, on the quality and systems thinking of Shewart’s student, William Edwards Deming.

However, agile as we understand it today is seen as emerging from software programming communities. It crystallised when 17 software developers gathered at the Snowbird ski resort in Utah in 2001 to share and refine their approaches to software development.

One of the participants had been reading a book on major companies coping with turbulent markets, called Agile Competitors and Virtual Organizations: Strategies for Enriching the Customer. Drawn to the agile’s connotations of speed and responsiveness, the group eventually adopted it as the moniker for their movement.

They published their views in The Manifesto for Agile Software Development, intending to help accelerate developers’ efforts to reliably produce software of the highest quality. Agile has since spread beyond the confines of IT to the other types of work and other organisations.

How to work in an agile style

As academics Rigby, Sutherland, and Takeuchi explain, agile now covers a broad range of methods, each varying according to their guiding principles and work rules. The three most well-known methods are scrum, lean, and kanban.

Scrum focuses on structuring teams to work across functions in a business, using creative and adaptive teamwork, daily stand-up meetings, and project reviews to quickly invent solutions and improve team performance.

Lean focuses on eliminating waste in systems and does not prescribe work rules to achieve this in the same way as scrum.

Kanban aims to shorten the time between the initiation and completion of work by visualising workflows, restricting the work being done at each stage in development, and measuring work cycle times to detect improvement.

ANZ seems to be most interested in the scrum method. ANZ’s Head of Product Katherine Bray stated:

There are vestiges of roles that we recognise, but with the underpinnings of hierarchy totally blown apart…[A scrum coach] is not your boss, that’s a coach, who is a peer. That product owner is not your boss, they’re a product owner who defines the how, and you galvanise around that.

Going back to the origins of agile and system thinking, it seems clear the agile approach is most likely to succeed where the organisation adopting it possesses structural modularity. Modularity proposes that organisations structure themselves in a way that allows teams to produce work that is layered, discrete, and testable.

This is what Bray is talking about – a radically new approach to roles and work styles at ANZ.

We might dismiss this whole reorganisation as marketing theatre, but intensifying competition and rapid change are all too real. This means many Australian businesses will have to come to terms with agile approaches if they are to remain responsive and competitive.

By taking up agile’s shift from top-down management to teams that organise themselves, and from a focus on compliance to a focus on innovation, ANZ is making its intent clear. It wants to achieve different results by doing things differently – surely a sane approach to change.

Yet this idea challenges the conventional structure and ethos of banks and similarly run businesses. These organisations are built to be secure and centralised in service of efficiency; modularity pushes them to be integrated and decentralised in service of innovation.

Modularity and agility are not easy to achieve. But they are fast becoming necessary if large companies, like ANZ, are to move with the times and adapt well to market turbulence.

Authors: Massimo Garbuio, Senior Lecturer, University of Sydney; Dreu Harrison, Research Assistant, University of Sydney

Major Banks Second Report – Déjà Vu (All Over Again!)

The House Of Representatives Standing Committee on Economics released its Major Banks Second Report in April 2017. Right over the Easter break and just before the budget!

Its a pretty weak document, in that while the issues they raise are quite important they miss the core structural issues which beset the industry, from vertical integration, lack to real competition, price gouging and poor culture. In fact the FSI inquiry did a better job, and there are still open issues from that review.

We think the “review fest” needs to stop and the focus should shift to making real change. This is what the summary of report 2 says:

The Committee’s second round of hearings has confirmed that the Recommendations of the First Report should be implemented now in order to improve the Australian banking sector for the benefit of customers. The Committee reaffirms each Recommendation from the First Report. While the Committee is open to some modest variations to the Recommendations, it affirms the substance of each of them.

Recommendation 1 of the First Report proposed the establishment of a one-stopshop where consumers can access redress when they are wronged by a bank. The Committee retains its view that one dispute resolution body should be established to provide straightforward redress for consumers. It is highly preferable to have one body dealing with these matters rather than two or more. The Committee believes that the Ramsay review should determine the precise administrative structure of this body – the key point is that it should be a one-stop-shop.

