CBA says the money laundering issue was caused by a software update

From Business Insider.

The Commonwealth Bank says its current legal problem over allegations of allowing money laundering, which potentially could see Australia’s largest company facing massive fines, started with a simple software problem with its ATMs.

Australia’s largest company says: “In an organisation as large as Commonwealth Bank, mistakes can be made. We know that because we are a big organisation, these mistakes can have significant impact.”

Last week Australia’s financial intelligence and regulatory agency, AUSTRAC, took the Commonwealth to the Federal Court claiming the bank breached the Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) Act over combined cash deposits of $624.7 million.

The bank, in a statement this morning, says the issue began after an unrelated software update to Intelligent Deposit Machines, the latest ATMs, in late 2012.

A coding error meant the ATMs did not create reports when deposit amounts exceeded $10,000, the level at which transactions need to be reported to authorities.

“This error became apparent in 2015 and within a month of discovering it, we notified AUSTRAC ,” the bank says.

AUSTRAC alleges more than 53,700 contraventions and says the Commonwealth didn’t take steps to assess the risks of intelligent deposit machines until mid-2015, three years after they were introduced.

On the potential fines associated with the breaches, the Commonwealth says the alleged contraventions could be considered to arise from a single course of conduct, a systems error.

Late lodgement of transaction reports carries a penalty of up to $18 million, meaning that in theory the bank could be fined that amount for each late transaction report, adding up to more than $966 billion.

“Ultimately, a court will seek to ensure that, overall, any civil penalties are just and appropriate and do not exceed what is proper having regard to the totality of established contraventions,” the bank says.

“Under the Act, the only mechanism available to AUSTRAC to secure a pecuniary penalty from CBA is by taking court action.

“What we can say about those proceedings is limited until they have run their course.

“In the meantime, CBA remains committed to continuously improve its compliance with the AML/CTF Act and will continue to keep AUSTRAC abreast of those efforts.”

Today Commonwealth Bank CEO Ian Narev says he’s focused on doing his job and has no intention of stepping down. “Right now, I’m focused on doing my job and am not spending any time on thinking about my own position,” he says.

Here’s the full statement from the Commonwealth:

    • We respect greatly the role AUSTRAC plays in keeping Australians safe. To that end, we work closely with AUSTRAC as well as the Australian Federal Police and other authorities.

AUSTRAC filed legal proceedings on Thursday and we are taking these very seriously. We have been working our way carefully through the statement of claim. While legal proceedings limit the detail we are able to provide, we acknowledge the public interest in this matter, and are committed to being as open as we can with updates to all our stakeholders.

We have already said we will file a statement of defence. We do not intend to litigate this matter publicly; our responses have been made in consideration of the desire for greater information by our people, shareholders, customers and the community.

There has already been extensive public discussion and because of the complexity of the matter, some facts are worth clarifying.

Our Intelligent Deposit Machines (IDMs) are now providing the correct Threshold Transaction Reports (TTRs) to AUSTRAC, and have been since September 2015.

When we first rolled out these machines in May 2012, they were providing all the correct TTR reporting. The issue began after an unrelated software update to the IDMs in late 2012. Following the software update, a coding error occurred which meant the IDMs did not create the TTRs needed. This error became apparent in 2015 and within a month of discovering it, we notified AUSTRAC, delivered the missing TTRs and fixed the coding issue. The vast majority of the reporting failures alleged in the statement of claim (approximately 53,000) relate specifically to this coding error. We recognise that there are other serious allegations in the claim unrelated to the TTRs.

In an organisation as large as Commonwealth Bank, mistakes can be made. We know that because we are a big organisation, these mistakes can have significant impact.

We need to be ever more vigilant in the area of financial crime and anti-money laundering. The rapid evolution of technology in banking, the increased sophistication of criminal activity, and higher regulatory expectations together create an imperative to continuously raise our standards. We have increased our investment in people, technology and processes through a program designed not only to address existing weaknesses, but also to meet the growing complexity in this area. This work continues today.

We continue to have an ongoing cooperative relationship with AUSTRAC and have kept them abreast of proactive steps we have taken to further enhance our compliance program and operations.

Allegations against the CBA show the need for a Royal Commission into the banks

From The Conversation.

The Commonwealth Bank is facing another scandal as the Australian Transactions Reports and Analysis Centre (AUSTRAC) launches civil proceedings accusing the bank of being complicit in money laundering.

