ASIC releases report on debt management firms

ASIC today released a research report that aims to better understand the debt management industry in Australia and the consumer experience in using debt management firms. Debt management firms promise to help consumers in financial hardship or with listings of payment defaults on their credit reports.

The report, Paying to get out of debt or clear your record: the promise of debt management firms (REP 465), was commissioned by ASIC’s Consumer Advisory Panel (CAP).

The research involved two phases:

  • a qualitative analysis and mystery shop of debt management firms by BIS Shrapnel Pty Ltd; and
  • a survey on the involvement of debt management firms acting for consumers in Ombudsman schemes covering the financial services, telecommunications and energy and water sectors.

Findings – qualitative analysis and mystery shop:

  • fees and costs were opaque making it difficult for consumers, often in significant financial hardship, to assess the cost relative to the purported value;
  • fees were often ‘front loaded’ – that is, fees were payable before services were provided thereby increasing consumer commitment through sunk costs;
  • some sales techniques create a high-pressure sales environment;
  • little information was given about important risks and some firms had a poor understanding of the relevant law and the consequences of particular strategies which may lead to unsuitable services for consumers.

Findings – Ombudsman survey data and analysis:

  • a growing number of firms are representing consumers at external dispute resolution (EDR)—this is concentrated among a few large players, with an increasing number of  small firms entering the market;
  • the disputes brought to EDR schemes by debt management firms relate almost exclusively to arguments about the removal of default listings on consumer credit reports (despite the breadth of other issues that can arise for indebted consumers);
  • while an increasing number of consumers are being represented at EDR by debt management firms, this is not leading to more credit reporting related disputes being found in favour of consumers.

‘Where consumers go to debt management firms, it is important they understand what they are getting and how much it will cost, so they can decide if it’s worth it,’ said ASIC Deputy Chairman Peter Kell.

‘The promise is always more prominent than the price”, he said.  “It is hard to find information about fees and they tend to be high, front loaded, and not refunded if the promise isn’t delivered.

‘It’s also important for consumers to understand that they have alternatives to the use of such firms that may be free of charge, such as financial counselling services.

‘Many stakeholders have raised concerns with ASIC and other regulators about potential harms posed by firms that may provide unsuitable services, act in ways not in the best interests of clients, or at worst, engage in predatory conduct leaving the consumer worse off,’ Mr Kell said.


Debt management firms promise to help consumers in financial hardship or with listings of payment defaults on their credit reports by:

  • ‘cleaning’, ‘fixing’ ‘repairing’, ‘removing’ or ‘washing’ away default listings on credit reports
  • developing and managing budgets
  • negotiating with creditors, including lenders, telecommunications companies , utilities companies or debt collectors
  • advising and arranging formal debt agreements under Part IX of the Bankruptcy Act, 1966.

While the models are diverse, many debt management firms operate one-stop-shop models offering a combination of some or all of the above services.

The debt management industry has grown despite the fact that  consumers can freely access:

  • their credit report and challenge an incorrect listing at no cost;
  • help from financial counsellors or community legal services;
  • independent ombudsman schemes to help resolve disputes with lenders, telcos and utilities providers.

This suggests that there is a lack of consumer awareness about the potential benefits of alternatives to debt management firms.

There is no uniform regulatory framework for debt management firms and barriers to entry are low or non-existent. Consumers in financial hardship can be extremely vulnerable and behavioural research shows that financial stress can materially affect people’s ability to make good decisions.

Case studies

The report includes case studies, which demonstrate that some consumers experience poor outcomes.

Westpac pays $1 million following ASIC’s concerns about credit card limit increase practices

ASIC has announced that Westpac has improved its lending practices when providing credit card limit increases to customers. Westpac has also committed to a remediation program that includes proactive customer refunds, and a contribution of $1 million over four years to support financial counselling and literacy.

ASIC was concerned that Westpac failed to make reasonable inquiries about some consumers’ income and employment status before increasing their credit card limit. In particular, ASIC was concerned that Westpac, in relying largely on its automated processes, was not making reasonable inquiries of individual cardholders, which is not consistent with the responsible lending obligations under by the National Consumer Credit Protection Act 2009 (the National Credit Act).

Westpac has committed to a number of steps to address ASIC’s concerns including:

  • Changing its credit limit increase processes to ensure that, at a minimum, reasonable inquiries are made about a customer’s income and employment status to ascertain their financial situation before the limit is increased.
  • A remediation program involving a review of credit limit increases previously provided where a cardholder experiences financial difficulty, with consumer refunds paid where appropriate.
  • Engaging an independent external expert to provide assurance of the effectiveness of the remediation program.