Recommendation 2 of the First Report calls for a new public reporting regime to be put in place to hold senior bank executives much more accountable. This Recommendation is essential to achieving a change in bank culture. It will place relentless pressure on CEO-reporting executives to focus on the treatment of customers. While all of the banks except ANZ oppose this Recommendation, in the Committee’s view it will have a very substantial impact on the behaviour of banks, to the benefit of consumers. It should be implemented.

Recommendation 3 of the First Report proposed that a regulatory team be established to make recommendations on improving competition in the banking sector to the Treasurer every six months. The ANZ agreed with Recommendation noting that ‘analysis from a government agency would help demonstrate the nature and level of competition.’ The other banks oppose this Recommendation, for reasons that the Committee does not find persuasive. This team should be put in place to fill a substantial gap in Australia’s regulatory framework today: we do not currently have a permanent team focused on systemic competition issues in banking, and we should.

Recommendations 4 and 5 of the First Report seek to empower consumers. In particular, Recommendation 4 proposes that Deposit Product Providers be forced to provide open access to customer and small business data by July 2018. All four banks noted general support for data sharing. However, the banks are conflicted on this issue, as the process of opening up data means that an asset which is currently proprietary to the banks will be non-proprietary in the future. For this reason, it is critical that the banks are not allowed to control the process or set the rules by which consumer data is opened up. An independent body must lead the change and be responsible for implementation.

Recommendation 7 of the First Report proposes that there be an independent review of risk management frameworks aimed at improving how the banks identify and respond to misconduct. Each of the banks has responded claiming that APRA Prudential Standard CPS 220 performs this function. The Committee is not convinced that the CPS 220 risk management review process is sufficient in relation to misconduct. CPS 220 has a broad focus on the material risks to a bank. While these objectives are important for prudential reasons the Committee’s focus
in this Recommendation is the ongoing and serious nature of misconduct by the banks towards their customers. The Committee’s Recommendation will ensure that the banks give top priority to developing a risk  management framework that truly puts customers first. This risk management review should work in parallel to CPS 220.

As part of the hearings in March 2017, the Committee scrutinised the banks over their use of non-monetary default clauses in small business loans. This matter was examined by the Australian Small Business and Family Enterprise Ombudsman, Ms Kate Carnell, as part of her inquiry into small business loans. Ms Carnell recommended that for all loans below $5 million, where a small business has complied with loan payment requirements and has acted lawfully, the bank must not default a loan for any reason. The Committee commends Ms Carnell on her important work on this issue and has recommended that non-monetary default clauses be abolished for loans to small business.


Here is an excellent piece from King & Wood Mallasons which puts their finger nicely on the key issues.

The House Of Representatives Standing Committee on Economics released its Major Banks Second Report in April 2017. Its ten recommendations largely repeat those contained in its first report and the Committee’s Chairman has called for each of them to be implemented.

We have used the heading of “Here we go again” as that is the truth: the majority of the recommendations represent another attempt at addressing issues identified by the comprehensive and properly considered Financial System Inquiry, but do little to address the underlying issues and take a simplistic approach to a complex industry. At best they will add further process and cost for little incremental benefit; at worst they will create further confusion and overlap between other legislative change and regulations.

Given the strength of the convictions and apparent political will, we think it is highly likely that many of them will be implemented. Some of the recommendations could be positive if they are implemented in a meaningful way. Our concern is that political considerations and expediency will force the opposite result.

In an attempt to more actively engage and shape the implementation of these recommendations, we have put forward our predictions and what you need to be aware of on the following recommendations:

  • “One-stop-shop” EDR: Banking & Financial Sector Tribunal
  • Senior Executive / Manager Regime
  • A new focus on banking competition and making it easier for new banking entrants
  • Empower consumers (data sharing and use)
  • Independent review of risk management framework
  • Carnell Inquiry: Non-Monetary default

Now is the time to be conscious of these recommendations and understand the potential implications they may have.