This exposes a deeply worrying prospect, that the Australian public are vulnerable to crime and terrorism directly funded through the Australian banking system.

AUSTRAC alleges CBA breached the Anti-Money Laundering and Counter-Terrorism Financing Act (2006) 53,700 times since 2012, where transactions were not reported by the bank, or reported too late. The bank faces a potential penalty of A$18 million per breach, which could amount to billions of dollars.

According to AUSTRAC, criminals deposited cash, amounting to tens of millions of dollars, over a period of two years in intelligent deposit machines where it was automatically counted and credited instantly to the nominated recipient account. The funds were then available for immediate transfer to other accounts both domestically and internationally.

In their evidence AUSTRAC details how four identified criminal syndicates were able to readily use CBA ATMs to breach the A$10,000 transaction threshold on 1640 occasions amounting to A$17.3 million. A total of A$625 million of suspicious transactions flowed through these CBA ATMs.

CBA’s response to these serious allegations is that it reports 4 million transactions to AUSTRAC per year contributing to the effort to “combat any suspicious activity as quickly and efficiently as we can.” The bank insists all key personnel have been trained in compliance with the Money-Laundering Act. The CBA acknowledges there was a software fault with a number of their ATMs which allowed these transactions to take place, but apparently this took several years to fix.

Unfortunately this response in the circumstances only provokes further questions.

Regulators asleep at the wheel

What this really shows up is the government’s “light touch” regulatory approach which translates into soft touch regulation. It seems regulators in Australia are too frightened to take action even when there is mounting evidence of illegality.

AUSTRAC itself did not launch any proceedings under the Anti-Money Laundering and Counter-Terrorism Financing Act until 2015. This followed a lengthy report of the Financial Action Task Force which concluded:

[AUSTRAC’s] graduated approach does not seem to be adequate to ensure compliance.

Since then AUSTRAC has taken action against Tabcorp on a money-laundering case which reached a A$45 million settlement in February 2017. This contrasts with far larger fines imposed on international banks for money laundering including a US$1.2 billion fine for HSBC and a US$262 million fine for Standard Chartered in 2012 from the US Justice Department.

At a US Senate hearings in 2012, a HSBC chief compliance officer famously quit his post on the spot in answering money laundering allegations, implying he could not defend the indefensible.

The Australian banking industry has faced minimal pressure to reform compared to other countries, where the restructuring of the banks is progressing. Australia has seen a succession of inquiries however each has focused on particular aspects of the banks functioning and proposed specific reforms.

It will require a Royal Commission into the Australian banks to examine the structural and systemic failures of the banks. The banks have become the main providers of not only retail but investment banking, insurance, superannuation and financial advice, and this deserves critical scrutiny.

If the AUSTRAC allegations against the CBA are proven in the Federal Court, this matter is of a different order of magnitude to earlier problems. It suggests a degree of irresponsibility which is unacceptable in major financial institutions.

It also suggests it’s deeply embedded in the banks cultural and operating processes, which undermines the security of Australian citizens. This would demand a substantive inquiry into the management, integrity and culture of the banks that only a Royal Commission could provide.

In the meantime, the CBA needs to provide firm evidence to the Australian public that none of its ATM machines can continue to be used for money laundering. It also needs to prove there are procedures in place for ensuring all suspicious banking activity by potential criminals or terrorists is fully reported to the Australian authorities as soon as the CBA has any knowledge of such activity.

Author: Thomas Clarke, Professor, UTS Business, University of Technology Sydney

AUSTRAC seeks civil penalty orders against CBA

Australia’s financial intelligence and regulatory agency, AUSTRAC, today initiated civil penalty proceedings in the Federal Court against the Commonwealth Bank of Australia (CBA) for serious and systemic non-compliance with the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act).

AUSTRAC acting CEO Peter Clark said that this action follows an investigation by AUSTRAC into CBA’s compliance, particularly regarding its use of intelligent deposit machines (IDMs).