Westpac will also make a $1 million payment to support financial counselling and financial literacy initiatives.

Michael Saadat, Senior Executive Leader of Deposit Takers, Credit and Insurers said, ‘Credit card issuers, like all consumer credit providers, have to meet obligations under responsible lending laws.’

‘ASIC maintains an ongoing focus on compliance with these laws. Where we see non-compliance, we will take action, including taking steps to ensure affected consumers are appropriately remediated.’

ASIC acknowledges the co-operation of Westpac in resolving this issue, including suspending its sending of credit limit increase invitations until ASIC’s concerns were resolved and Westpac’s processes improved.

Bank of England proposes tougher rules on bonus buy-outs

More on banking culture. The Bank of England is proposing to strengthen the remuneration requirements on buy-outs of variable remuneration. These proposals represent an important addition to the current remuneration rules which seek to ensure greater alignment between risk and reward, discourage excessive risk-taking and short-termism and encourage more effective risk management.

The Bank of England has previously sought views on a number of options for addressing the issue of buy-outs, in which a firm compensates a new employee for any unpaid remuneration that is cancelled when they leave their previous firm. The proposed changes to the Remuneration Part of the PRA Rulebook will apply to all material risk takers (MRTs) at PRA-regulated banks, building societies and designated investment firms. However, in accordance with the PRA’s existing approach to proportionality, these rules would not need to be applied to firms which fall within level three of the proportionality framework.

The practice of buy-outs has the potential to undermine the effectiveness of the current remuneration rules. When a new employer buys-out an employee’s cancelled bonus, the individual becomes insulated against the possibility of their awards being subject to ex-post risk adjustments through the application of either malus (the withholding or reduction of unpaid awards) or clawback (the recouping of paid awards). Through the practice of buy-outs, individuals can therefore effectively evade accountability for their actions.

Today’s proposals intend to ensure the practice of buy-outs does not undermine the intention of the current rules on clawback and malus or allow employees to avoid the proper consequences of their actions.

The Bank of England proposes that buy-outs should be managed through the contract between the new employer and employee. The employment contract would allow for malus or clawback to be applied should the old employer determine that the employee was guilty of misconduct or risk management failings. The proposed rules would also allow new employers to apply for a waiver if they believe the determination was manifestly unfair or unreasonable.

Andrew Bailey, Deputy Governor for Prudential Regulation and CEO of the Prudential Regulation Authority said:

“Having the right incentives is a crucial part of an effective accountability regime. Remuneration policies which lead to risk-reward imbalances, short termism and excessive risk taking undermine confidence in the financial sector. Individuals should be held accountable for their actions and not be able to actively evade the consequences of their actions. Today’s proposals seek to ensure that individuals are not rewarded for bad practice or wrong-doing and should help to encourage a culture within firms where reward better reflects the risks being taken.”

Should Banks Be Able To Create Money?

Banks today have the power to extend their reach by multiplying the value of loans against deposits and shareholder capital held. Indeed, all the recent regulatory work has been to try and lift the capital ratios, to protect the financial system and to try to ensure in event of failure, tax payers are be protected. We have highlighted how highly leveraged the main Australian Banks are. And this morning we discussed the risks associated with a credit boom.

Last year the Bank of England suggested that banks have the capacity to create UNLIMITED amounts of credit, in fact creating money, unrelated to deposits.

In this light, a working paper from the IMF in 2012 (note this is a research document, not the views of the IMF), “The Chicago Plan Revisited“, is worth reading.

The decade following the onset of the Great Depression was a time of great intellectual ferment in economics, as the leading thinkers of the time tried to understand the apparent failures of the existing economic system. This intellectual struggle extended to many domains, but arguably the most important was the field of monetary economics, given the key roles of private bank behavior and of central bank policies in triggering and prolonging the crisis.

During this time a large number of leading U.S. macroeconomists supported a fundamental proposal for monetary reform that later became known as the Chicago Plan, after its strongest proponent, professor Henry Simons of the University of Chicago. It was also supported, and brilliantly summarized, by Irving Fisher of Yale University, in Fisher (1936). The key feature of this plan was that it called for the separation of the monetary and credit functions of the banking system, first by requiring 100% backing of deposits by government-issued money, and second by ensuring that the financing of new bank credit can only take place through earnings that have been retained in the form of government-issued money, or through the borrowing of existing government-issued money from non-banks, but not through the creation of new deposits, ex nihilo, by banks.