“One-stop shop” EDR: the “Banking & Financial Sector Tribunal”

Recommendation: The Government amend or introduce legislation to establish a “one stop shop” Banking and Financial Sector Tribunal by 1 July 2017. This Tribunal should replace the Financial Ombudsman Service, the Credit and Investments Ombudsman and the Superannuation Complaints Tribunal.

Our prediction: This recommendation will be implemented, and with an increased monetary threshold for both claims and compensation. It is a practical solution to a key problem of the multiplicity of existing tribunals, and is inevitable given the government and industry positions in respect of them. However, it is still a work-in-progress, as the hard work of the design and detail of the one-stop shop has been delegated to the Ramsay review. The devil will be in the detail of what is suggested by that review.

What to watch for: Whether the recommendation solves the problem, and gets right the balance between pragmatism and legalism.

The interim report of the Ramsay review recommends that the claim and compensation limits under the existing EDR schemes be significantly increased for small business and consumer complaints. The Carnell report suggests a limit of $5 million. Ramsay currently recommends that the new EDR scheme be an industry ombudsman scheme, while the Committee recommends that it be a statutory banking tribunal. Consumer groups have also been strong advocates of a tribunal model. The difference is that a statutory banking tribunal is likely to have more comprehensive appeal rights, be more accountable and be more legalistic than an industry scheme.

In our opinion, an “all powerful” tribunal with higher limits and compensation thresholds will, by default, become more “legalistic” and some of the perceived benefits of the current EDR schemes, and their more informal and speedy processes and outcomes, will not be preserved. This could be an advantage for banks, as the appeal rights in relation to the existing EDR schemes are limited, and it is likely that more comprehensive appeal rights would be available for banks should a banking tribunal be established.

The consumer response to this change will need to be managed and positioned as a result of government policy which was supported by consumer groups, rather than as a result of a bank’s behaviour toward the tribunal.

Senior executive/manager regime

Recommendation: That, by 1 July 2017, the Australian Securities and Investments Commission (ASIC) require Australian Financial Services License holders to publicly report on any significant breaches of their licence obligations within five business days of reporting the incident to ASIC, or within five business days of ASIC or another regulatory body identifying the breach.

Our prediction: The problems to solve include culture and enforcement. These are inextricably linked. The proposed solution will not address either problem and could worsen them. It is simplistic, takes no account of the strong systems in banks, currently overseen by APRA, and will have at least two unintended consequences:

  • first, the time period for disclosure could result in a fast but wrong decision which in turn creates a culture of non-disclosure for fear of an arbitrary outcome or the prospect of being a “scapegoat”. Further, a “significant” breach will require investigation and often systems based responses which take time to investigate and develop – customers and shareholders will be prejudiced if a thorough review and response is compromised;
  • second, the statement in the recommendation that the CEO-level reports within a bank have the greatest capacity to change the culture shows a lack of understanding of the banking industry and the scale of each bank division’s operations, as a “CEO-level” report is basically the CEO of each of those divisions. The problem can only be fixed by changing the culture through the entire bank, with a focus on training, education, accountability and reporting systems. Senior management can set values and oversee systems and processes, but implementation errors will often not be obvious until the issue is spotted. Speedy escalation of the issue needs to be supported and not feared.

What to watch for: The balance between culture and enforcement.

In terms of culture, banks recognise that they need to address issues in their culture and rebuild trust with the public, and that one element of doing so is to ensure that breaches are identified, reported and acted upon and that bad behaviour has consequences, at all appropriate levels. There have been failures to do this in the past that cannot be repeated.

To do so, a culture of disclosure rather than a culture of fear needs to be created. People within banks at all levels need to feel safe to report a problem by having a supportive environment in which possible breaches can be reported, assessed and actioned, not an environment where they are afraid to do so because of arbitrary standards, a time frame which could result in the wrong decision being taken or where there is the risk of adverse publicity which is not warranted by the underlying circumstances.