AUSTRAC’s action alleges over 53,700 contraventions of the AML/CTF Act. In summary:

  • CBA did not comply with its own AML/CTF program, because it did not carry out any assessment of the money laundering and terrorism financing (ML/TF) risk of IDMs before their rollout in 2012. CBA took no steps to assess the ML/TF risk until mid-2015 – three years after they were introduced.
  • For a period of three years, CBA did not comply with the requirements of its AML/CTF program relating to monitoring transactions on 778,370 accounts.
  • CBA failed to give 53,506 threshold transaction reports (TTRs) to AUSTRAC on time for cash transactions of $10,000 or more through IDMs from November 2012 to September 2015.
  • These late TTRs represent approximately 95 per cent of the threshold transactions that occurred through the bank’s IDMs from November 2012 to September 2015 and had a total value of around $624.7 million.
  • AUSTRAC alleges that the bank failed to report suspicious matters either on time or at all involving transactions totalling over $77 million.
  • Even after CBA became aware of suspected money laundering or structuring on CBA accounts, it did not monitor its customers to mitigate and manage ML/TF risk, including the ongoing ML/TF risks of doing business with those customers.

Mr Clark said that today’s action should send a clear message to all reporting entities about the importance of meeting their AML/CTF obligations.

“By failing to have sound AML/CTF systems and controls in place, businesses are at risk of being misused for criminal purposes,” Mr Clark said.

“AUSTRAC’s goal is to have a financial sector that is vigilant and capable of responding, including through innovation, to threats of criminal exploitation.”

“We believe this can be achieved by working collaboratively with and supporting industry. We will continue to work in this way with our industry partners who also share this aim and demonstrate a strong commitment to it.”

Wells Fargo’s Auto Insurance Practices

From Moody’s

Last Thursday, Wells Fargo & Company announced an $80 million remediation plan for auto loan customers that it had incorrectly charged for collateral protection insurance (CPI) between 2012 and 2017. The announcement is credit negative for Wells Fargo. The remediation costs are relatively immaterial at approximately 1% of its pre-tax quarterly earnings, but the announcement is yet another negative reputational headline for the bank. Despite the limited financial effect, we expect that the announcement will exacerbate the damage to Wells Fargo’s reputation in this past year.

Wells Fargo requires auto loan customers to maintain comprehensive and collision insurance for financed autos during the term of the loan. The bank’s CPI program purchased auto insurance on the customer’s behalf from a third party if proof of auto insurance had not been provided. Wells Fargo’s review of its CPI program and related third-party vendor practices, which began in July 2016 and was prompted by customer concerns, found that approximately 570,000 customers may have been negatively and incorrectly affected.

Roughly 490,000 customers were incorrectly charged for CPI despite having satisfactory auto insurance of their own. Approximately 60,000 customers did not receive adequate notification and disclosure information from the vendor before the bank’s purchase of CPI on their behalf. Finally, for 20,000 customers, the required payments for the incorrectly placed CPI may have contributed to the default of their loan and repossession of their vehicle. Wells Fargo’s $80 million remediation plan intends to rectify financial harm to these customers. As a result of its initial findings, Wells Fargo discontinued its CPI program in September 2016.

Wells Fargo historically had strong customer satisfaction scores and a reputation for sound risk management. In September 2016, its lead bank subsidiary agreed to pay $185 million to federal regulators and the Office of the Los Angeles, California, City Attorney to settle sales practice issues. The settlement revealed that Wells Fargo’s retail banking incentive structure had led to pervasive inappropriate sales practices. The fallout from revealing the sales practices deficiencies resulted in a hit to Wells Fargo’s customer loyalty measure, shown in the exhibit below. Although the metric has improved from its fourthquarter 2016 low, the latest announcement could add pressure. However, on the positive side, there has been no significant sign of client attrition, despite the negative effect on customer loyalty metrics.

Furthermore, any resulting regulatory investigations, lawsuits or political inquiries could add to the bank’s costs, particularly for litigation. In particular, we have previously noted that the high end of Wells Fargo’s range for reasonably possible potential litigation losses in excess of its established liability was $2.0 billion at the end of the first quarter, up from $1.8 billion at year-end 2016 and $1.3 billion at year-end 2015. On the bank’s second-quarter earnings call, before this announcement, management indicated the high end of this range could grow by another $1.3 billion. Although these potential litigation costs are manageable given Wells Fargo’s robust pre-tax earnings, this recent announcement adds to profitability challenges the bank continues to face.

ASIC reports on Australian bank audits following Wells Fargo misconduct

ASIC has outlined the results of audits conducted by eight banks in Australia following the regulatory action taken in the United States against Wells Fargo Bank, N.A. (Wells Fargo) in late 2016. Overall, the audits did not find evidence of systemic misconduct involving illegal opening of accounts as seen at Wells Fargo.

While not identifying systemic unlawful conduct, the results of the audits indicated that improvements should be made to the sale of consumer credit insurance (CCI), which is leading to further action announced today (refer: 17-255MR).