Fisher (1936) claimed four major advantages for this plan. First, preventing banks from creating their own funds during credit booms, and then destroying these funds during subsequent contractions, would allow for a much better control of credit cycles, which were perceived to be the major source of business cycle fluctuations. Second, 100% reserve backing would completely eliminate bank runs. Third, allowing the government to issue money directly at zero interest, rather than borrowing that same money from banks at interest, would lead to a reduction in the interest burden on government finances and to a dramatic reduction of (net) government debt, given that irredeemable government-issued money represents equity in the commonwealth rather than debt. Fourth, given that money creation would no longer require the simultaneous creation of mostly private debts on bank balance sheets, the economy could see a dramatic reduction not only of government debt but also of private debt levels.

We take it as self-evident that if these claims can be verified, the Chicago Plan would indeed represent a highly desirable policy. Profound thinkers like Fisher, and many of his most illustrious peers, based their insights on historical experience and common sense, and were hardly deterred by the fact that they might not have had complete economic models that could formally derive the welfare gains of avoiding credit-driven boom-bust cycles, bank runs, and high debt levels. We do in fact believe that this made them better, not worse, thinkers about issues of the greatest importance for the common good. But we can say more than this. The recent empirical evidence of Reinhart and Rogoff (2009) documents the high costs of boom-bust credit cycles and bank runs throughout history. And the recent empirical evidence of Schularick and Taylor (2012) is supportive of Fisher’s view that high debt levels are a very important predictor of major crises. The latter finding is also consistent with the theoretical work of Kumhof and Rancière (2010), who show how very high debt levels, such as those observed just prior to the Great Depression and the Great Recession, can lead to a higher probability of financial and real crises.

But this is more than a theoretical discussion, because Switzerland will hold a referendum to decide whether to ban commercial banks from creating money, after more than 110,000 people signed a petition calling for the central bank to be given sole power to create money in the financial system. Its been led by the Swiss Sovereign Money movement – known as the Vollgeld initiative – and is designed to limit financial speculation by requiring private banks to hold 100% reserves against their deposits.

“Banks won’t be able to create money for themselves any more, they’ll only be able to lend money that they have from savers or other banks,” said the campaign group.

If successful, the sovereign money bill would give the Swiss National Bank a monopoly on physical and electronic money creation, “while the decision concerning how new money is introduced into the economy would reside with the government,” says Vollgeld.

In the aftermath of the 2008 financial crisis, Iceland commissioned a report “Monetary Reform – A better monetary system for Iceland” which was  published in 2015, and suggests that money creation is too important to be left to bankers alone.

Consider the impact if banks had to back loans with deposits. Credit would be expensive, and hard to get. Depositors would be better rewarded, and eventually households would deleverage, whilst property prices normalised.  It might just reverse the “financialisation” of society. If it happened, banks would be very different beasts.

Financialisation is a term sometimes used in discussions of the financial capitalism that has developed over the decades between 1980 and 2010, in which financial leverage tended to override capital (equity), and financial markets tended to dominate over the traditional industrial economy and agricultural economics.

UK’s Financial Conduct Authority’s review of banking culture is scrapped

The City regulator, the Financial Conduct Authority (FCA), has shelved plans for an inquiry into the culture, pay and behaviour of staff in banking.

The FCA had planned to look at whether pay, promotion or other incentives had contributed to scandals involving banks in the UK and abroad.

The FCA said it had decided instead to “engage individually with firms to encourage their delivery of cultural change” according to UK reports.

The move means the watchdog’s so-called “banker bashing” review has effectively ended after only a few months.

The decision comes after the FCA’s chief executive, Martin Wheatley, announced in July his decision to quit the post when the Chancellor George Osborne refused to renew his contract, which was due to end in March next year.

In a statement the FCA said: “A focus on the culture in financial services firms remains a priority for the FCA.

“There is currently extensive on-going work in this area within firms and externally.

“We have decided that the best way to support these efforts is to engage individually with firms to encourage their delivery of cultural change as well as supporting the other initiatives outside the FCA.”

Earlier this year, the FCA told banks to sharpen up their efforts to learn lessons from scandals such as foreign exchange and Libor rate-rigging, which have already cost them billions of pounds in fines.

The body said companies’ progress in making improvements as part of the review – designed to examine and compare behaviour within the banking sector, including staff pay and complaints procedures – was initially disappointing and improvements “had been uneven” across the industry.

They also often lacked the urgency required given the severity of recent failings, the watchdog said.