In terms of enforcement, the solution of a senior manager regime will create a problem of duplication between this regime, ASIC’s current powers to penalise behaviour of senior office holders under the Corporations Act and APRA’s current powers under the fit and proper person regime. Which will have priority? How will competing claims between regulators and the courts be managed?

In our opinion, the better solution is to improve these existing laws and clarify and coordinate their enforcement – and actually use them – rather than creating a further set of laws that will not solve the problem and will likely cause further cost and complexity for the industry for little additional benefit, and distract banks from their priority of serving customers’ needs.

For this sort of regime to be workable and fair, there needs to be a tiered approach of notification, an appropriate time to investigate and then reporting of the proposed action to be taken and the involvement of management. Given the draconian consequences, our view is that these proposals will inevitably lead to a conservative view being taken of what is a “significant breach”, which will not be much different to the current regime. An approach which encourages and rewards the reporting of breaches, and building a strong relationship between the industry and the regulator, is more preferable and would go further towards solving the current problems.

A new focus on banking competition and making it easier for new banking entrants

Recommendation: that the Australian Competition and Consumer Commission, or the proposed Australian Council for Competition Policy, establish a small team to make recommendations to the Treasurer every six months to improve competition in the banking sector, and suggest any changes required to improve competition.

Our prediction: The recommendation is a triumph of process over substance that may not deliver any tangible results or achieve any significant change in levels of competition.

What to watch for: Political pressure driving further bad policy and another unwarranted inquiry into the banking industry.

“Competition” is a motherhood problem that always generates a motherhood statement: while everyone will always say that they want more competition, and will welcome more competition, the real questions to be asked and answered are:

  1. What is improved competition? Is it more banks, or increased competition between existing banks or both?
  2. How will improved competition be achieved? Will it involve legislative reform to lower barriers to entry and expansion, or to increase demand-side power or will the other reforms, including those directed at changing culture in the banking sector, achieve the underlying objective?
  3. How should the increased competition be measured? Should it be measured in increased productivity, or increased consumer welfare, or reduced profitability?

In the fuel sector, the ACCC claimed that “shining a light on petrol prices” improved competition. But, is there any enduring evidence to support this?

To solve the problem, we think that the government needs to take a holistic view of the future banking industry, not tinker with the current. That is:

  • first, reduce the barriers to entry by creating a more supportive environment for new entrants and start-ups (including a UK style “two stage” licensing system for new entrants) as well as reviewing the APRA process for licensing and prudential regulation to achieve a better balance between APRA’s obligations to promote stability and competition as well as different capital applications for different sized lenders (as the US is moving towards, and as the report contemplates);
  • second, reduce the height of those barriers in terms of access to customer data, portability of customers, prudential requirements and infrastructure costs; and
  • third, recognise that the new suppliers are less likely to be traditional financial institutions but rather technology companies which both have and need access to data (such as Amazon, Google, Alibaba, Apple) and that a regulatory environment that both encourages their entry into the Australian market while preserving the ability of the current suppliers to access capital and funding is the best way of ensuring better long term competition in the Australian market.

One thing is certain. Access to foreign debt capital is critical for the Australian Banking system and the cost of that capital directly affects the cost of mortgage loans to mums and dads. The Government needs to tread very carefully here.

Therefore, a comprehensive and well thought through, holistic solution to all of these related issues is required, not a further series of knee jerk reactions that will never be implemented or, if implemented, will not solve the problem of improved competition.

Empower Consumers (data sharing and use)

Recommendation: that Deposit Product Providers be forced to provide open access to customer and small business data by July 2018. ASIC should be required to develop a binding framework to facilitate this sharing of data, making use of Application Programming Interfaces (APIs) and ensuring that appropriate privacy safe guards are in place. Entities should also be required to publish the terms and conditions for each of their products in a standardised machine-readable format.