Conduct at Wells Fargo

In late 2016, Wells Fargo was fined US$100 million by United States regulators after it was found that its staff had systematically and unlawfully opened as many as two million customer accounts since 2011. Many customers incurred fees and other charges as a result.

The misconduct at Wells Fargo involved widespread secret opening of accounts by employees in order hit sales targets spurred by compensation incentives. In most cases, customers were completely unaware that the accounts had been opened.

Audits by Australian banks

Although ASIC did not have information to suggest that similar systemic misconduct had been occurring in Australia, in December 2016 ASIC required eight banks to audit their sales practices. The audits were designed to identify whether aggressive sales targets had driven bank staff to act illegally by issuing products without customer knowledge or consent.

ASIC required audits of:

  • ANZ
  • Bank of Queensland
  • Citibank
  • Commonwealth Bank
  • HSBC
  • NAB
  • Suncorp
  • Westpac

The audits examined processes in relation to three common consumer banking products: basic deposit products, credit cards and CCI from 2014 to 2016. The audits reviewed:

  • Account and product onboarding processes, with a focus on customer acknowledgement and account activation controls;
  • Details of the processes in place to proactively detect potential misconduct arising from sales incentives;
  • Analysis of complaints where customers claimed they had not applied for an account or product;
  • Details of internal reporting processes to ensure senior management had visibility of potential issues; and
  • Organisational whistleblower processes and protections.

All of the audits found that the systemic misconduct that occurred at Wells Fargo had not been occurring in the banks and that, overall, controls were adequate to prevent and identify misconduct.

However, while systemic illegal misconduct was not identified, the audits highlighted CCI as a standout product for customer complaints and at heightened risk for sale without proper informed customer consent. The audits also identified potential weaknesses in account opening and activation controls, record keeping, and change of address processes in relation to CCI. The banks have commenced enhancing their controls and processes in light of the audit findings.

ASIC Deputy Chair Peter Kell said the audits were an example of ASIC proactively responding to potential issues in the market: ‘These audits were all about ensuring that banks were not – intentionally or inadvertently – encouraging illegal sales practices by staff and that the banks have processes in place to identify unlawful selling of retail banking products,’ he said.

Following the audit findings, ASIC has announced today it will be working with the banking industry and consumer advocates to improve sales practices in relation to CCI, including the introduction of a deferred sales model for CCI sold with credit cards over the phone and in branches (refer: 17-255MR).

Changes to bank sales incentives

The Retail Banking Remuneration Review conducted by Mr Stephen Sedgwick AO (published on 19 April 2017) identified that some current sales incentives could promote behaviour that is inconsistent with customers’ interests. All banks involved in the review will be moving away from a primary sales-based reward structure for frontline staff to one that reduces conflicts of interest between staff and customers.

Mr Kell welcomed the banks’ move toward sales incentives based on customer experience: ‘Sales staff should be ensuring first and foremost that consumers understand what they’re purchasing and that what they buy meets their needs. ASIC supports sales processes and incentives that are consistent with these objectives.’

NAB Retail Will Align Staff Incentives To Customer Outcomes

NAB is changing the incentives program for its most senior branch and contact centre managers, to reward delivery of great customer outcomes, leadership, and performance.

More than 700 NAB Retail branch managers, assistant branch managers, and sales team leaders in consumer call centres will move from their existing incentive plan to NAB’s Group Short Term Incentive (STI) Plan.

This will take effect from 1 October 2017, well ahead of the 2020 deadline set by Stephen Sedgwick AO for bank remuneration reforms.

NAB Chief Customer Officer of Consumer Banking and Wealth, Andrew Hagger, said the change will see greater emphasis placed on customer outcomes, actions and behaviours, not just product sales, for staff incentives.

“Our branch managers are the respected and trusted face of our business in the community, and their priority is to deliver the best outcomes for customers,” Mr Hagger said.

“This change to our staff incentive program sends a very clear message: that the customer must be at the heart of everything we do, and that great leadership is both valued and rewarded.”

The NAB Group STI Plan has a sharp focus on deep understanding of customer needs, and also links incentives to an overall assessment against a range of factors, including risk management, conduct, and adherence to NAB values.

“We’ve heard the message from our customers and the community, and we’re taking action to make banking better for our customers,” Mr Hagger said.