But it also said “some progress had been made on improving oversight and controls and benchmarks” following the scandals involving the benchmark rates in Libor – the interbank lending rate – as well as in foreign exchange and gold markets.

A number of banks have already signalled that changes are being made to their operations.

Conservative Mark Garnier, who sits on the Treasury select committee, suggested Chancellor George Osborne may have been behind the move.

“I am disappointed about it. It remains to be seen whether this is a cancellation or a delay but I fear it probably is a cancellation,” he told BBC Radio 4’s Today programme.

Mr Garnier said there was a “difficult balance” between a strong regulatory regime and “over doing it”.

He added: “There has always been this great argument that perhaps the Treasury is having more influence over the regulator than perhaps it ought to and certainly if I was looking for a Machiavellian plot behind what’s happened here and the tone of the regulator then I suppose I would start looking at the Treasury.

“But I equally think that the regulator has a very, very difficult job to do, which is striking the balance between looking after the people who are its members, the financial institutions, and the consumer.

“And it has certainly been widely talked about that the Treasury thought the regulator was over doing it in favour of the consumer and, certainly from my point of view on the Treasury select committee, I thought otherwise.”

Banking Regulation – Why focus on culture?

Remarks by Mr Alberto G Musalem, EVP of the Integrated Policy Analysis Group of the Federal Reserve Bank of New York, highlight why cultural reform in financial services is important. He argues: First, cultural problems are the industry’s responsibility to solve. Second, a bank’s implicit norms-especially those reinforced through incentives-must align with the public purpose of banking. Third, the reform of bank culture should aim to restore trust.

The New York Fed has, for the last two years, been part of an international dialogue on the reform of culture in the financial services industry. Why culture? Let’s begin with the following hypothesis: environment drives conduct. What each of us learned from our parents governs some of our behavior, but not nearly as much as any of us who are parents would like to believe. Place ordinary people in a bad environment, and bad things tend to happen. That said, place someone in a good environment, and good things tend to happen. This is just part of being human. We observe and adapt.

Before continuing, I would like to clarify that the views I express today are my own and may not reflect the views of the Federal Reserve Bank of New York or the Federal Reserve System.

Part of any organization’s environment is its culture. Some have labored over a precise definition of the word “culture.” Bill Dudley, the President of the New York Fed, has offered the following description, which works for me: “Culture relates to the implicit norms that guide behavior in the absence of regulations or compliance rules – and sometimes despite those explicit restraints. Culture exists within every firm whether it is recognized or ignored, whether it is nurtured or neglected, and whether it is embraced or disavowed.”1

The New York Fed’s interest in reforming culture is a product of events since the Financial Crisis. Take, for example, the manipulation of LIBOR and foreign exchange rates, much of which was collusive. Each of those episodes involved misconduct affecting wholesale markets on which the real economy relies. Both cases shared an underlying, flawed outlook. Bankers failed to see beyond their immediate financial goals. They ignored the broader social consequences of their decisions on the firm and its customers, as well as on consumers, producers, savers and investors. The same flawed outlook may have contributed to the Financial Crisis.

There are many more examples. One bank was fined for doing business with Sudan despite economic sanctions imposed for engaging in genocide. Another bank manipulated electricity markets in California and Michigan. Other banks helped U.S. citizens evade taxes. I will not review the full litany. Notably, none of these recent episodes had anything to do with capital levels or liquidity ratios. The many post-Crisis reforms to bank balance sheets – including the Dodd-Frank Act and new standards developed by the Basel Committee on Bank Supervision and the Financial Stability Board-provided necessary bulwarks against systemic risks. Capital and liquidity requirements, and the enhanced testing surrounding them, have made banks and the financial system more resilient to stress. But those new laws, regulations, and standards have done little to curb banker misconduct. Each post-Crisis episode demonstrates a narrow cultural focus on short-term gain and disregard of broader social consequences.

Last year the New York Fed challenged the industry to consider many factors that have contributed to recent, widespread misconduct. There are no simple answers and that discussion is continuing. This year, by contrast, our focus has been more on solutions-what’s working, and what is not. In both years, we have offered three messages to the industry.

First, cultural problems are the industry’s responsibility to solve. The official sector can monitor progress and deliver feedback and recommendations. In fact, many individual supervisory findings are often symptoms of deeper cultural issues at a firm. But the banks themselves must actively reform and manage their cultures.