The Government should also amend the Corporations Act 2001 to introduce penalties for non-compliance.

Our prediction: While we are still waiting for the Federal Government’s response to the final recommendations of the Productivity Commission on data availability and use, our prediction is that a new regime of open data for consumers and small business is inevitable. This train has left the station. The only questions are what model will be implemented and how it will be implemented.

What to watch for: These recommendations bring the questions of data “front and centre”. Data is the current and future asset of value in the industry. However, there are two critical aspects to this:

  • first, the recommendations are in several ways inconsistent with (or critical of) the approach taken by the Productivity Commission in its draft report. We need one model that reflects the culture and values of the Australian industry and consumers; and
  • second, competition cannot be improved without a solution to the questions of: who owns the data; how will it be secured; who can access it; how is that access provided; how is privacy maintained; who is accountable and who bears the risk if the data security is lost?

A key challenge for the industry is that a customer-centric model of open data may not be fully consistent with the industry’s business model or needs, and that the industry’s role in developing that model will need to be carefully managed given the range of stakeholders’ interests in play.

Independent review of risk management framework

Recommendation: that the major banks be required to engage an independent third party to undertake a full review of their risk management frameworks and make recommendations aimed at improving how the banks identify and respond to misconduct. These reviews should be completed by July 2017 and reported to ASIC, with the major banks to have implemented their recommendations by 31 December 2017.

Our prediction: This will be implemented as it is a no-brainer for the government. At least it doesn’t require a “culture audit”. It provides a customer, not a prudential, framework for the risk management of conduct. However, the time-frame will need to be longer: all banks have existing detailed risk framework and processes which need to be taken into account.

What to watch for: Will it solve the problem? No, as a review alone will change nothing. It needs to be seen as part of the solution to the culture and enforcement problem (described above) and to assist a bank in reviewing and making wider changes to its organisation and behaviours that will help it to drive a different culture. Nothing is gained by simply reviewing the current systems, or just creating a new penalty or threat for employees.

A review of this nature needs to be undertaken by an independent party that genuinely understands the banking industry, its consumer products, its current legal framework and regulation and the current steps being taken by the banks to reform their systems of culture, incentives, accountability and enforcement. It needs to be part of the solution and assist a bank in making these wider changes to its business.

Carnell Inquiry: Non-monetary default

Recommendation: That non-monetary default clauses be abolished for loans to small business. If the banks do not voluntarily make this change by 1 July 2017 then the Government should act to give effect to this Recommendation.

Our prediction: The recommendation will solve the perceived problem of allowing a lender to enforce for a non-monetary default, and this is already being actioned by the industry. However, it will simply create a different problem for a customer: the term of a loan could be shorter (say, between 12 months and 3 years) and be charged at a higher interest rate, as the recommendation transfers more risk to the bank. So a customer could get less certain and more expensive credit as a result.

What to watch for: The problem is said to be one of unfairness, in that a lender should not be able to default a loan except if the borrower has not paid interest or principal on time. A non-monetary default gives too much power to the lender to take action even when a customer might be making those payments on time.

The reality is that there are too many non-monetary default provisions, and they can be simplified. They are also rarely, if ever, used. However, they underlie the relationship between the bank and the customer, and in some cases reflect prudential risk management requirements on the bank and give each of them a catalyst to discuss improvements to the customer’s business that may increase its ability to pay or the adequacy of the security given to the bank for the loan, rather than calling a default. Banks currently use non-monetary default provisions as “early warning signs” to enable banks to meet the risk requirements imposed by prudential regulation and work with customers with deteriorating businesses to turn them around before customers commit monetary defaults.

The balance between the term of the credit (more than 12 months to give certainty of funding to small business) and the terms of the credit (to allow banks to monitor and manage their exposures, and ultimately their capital) needs to be fair between them and put into the right balance.

What now?

The next few months are critical, as not only the Committee but many commentators are calling for implementation of these recommendations. A firm but fair approach by the banking industry, which recognises its issues to be addressed which is accompanied by meaningful suggestions, is required to all stakeholders.