The move of these employees to the Group STI Plan is consistent with final recommendations made by Stephen Sedgwick AO in April as part of the Australian Bankers’ Association’s Better Banking reform package, which aims to protect consumer interests, increase transparency and accountability, and build trust and confidence in the industry.

“This change is just one of many things we’re doing to ensure we are better serving our customers,” Mr Hagger said.

“Over the coming 12 months we will continue to review our practices – including things that influence our culture, such as performance plans, incentives, visual management, and team meeting structures – to ensure we are consistently delivering great customer outcomes,” Mr Hagger said.

NAB has already made a number of other changes to its employee remuneration structure, including:

  • In 2016, NAB moved away from performance-based, fixed pay increases for customer service and support staff. These staff receive a standard pay rise of 3% per year, under our 2016 NAB Enterprise Agreement;
  • All of our people have a balanced scorecard where demonstration of values is as important as performance metrics;
  • We have introduced higher standards for conduct and compliance; and
  • NAB was the first bank to commit to implementing the Sedgwick reforms and we aim to implement them well ahead of the 2020 deadline.

MyState refunds more than $230,000 of over-charged fees and interest

ASIC said MyState Bank Limited (MyState), a Tasmanian bank, has refunded more than $230,000 in over-charged interest and fees to more than 1,040 customers with mortgage offset accounts.

Following a customer complaint, and after a review of its accounts, MyState found that some customers:

  • Did not have their offset accounts linked to their mortgages – meaning that they were over-charged interest
  • Were charged ‘offset account’ fees after their loan had been discharged or changed to a kind that could not be linked to an offset account.

This was due to errors in MyState’s manual administration processes, including failures to link loans and offset accounts, and failures to deal with offset accounts when loans were switched or discharged.

The matter was reported to ASIC by MyState. MyState has worked with ASIC to refund customers and improve its internal processes, including by ensuring employees have appropriate account administration training.

“Banks need to ensure that their products are delivering the benefits that they are promoting,” ASIC Deputy Chair Peter Kell said.

“This is another example of a single customer complaint revealing a systemic issue, and we are pleased that MyState has taken the appropriate action in response.”

MyState has contacted customers who are eligible for a refund. Customers who have questions about their accounts should contact MyState on: 138 001.

Background

MyState is a wholly owned subsidiary of MyState Limited, a national diversified financial services group headquartered in Tasmania.

The breach was detected when a customer enquired about their accounts being linked. MyState conducted a review of accounts set up in a similar manner. MyState found customers with loans and unlinked offset accounts, customers with offset accounts but no loans, and customers with offset accounts together with ineligible loan products.

The BEAR Roars!

The Government has released the Banking Executive Accountability Regime (BEAR) Consultation Paper for comment. We now get to see how these measures may be implemented, and it is the consequence of a significant “fail” across the industry in terms of appropriate behaviour over many years, especially given the special yet unequal place financial services companies have in the economy.

Of course, the question is – will these measures help tackle the cultural shortcomings endemic to the sector?

In the 2017-18 Budget the Government brought forward a comprehensive package of reforms to strengthen accountability and competition in the banking system. As part of this package, the Government announced that it will legislate to introduce a new Banking Executive Accountability Regime (BEAR).

The intention of the BEAR is to enhance the responsibility and accountability of ADIs and their directors and senior executives. The BEAR will provide greater clarity regarding their responsibilities and impose on them heightened expectations of behaviour in line with community expectations.

Where these expectations are not met, APRA will be empowered to more easily remove or disqualify individuals, ensure ADIs’ remuneration policies result in financial consequences for individuals, and impose substantial fines on ADIs. ADIs will be required to register individuals with APRA before appointing them as senior executives and directors.

The Government is now releasing this consultation paper, which outlines the key features of the BEAR and the proposed approach for implementation.

All interested parties are encouraged to make a submission by 3 August 2017.

Here are the main points.

All ADI’s are included.

ADIs are in scope of the BEAR due to the critical role they play in the economy and in response to community concern regarding recent poor behaviour. It is imperative that they maintain the trust of financial sector participants and depositors in particular.

The scope of the BEAR is also intended to include all entities within a group with an ADI parent. This will include subsidiaries of ADIs, including those that provide non-banking services and those that are foreign subsidiaries. Where an ADI exists within a group with a non-ADI or overseas parent company, the scope of the BEAR is intended to apply only to the subgroup of entities for which the ADI is the parent.

Senior Management and Board are included.