Second, a bank’s implicit norms-especially those reinforced through incentives-must align with the public purpose of banking. Gerald Corrigan, more than three decades ago, presented a theory of banking based on the principle of reciprocity. Banks receive operating benefits unavailable to other industries because they provide important services to the public. For example, financial intermediation is enhanced through deposit insurance and access to the discount window. Public benefits, though, are not a gift. They are part of a quid pro quo. In exchange for receiving valuable operating benefits, a bank’s implicit codes of conduct-that is, its culture-must reflect the public dimension of the services that banks provide.

Third, the reform of bank culture should aim to restore trust. The bedrock of the financial system is trust and the word credit derives from the Latin notion of believing or trusting. We saw seven years ago that the public’s trust is critical in a crisis. The repair of the financial system would not have been possible without public support. If another crisis were to happen tomorrow, would there be that support?

A lack of trust-or, more accurately, low trustworthiness-also imposes day-to-day costs.8 For starters, there are fines. Then there are the legal costs in investigating allegations and defending lawsuits. Internal monitoring also becomes more expensive as rules become more extensive. Some might say that the proliferation of rules since the Financial Crisis is inversely proportional to a decline in the industry’s perceived trustworthiness. The choice between rules and standards depends on the trustworthiness of the regulated. A more flexible, standards-based legal regime requires a degree of trustworthiness that, in recent years, banks have not demonstrated.

Those are the measurable costs of low trustworthiness. There may be other, longer-term costs that are more difficult to price. Let me raise just two. If employees perceive a firm as untrustworthy or disloyal, will they choose to work in that firm? And, if they do, how will they behave toward the firm and its stakeholders?

I am encouraged that the industry seems to understand the importance of reforming its culture. Consider for a moment the following data points. In September 2013, shareholders of a major U.S. bank requested that the bank prepare “a full report on what the bank has done to end [its] unethical activities, to rebuild [its] credibility and provide new strong, effective checks and balances within the [b]ank.” That request was forwarded, by the way, by a Catholic nun. The bank responded through its attorneys that the nun’s proposal was “materially false and misleading” and “impermissibly vague and indefinite.” Fast forward to May 2015. The Federal Advisory Council-a panel of bankers that advises the Federal Reserve System-reported that “Regulators and the banking industry have worked extensively to restore financial stability through a series of mechanisms and rules that establish appropriate levels of capital, liquidity, and leverage. . . . As often as not, however, the challenges faced in recent years have been behavioral and cultural; post-crisis episodes such as LIBOR and foreign exchange manipulation provide hard evidence that there remains work to be done.” This is clearly an encouraging difference in perspectives.

The public sector, too, has paid increasing attention to culture. The Group of Thirty, the Basel Committee, the European Systemic Risk Board, and the Financial Stability Board have issued papers on culture, governance, and misconduct risk. The Fair and Effective Markets Review-a joint project of the Bank of England, the Financial Conduct Authority, and Her Majesty’s Treasury-has called for heightened standards for market practice in matters affecting the public good. And in the last year, we have seen emerging approaches to supervision that aim to address culture, conduct, and governance. In particular, the central bank of the Netherlands-De Nederlandsche Bank-has pioneered new techniques for the supervision of corporate governance, especially for assessing the group dynamics of boards and senior management.

Culture also features prominently in criminal enforcement. The U.S. Department of Justice requires its prosecutors to determine “the pervasiveness of wrongdoing” at a corporation before seeking an indictment. According to its prosecutors’ manual, “[T]he most important [factor in making this determination] is the role and conduct of management. Although acts of even low-level employees may result in criminal liability, a corporation is directed by its management and management is responsible for a corporate culture in which criminal conduct is either discouraged or tacitly encouraged.” Individuals, including senior managers, also face criminal liability for their conduct. Recent guidance from the U.S. Department of Justice places greater emphasis on individual culpability. And the recent convictions of two traders for rigging LIBOR, one of whom served as the Global Head of Liquidity and Finance at a major bank, may send a powerful message to bankers about the consequences of their misconduct.