Murray slams Medcraft for “political agenda”

From Australian Broker.

The head of the financial systems inquiry, David Murray, has publicly criticised chairman of the Australian Securities & Investments Commission (ASIC) Greg Medcraft for overreaching in what Murray phrased as bank bashing.

In an interview on Sky News Business, Murray responded to comments made by Medcraft welcoming tighter controls on banks to limit cross-selling.

These recommendations were “outside the intent” of the inquiry’s original product intervention power with Medcraft “well and truly” exceeding the mandate set for him, Murray said.

“By attacking vertical integration of the banks, he’s picking up a political agenda and running with it. For the regulators, that is the wrong thing to do.”

The topic of bank bashing was also raised after Medcraft’s comments of the Australian banking oligopoly were raised.

“I think we should put in context what the banks actually do,” Murray said. “Whilst the structure is oligopolistic, that’s not uncommon in Australia. We have two major airlines, we have a small number of [major] retail landlords, we have a small number of integrated transport companies, and on it goes.”

There is a need to “start building and stop bashing,” Murray said.

“You cannot have a large number of small, badly rated banks borrowing in foreign markets to intermediate the current account deficit. We need a small group of strong banks to do that.”

The act of bank bashing leads to systemic risk as this can lead to a fall in bank ratings, he said.

“If there’s a political agenda for a Royal Commission – that is a Royal Commission that you have to have when you don’t really need one – the Commission can go searching for solutions that we don’t really need either.”

The current environment had already put a number of “dark clouds” on the banks that need not be there, including the present housing issue, Murray added.

“If foreign investors in banks and foreign lenders to our banks believe that that’s an added layer of risk and their credit ratings could slide further than the Commonwealth government, we are then inducing a price spiral which will hurt the economy deeply.”

“This bank bashing is really helping people think that a Royal Commission is necessary. It’s not necessary.”

Sedgwick review accused of supporting ‘cartel behaviour’

From The Adviser.

A Melbourne-based broker and former CBA employee believes the ABA-commissioned Sedgwick review is looking to “support cartel behaviour” and has used the term ‘commission’ unethically.

Following the release of the Sedgwick review Issues Paper in January, Universal Wealth Management director and AFG broker Maria Rigoni sent a submission to the review. However, the independent reviewer reportedly decided not to publish it, citing “some legal considerations”.

The Adviser has obtained a copy of Ms Rigoni’s submission, which expresses her concerns over the Sedgwick review and its remarks about mortgage broker remuneration.

“Reading the ABA submission and associated legal advice it seems that the review is seeking options to support cartel behaviours,” the submission states.

Meanwhile, Ms Rigoni argues that the use of the word ‘commission’ for receipt of remuneration is being used “unethically” to create an illusion bias of how much money a mortgage broker actually earns as take-home pay and what they are required to do to earn it.

“Bank employees are generally paid a salary and a performance bonus, mortgage broker firms are not,” she said.

“The word commission has several different meanings, nevertheless in its most simple meaning, commission is the act of passing a responsibility to someone else. It is the action of granting certain powers or authority to carry out a certain task or duty.

“For example, the ABA may commission an individual to complete a review into a subject matter. The review has a specific set task, with terms of reference and authorisation to seek confidential information, and when complete a report would be provided to the ABA and then the commission ceases to exist.”

According to Ms Rigoni, remuneration for the completed commissioned task may be on a fixed price agreement, or a sliding scale of remuneration with incentives, depending on the agreement made directly between the parties.

“Either way a payment for the commission is made,” she said. “Has the reviewer sold a product? No! The reviewer has sold his ability to perform the required task.”

In her submission, Ms Rigoni states that credit providers outsource or commission contractors to do many things, such as printing, advertising, marketing, catering, legal advice, and lead generation.

She believes it is “nonsense” for anyone to say that the labour market for mortgage brokers is principally product-related commission-based.