An objective in defining accountable persons for the purpose of the BEAR is to provide greater clarity in relation to the responsibilities of the most senior individuals within an ADI. The BEAR should make it easier to hold senior individuals to account for their behaviour in carrying out their responsibilities.

The net should not be cast so wide that responsibility can be deflected and accountability avoided. The risk is that if everybody is responsible, nobody will be accountable. On the other hand, the definition of accountable persons should not be cast too narrowly so as to exclude individuals with effective responsibility for management and control.

The definition of accountable persons is intended to clearly identify the most senior directors and executives who will be held to a heightened standard of responsibility and accountability. It is intended to build on, rather than replace, existing concepts of responsibility and accountability, such as definitions of ‘responsible persons’, ‘directors’ and ‘senior managers’ under APRA’s Fit and Proper framework.

Specific Behaviour Expectations Are Defined.

The new expectations are intended to identify a heightened standard of conduct or behaviour rather than replacing existing concepts such as contained in APRA’s Fit and Proper framework.

The BEAR will apply where there is poor conduct or behaviour that is of a systemic and prudential nature.

ASIC will remain responsible in its role as conduct regulator.
One potential approach in identifying the new expectations for ADI groups and accountable persons is to draw upon the expectations of behaviour contained in the SMR and the Fundamental Rules in the United Kingdom, as outlined in Appendix A, but keeping the focus on systemic and prudential matters.

Using this approach, an ADI would be expected to:
• conduct its business with integrity;
• conduct its business with due skill, care and diligence;
• deal with APRA in an open and cooperative way; and
• take reasonable steps to:
– act in a prudent manner, including by meeting all of the requirements of APRA’s prudential standards, and maintaining a culture which supports adherence to the letter and spirit of these standards;
– organise and control its affairs responsibly and effectively; and
– ensure that these expectations and accountabilities of the BEAR are applied and met throughout the group or subgroup of which the ADI is parent.

An accountable person would be expected to:
• act with integrity, due skill, care and diligence and be open and co-operative with APRA; and
• take reasonable steps to ensure that:
– the activities or business of the ADI for which they are responsible are controlled effectively;
– the activities or business of the ADI for which they are responsible comply with relevant regulatory requirements and standards;
– any delegations of responsibilities are to an appropriate person and those delegated responsibilities are discharged effectively; and
– these expectations and accountabilities of the BEAR are applied and met in the activities or business of the ADI group or subgroup for which they are responsible.

Includes Variable Remuneration Deferment.

In the 2017-18 Budget, the Government announced that:
• a minimum of 40 per cent of an ADI executive’s variable remuneration — and 60 per cent for certain ADI executives such as the CEO — will be deferred for a minimum period of four years; and
• APRA will have stronger powers to require ADIs to review and adjust remuneration policies when APRA believes these policies are producing inappropriate outcomes.

Remuneration policy should be aligned with sound and effective risk management and should not incentivise a short-term focus or excessive risk-taking. Deferring variable remuneration is aimed at providing an appropriate period of time for risks to crystallise and for variable remuneration to be adjusted downwards as a result. The intention is to better align the realisation of risk with reward.

Accountable Persons to be Registered.

ADIs will be required to register accountable persons with APRA. This mechanism will operate by requiring ADIs, prior to appointing an individual as an accountable person, to advise APRA of the potential appointment and provide APRA with information regarding the candidate’s suitability.

Upon notification, APRA would consult its register of accountable persons and advise the ADI if the candidate has previously been removed or disqualified by APRA, or if APRA is aware of any other issues that that could affect the candidate’s suitability for the role. It is not intended that ADIs be able to consult the register themselves. In order to ensure that the register is internal to APRA it may be necessary to provide exceptions from information law regimes, such as the Freedom of Information Act and the Privacy Act.

From The Introduction.

In recent years, there has been growing community concern regarding a number of examples of poor culture and behaviour in banks and the financial sector generally. There have been too many instances where participants have been treated inappropriately by banks and related financial institutions.

The House of Representatives Standing Committee on Economics Review of the four major banks (the Coleman Report) found that no individuals have had their employment terminated as a result of recent scandals, noting that:

‘The major banks have a ‘poor compliance culture’ and have repeatedly failed to protect the interests of consumers. This is a culture that senior executives have created. It is a culture that they need to be accountable for.’

The Australian financial system is the backbone of the economy and plays an essential role in promoting economic growth. In order for it to operate in an efficient, stable and fair way, it is imperative that participants have trust in the system. It must operate at the highest standards and meet the needs and expectations of Australian consumers and businesses.