The new acceptance of culture as an important area of focus was evident at a workshop that the Federal Reserve Bank of New York hosted on November 5. Christine Lagarde, Managing Director of the International Monetary Fund, and Stanley Fischer, Vice Chairman of the Board of Governors of the Federal Reserve System, headlined a contingent of over 20 public sector authorities from around the globe. They were joined by the CEOs, senior executives, and board members of global financial institutions. Together, they discussed methods of reforming culture and the continuing challenges in this effort. In my view, the workshop offered a number of useful insights, chiefly:

  • Culture is a soft concept that is hard to measure, and perhaps harder to manage and sustain. But it is as important as capital and liquidity, and should receive continuous and persistent attention.
  • A bank’s culture must be consistent with public expectations and promote behavior that considers the firm’s many stakeholders, including the public. Also, a positive, constructive culture can be an important pillar aligned with the execution of a firm’s business strategy.
  • Culture cannot be set by fiat. Leadership is indispensable, and requires more than a “tone from the top.” Managers of all levels must take action to promote a greater sense of personal responsibility and stewardship among employees. The next generation of financial leaders will reflect the expectations of leaders today.
  • Despite firm-wide statements about values and codes of conduct, banks may have several dissonant sub-cultures. “Silos” or “tribes” as they are sometimes called, appear in most if not all of the episodes I described earlier. By sharing best practices across the industry, firms might identify common warning signs of problems within sub-cultures and behaviors that are incompatible with the firm’s values.
  • Diversity of thought and background are valuable cultural assets because they generate better questions and decisions, contributing to effective challenge. A diversity of views, though, must be complemented by a sense of common purpose. Certain basic principles-fair treatment of customers and employees, for example-cannot be open to debate.

The Federal Reserve Bank of New York recently launched a webpage that collects resources on bank culture. We’ve included the papers by the Group of Thirty and other organizations that I have mentioned, and summaries of our two workshops on culture. I hope you’ll take a look.

To conclude, the Financial Crisis and subsequent scandals revealed deep and continuing flaws in the culture of banking. The responsibility to address these flaws rests with the banks themselves. Many industry leaders have initiated reform programs within their firms. It is important to keep the momentum going. Reform requires relentless and sustained effort: from the top of an institution to its most junior employees, and across all of the institution’s business activities. Reform must include the full scope of an employee’s career, beginning with recruiting and continuing with annual performance management, compensation and promotion decisions. We in the official sector will be looking to the industry to fulfill its end of the bargain-to act consistent with the public well-being, to value long-term stability over short-term gain, and to take account of all stakeholders in making decisions.

Commonwealth Bank to refund $80 million after failing to apply benefits

ASIC says Commonwealth Bank of Australia (CBA) will refund approximately $80 million to around 216,000 Wealth Package customers as compensation for failing to apply fee waivers, interest concessions and other benefits since 2008. The refund payments include an additional amount of interest to recognise the time elapsed since the relevant benefit was not applied. CBA reported this matter to ASIC under its breach reporting obligations in the Corporations Act.

For an annual fee, the Wealth Package (for some customers described as ‘Mortgage Advantage Package’)  offered benefits such as interest rate discounts and fee waivers in relation to a range of products including home loans, credit cards, transaction accounts, personal loans, overdrafts and insurance.

CBA relied on staff to manually apply many of the discounts available under the Wealth Package. Investigations revealed that an exception reports, which was designed to detect when the discounts were not properly applied, was not working properly.

CBA discovered the breach following a customer complaint and reported it to ASIC in 2014. CBA committed to fully investigate  the cause of the breach and the impact on all eligible Wealth Package holders. CBA also engaged Ernst & Young, an independent firm, to review and provide recommendations to improve controls, ensure its remediation process would identify all those affected, and ensure an accurate calculation of refunds.

ASIC Deputy Chairman Peter Kell said, ‘This was a significant breach, and shows how important it is for licensees to have robust systems in place to ensure financial products deliver the benefits that consumers have paid for.’

‘Manual processes to apply discounts, waivers and other concessions involve inherent compliance risks. Licensees should carefully consider whether those risks are being appropriately managed, or are capable of being appropriately managed’ Mr Kell said.

CBA has simplified the Wealth Package by reducing the number of options and products on offer. These changes have not removed benefits that existing package holders were entitled to receive for existing eligible products.

Consumer leasing company to pay $1.25 million in penalties

According to ASIC, the Federal Court has awarded penalties totalling $1.25 million against consumer leasing company Make It Mine Finance Pty Ltd ACN 130 102 411 (Make It Mine) for breaching consumer credit laws, including its responsible lending obligations.

The Court handed down the penalty  following its 28 April 2015 decision that Make It Mine failed to disclose important information to its customers, breached various responsible lending obligations and operated for a period whilst unlicensed (refer: 15-093MR).

His Honour Justice Beach made reference to the strong public interest in imposing penalties to deter other operators who fail to comply, stating that: ‘The consumer lease industry is growing… The undesirable practices of operators in consumer leasing and, by analogy, credit contracts for purchase by instalments, are a matter of significant public interest and importance, and are capable of serious adverse impacts on the most vulnerable members of the Australian community.’