“Mortgage brokers are not paid for the sale of a loan product. They are paid for ‘commissioned work’ required in the introduction of loan applications from a person the lender wants to deal with.”

Deutsche Bank Fined For Rigging FX Trading

The US Federal Reserve has announced two enforcement actions against Deutsche Bank AG that will require bank to pay a combined $156.6 million in civil money penalties.

The Federal Reserve on Thursday announced two enforcement actions against Deutsche Bank AG that will require the bank to pay a combined $156.6 million in civil money penalties. The bank will pay a $136.9 million fine for unsafe and unsound practices in the foreign exchange (FX) markets, as well as a $19.7 million fine for failure to maintain an adequate Volcker rule compliance program prior to March 30, 2016.

In levying the FX fine on Deutsche Bank, the Board found deficiencies in the firm’s oversight of, and internal controls over, FX traders who buy and sell U.S. dollars and foreign currencies for the organization’s own accounts and for customers. The firm failed to detect and address that its traders used electronic chatrooms to communicate with competitors about their trading positions. The Board’s order requires Deutsche Bank to improve its senior management oversight and controls relating to the firm’s FX trading.

The Board is also requiring the firm to cooperate in any investigation of the individuals involved in the conduct underlying the FX enforcement action and is prohibiting the organization from re-employing or otherwise engaging individuals who were involved in this conduct.

Separately, the Board found gaps in key aspects of Deutsche Bank’s compliance program for the Volcker rule, which generally prohibits insured depository institutions and any company affiliated with an insured depository institution from engaging in proprietary trading and from acquiring or retaining ownership interests in, sponsoring, or having certain relationships with a hedge fund or private equity fund.

The Board also found that the firm failed to properly undertake certain required analyses concerning its permitted market-making related activities. The consent order requires Deutsche Bank to improve its senior management oversight and controls relating to the firm’s compliance with Volcker rule requirements.

ABA Welcomes McPhee Report

The Australian Bankers’ Association has welcomed today’s release of Mr Ian McPhee’s report which found the industry has made significant progress delivering the reform program it announced 12 months ago.

Mr McPhee noted that banks were making good progress in delivering the initiatives but also recognised that expectations are constantly changing and there are government processes which will need to be carefully factored into the reform program.

Significant milestones achieved in the quarter to April 2017 included:

  • The appointment of customer advocates by 19 banks to help customers resolve issues.
  • Major banks updating their whistleblower protections to meet the highest standard to encourage a ‘speak up’ culture, and three other banks doing this ahead of schedule.
  • The delivery of two key independent reviews into the Code of Banking Practice (Khoury Review) and retail bank staff remuneration (Sedgwick Review), which will result in significant benefits to customers.
  • Three additional initiatives1 to build on the ‘6 Point Plan’, which address consumer concerns about people in financial hardship, switching banks and small businesses and farmers.

ABA Chief Executive Anna Bligh said she was pleased Mr McPhee had acknowledged banks’ commitment to change.

“One of my first priorities is to work with banks to identify changes that can be implemented quickly and effectively, and which will make a meaningful difference for customers.

“In my own interactions with bank CEOs, I have been impressed by how committed they are towards this reform program and I was pleased Mr McPhee acknowledged this in his report.

“Ultimately it is action, not commitment, which will demonstrate that change is genuine. Banks understand that to build greater trust in banking, customers need to see, feel and touch evidence of change,” Ms Bligh said.

Mr McPhee’s report also highlighted that some reform initiatives – such as external dispute resolution arrangements and ASIC breach reporting – rely on government and regulatory action before banks can progress them further.

Ms Bligh said that in addition to the banking industry’s own reform program, there were a further 15 inquiries, reviews or investigations into banking underway by government or regulators.

“There is an enormous amount of scrutiny on banks at the moment and the industry is serious about change. Banks have made a lot of progress over the past year, but there is much more to do.