Participants need to be confident that financial firms will balance risk and reward appropriately and serve their interests. As the Financial System Inquiry noted:

‘Without a culture supporting appropriate risk taking and the fair treatment of consumers, financial firms will continue to fall short of community expectations.’

Banks, as authorised deposit-taking institutions (ADIs), play a critical role in the financial system, including through their deposit-taking, payments and lending activities. ADIs enjoy a privileged position of trust, with prudential regulation designed to provide consumers with confidence in the safety of their deposits.

In the 2017-18 Budget the Government brought forward a comprehensive package of reforms to address the recommendations of the Coleman Report and strengthen accountability and competition in the banking system. As part of this package, the Government announced that it will legislate to introduce a new Banking Executive Accountability Regime (the BEAR).

NAB makes corrective disclosure to customers about relationships within its wealth management business

An ASIC investigation of a number of advice licensees within the National Australia Bank Group (NAB Group), for failing to disclose relationships between advisers, advice licensees, and other members of the NAB Group that issue investment products, has resulted in corrective disclosure being made to customers.

The non-disclosure occurred when customers were advised to acquire products issued by NAB Group-related firms, including MLC-branded products. Customers were provided with Statements of Advice (SoAs) and Financial Services Guides (FSGs) by their financial advisers that did not fully disclose the connection between each customer’s adviser, the advice licensee, and recommended investments.

Disclosing associations or relationships between advisers, employers, authorising licensees and issuers of financial products to customers in FSGs and SoAs is required under the Corporations Act.

At least 150,000 customers received deficient disclosure either in SoAs or FSGs in relation to MLC-branded products and boutique investment manager products.

The defective disclosure occurred following a failure to update template documents due to a process error.

The licensees investigated by ASIC were:

  • National Australia Bank Limited;
  • Godfrey Pembroke Limited;
  • Apogee Financial Planning Limited;
  • GWM Adviser Services Limited;
  • Meritum Financial Group Pty Ltd; and
  • JBWere Limited.

Following discussions between ASIC and the NAB Group, customers who invested in MLC-branded products will receive corrective disclosure when they log in to their accounts on the MLC website for a three month period. NAB has also agreed to write to the remainder of affected customers currently invested in related products, explicitly acknowledging the issue and providing corrective disclosure.

Customers with further concerns can contact NAB’s dedicated hotline on 1800 035 687.

ASIC’s Deputy Chairman Peter Kell said, ‘This investigation is a result of ASIC’s priority of improving compliance and disclosure standards in vertically integrated financial services licensees.’

ASIC acknowledges the cooperation of NAB in this matter.

Background

This outcome is a result of ASIC’s Wealth Management Project.

The Wealth Management Project was established in October 2014 with the objective of lifting standards by major financial advice providers. The Wealth Management Project focuses on the conduct of the largest financial advice firms (NAB, Westpac, CBA, ANZ, Macquarie and AMP).

ASIC’s work in the Wealth Management Project covers a number of areas including:

  • working with the largest financial advice firms to address the identification and remediation of non-compliant advice; and
  • seeking regulatory outcomes, where appropriate, against licensees and advisers.

Big four bank satisfaction well behind mutuals

From Investor Daily.

Smaller banks continue to be significantly ahead of the big four banks when it comes to overall customer satisfaction, according to Roy Morgan.

Australia’s four largest banks are “well behind the smaller banks” when it comes to the proportion of ‘very satisfied’ customers, the company said.

Teachers Mutual Bank and Greater Bank had the highest number of ‘very satisfied’ customers, Roy Morgan found, with 62.3 per cent of Teachers Mutual Bank customers and 58.8 per cent of Greater Bank customers falling in to this category.

The big four banks on the other hand have only around a third of their customers feeling ‘very satisfied’, led by the Commonwealth Bank with 33.5 per cent of customers selecting this option.

Overall, general satisfaction with the big four banks has increased marginally in the six months to May 2017, climbing up 0.1 of a percentage point to 80.2 per cent, which Roy Morgan attributed to improvement in satisfaction among the banks’ home loan customers.

“Satisfaction among home-loan customers of the big four continues to be below that of their other customers, but over the last year they have narrowed the gap marginally,” the company said.

“The small overall improvement in satisfaction from last month was the result of minor gains among both home-loan and non-home loan customers.”