His Honour was clear in conveying a message that businesses dealing with vulnerable consumers must take considerable care in complying with and implementing statutory safeguards designed for the protection of those consumers. In particular, ‘Commercial behaviour leveraged off the vulnerability of others will be closely scrutinised and disciplined’ where businesses fail to comply with the legislation.

The decision demonstrates that tough penalties will be imposed on credit licensees who fail to comply with their obligations under the National Credit Act, including responsible lending obligations.

ASIC Deputy Chair Peter Kell said, ‘As ASIC found in its report on the consumer lease industry issued in September 2015, the market for consumer leases is delivering poor outcomes for many consumers.’

‘Particularly given the very high cost of leases which are often taken out by vulnerable consumers, it is imperative that consumer lease providers disclose all information necessary to enable consumers to make an informed decision, and comply fully with their responsible lending obligations, including making proper inquiries about the consumer’s income and living expenses and obtaining all necessary information to enable a meaningful suitability assessment to be made. Relying on consumers being able to make payments as long as they are in receipt of Government benefits is not a substitute to making these inquiries.’

In addition to the penalties, in September 2015, Make It Mine agreed to the imposition of a condition on its credit licence by ASIC. This licence condition will require Make It Mine to engage an independent external compliance consultant to conduct a review of and report to ASIC on Make It Mine’s policies and procedures to ensure compliance with consumer credit laws.

Download the judgement


Make It Mine supplies computers and household white goods to customers in receipt of Centrelink benefits. As at 30 June 2015, 17,493 Centrelink customers had a current Centrepay deduction authority for payments to Make It Mine. The total dollar amount in Centrepay deductions paid to Make It Mine during the 2014/2015 financial year was over $30 million.

ASIC received complaints from Murray Mallee Family Care in Dareton and NSW Legal Aid in 2013 which prompted ASIC’s initial surveillance. The NSW Office of Fair Trading also received complaints about Make It Mine.

The findings which led to the Court imposing the penalties were made in a proceeding brought by Make It Mine itself, and another proceeding commenced by ASIC, which were consolidated and heard together. Most of the key facts in the proceedings were undisputed and Make It Mine largely admitted the conduct.

The breaches related to:

  • The failure to inform customers of the cash price, or market value, of the goods they were purchasing on a sale by instalments basis, as well as the interest rate and total amount of interest to be paid in relation to more than 24,000 contracts entered into between July 2010 and March 2013;
  • The failure to make any enquiries about the financial position of more than 20,000 customers between April 2011 and March 2013. This included failing to make an assessment as to whether the contract was suitable; and
  • Unlicensed conduct in relation to more than 3,600 contracts entered into between July 2010 and April 2011.

In November 2014, ASIC commenced civil action against Make It Mine (refer: 14-316MR).

In September 2015 ASIC issued its report on consumer leases (refer: 15-249MR).

ANZ to pay $13 million after failing to accurately apply bonus interest

ASIC says Australia and New Zealand Banking Group (ANZ) is compensating around 200,000 customers approximately $13 million after it failed to accurately apply bonus interest to Progress Saver Accounts (PSA) for a number of years. The refund payment includes an additional amount to recognise the time elapsed since the initial breach. ANZ reported this matter to ASIC under its breach reporting obligations in the Corporations Act.

PSA holders qualify for bonus interest payments in any particular month if they satisfy deposit and withdrawal requirements for that month. ANZ misaligned the monthly cycle it applied to determine whether a PSA holder was eligible for bonus interest payments and the monthly cycle it applied to calculate bonus interest payments. This issue was limited to PSA holders who made qualifying deposits or disqualifying withdrawals near the end of their monthly interest cycle, and did not impact the payment of bonus interest in other circumstances.

As a result, PSA holders may have made a qualifying deposit or disqualifying withdrawal on the last day of the previous monthly cycle while believing that it was the first day of a new monthly cycle.

ANZ discovered the breach following a customer complaint and reported it to ASIC. ANZ advised ASIC of its intention to undertake a thorough account reconstruction exercise to determine the financial impact on all affected PSA holders. The financial impact is dependent on what other transactions occurred in neighbouring monthly cycles.

ASIC Deputy Chairman Peter Kell said, ‘ANZ has taken its breach reporting obligations seriously in this matter. Breach reporting helps ASIC ensure affected consumers are returned to the position they would have held if it were not for the breach occurring at all.’

ASIC acknowledges the cooperative approach taken by ANZ to resolve this matter.