“The industry needs to get better at communicating its massive reform agenda which is transforming banking in Australia, and also measuring how well it has met the changing expectations of customers and the wider community,” she said.

A copy of Mr McPhee’s report is available at

MFAA boss rejects Sedgwick review, slams commission reforms

From The Adviser.

The association has warned that Sedgwick’s recommendations will give the banks “complete oversight” of brokers, erode independence, and further empower the major lenders.

The Mortgage & Finance Association of Australia (MFAA) has expressed serious concerns with some of the themes outlined in the Australian Bankers’ Association’s (ABA) Review, conducted by Mr Stephen Sedgwick AO, into commissions and payments, calling on banks to align with the “well-considered ASIC process” that is currently underway.

The association stressed that ASIC has recommended that the framework for the industry’s incentive structure should largely be left in place.

MFAA CEO Mike Felton said that while the ABA Review made a number of observations and recommendations regarding the third-party channel, it did not present realistic solutions.

“This is a review commissioned by the banks that aims to deal with the banks’ reputational problems, but as far as the broker channel is concerned does not create better consumer outcomes,” Mr Felton said.

“We are frustrated that this Review claims to be focused on a ‘customer-centric’ view. Brokers and aggregators already have a customer-centric view. Indeed, they are dependent on a relationship model and must focus on their customers in order to survive,” he said.

“The Review’s recommendations on the third-party channel appear to be based mostly on anecdotal evidence from its members. It is unfortunate that the Review process did not include meaningful consultation with the broader industry in developing this report.”

Mr Felton said there is no evidence provided in review that links consumer detriment to the current remuneration structure.

“This lack of poor customer outcomes has likely driven ASIC’s recommendation to leave the current commission structures in place, with a view to reviewing them again in four years to determine if consumer outcomes were affected by the potential conflicts identified by its Report,” he said.

“This was supported by comments made by ASIC chairman Greg Medcraft after the Report’s release, in which he said that brokers deliver great consumer outcomes, and that lenders are still responsible for lending.”

While the ABA Review assumes consumer detriment as a result of anecdotal evidence, Mr Felton pointed to MFAA data, which demonstrates that consumers are very happy with their brokers. The industry grew by 4 per cent in 2016, and 92 per cent of consumers reported they were ‘satisfied’ or ‘very satisfied’ with their broker’s performance, according to a 2015 Ernst & Young study.

“The data shows default and other metrics are closely aligned with outcomes driven by lenders’ staff,” Mr Felton said.

The MFAA boss further highlighted that the Sedgwick review recommends changes that go significantly beyond those recommended by the ASIC report, seeking to adjust or remove current incentives for mortgage brokers and potentially implement a lender fee-for-service approach.

“The ASIC Report does not recommend removing the link between loan size and commission, nor a fee-for-service model nor removal of trail commission — with good reason. A single, lender-funded, fee-for-service is likely to lead to a degree of standardisation of all fees, which ASIC is not calling for,” he said.

“It may also be considered anti-competitive by the ACCC, and therefore would not be able to be implemented. Ultimately, ASIC concluded these actions are not required because they do not create better consumer outcomes.”

The Review, which was released yesterday and included 21 recommendations, suggested that banks adopt, through negotiation with their commercial partners, an ‘end to end’ approach to the governance of mortgage brokers that approximates as closely as possible a holistic approach broadly equivalent to that proposed for the performance management of equivalent retail bank staff.

In effect, broker commissions would be governed by similar principles that banks would apply in assessing performance against a scorecard for their staff.

“Some commentary has questioned the role of ABA or the banks in this matter,” Mr Sedgwick noted.

According to Mr Felton, the Sedgwick review is 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.

Mr Felton said he believed the Review sought to re-interpret the ASIC report, providing unnecessary solutions to issues that ASIC had already reviewed and put aside.

“What really matters, in terms of remuneration, is the ASIC process and the regulatory outcomes from it. ASIC’s approach is considered and well-informed, and is based on extensive data and consultation with all parties,” he said.