ANZ has issued letters to current PSA holders to clarify and update existing terms and conditions such as requirements and timing to qualify for bonus interest payments.

ANZ is contacting and providing refunds to affected past and present PSA holders, a process that should be completed by the end of this week.

Improving Culture and Conduct in the Financial Services Industry II

Wayne Byres, Chairman ARPA, spoke at Hong Kong and discussed financial services culture.  Internal failings within firms were at the heart of the financial crisis. But you cannot regulate good culture into existence he says. Standards of behaviour are far more difficult to define than standards of capital adequacy.

The FSB, Basel Committee, IAIS and IOSCO still have important pieces of work on their agenda. As each new proposal emerges, the questions are asked ‘are we almost there yet?’ and ‘how much longer?’ The answers are usually ‘not quite’ and ‘next year’. Yet work agendas do not seem to shorten, and another year rolls on ….

We are at that stage of the reform program where a great deal of time and effort is being spent on technical issues of regulatory detail: the right parameter for this, the appropriate transition timetable for that. But I sometimes think we are deciding these without enough clarity on the operating model we are ultimately working towards. My experience in Basel certainly highlighted that, when we had the greatest difficulty reaching agreement on the way ahead, it was usually because there were some underlying disagreements on the destination we were aiming for. It is like debating whether it is best to travel by car or plane on your next holiday, without first agreeing where exactly it is you plan to go.

I would suggest our task in dealing with the specifics would be easier – and we would get the work done faster – if we had a more strategic perspective on a few key issues. Those issues are the extent to which we want to design a regulatory framework founded on a degree of reliance on:

  • internal models;
  • supervision;
  • market discipline; and
  • internal governance and culture?

The reason that I highlight these issues is that all four could be said to be areas where reality has not always lived up to expectations. Yet all have the potential to act as a means of limiting the sorts of prescriptive, one-size-fits-all regulation that industry – with some justification – rails against. To put it another way, think what the regulatory framework might look like if we removed all reliance on internal models; undertook very limited supervision activities; and could not assume any form of market discipline externally, or good governance and culture internally, to act as a constraint on imprudent behaviour. The result would inevitably be a highly constraining regulatory rulebook, which assumed the lowest common denominator in all firms. Being able to relax those constraints, because there are other, better and less costly tools to help generate sound financial firms and systems, is important for ensuring regulation does not just produce financially-sound firms, but innovative and competitive ones too…..

Culture – the final frontier

The final question we need to ask is: how the regulatory framework should be shaped by the industry’s culture? To be blunt, how can we avoid just assuming the worst?

For all the weaknesses in regulation, supervision and market discipline, we know there were internal failings within firms that were at the heart of the financial crisis. Standards of collective governance, and individual behaviour, fell a long way short of expectations. Initial attempts to correct this came in the form of executive compensation standards established by the FSB, followed up by efforts to strengthen standards of governance by both the standard-setters and groups like the G30. But increasingly these are recognised as helpful adjuncts to the main game: that is, tackling the underlying culture within financial firms. It is, to a large degree, the final frontier in the post-crisis response.

I don’t think anyone on the regulatory side of the fence would be naïve enough to think they can regulate a good culture into existence. Ultimately, the financial sector will collectively determine the values it wants to uphold, and the behaviours it wants to display. Regulators and supervisors can only do so much.

I recently met with the CEO of one of the larger G-SIBs, and we spent some time talking about the efforts underway in his institution to strengthen the bank’s culture. There was certainly a major program of activity underway but, to be frank, none of it was particularly innovative or unusual. That prompted me to ask two questions:

  • why was it not done before?
  • what is to stop it being forgotten again once the current program has been rolled out?

I have had similar discussions and asked similar questions of a range of banks I have met with, and I am yet to get a really convincing answer. But I think it boils done to the fact that ‘doing the right thing’ has not, at least until more recently, been seen as strategically important. And, coming back to the role of market discipline, managers were not being rewarded for putting long-standing principles ahead of short-term profit.

The challenge for the industry is therefore to show genuine leadership and commitment on this issue, and not put it in the too hard basket. I do not pretend this is an easy task, and fully acknowledge that standards of behaviour are far more difficult to define than standards of capital adequacy. However, it is critical to establishing confidence – amongst regulators, let alone the wider community – that the current focus on establishing a strong, ethical culture across the industry is not just a passing fad. That will be the case when, amongst other things, developing and maintaining the right culture is seen as a core part of the organisation’s strategy, and critical for its long-term success. If that occurs, then it is more likely reality will match expectations.