Referrers being paid ‘almost as much’ as brokers

From The Advisor.

There has been a sharp increase in the use of mortgage referrers, such as real estate agents and developers, whom are being paid “almost as much” as mortgage brokers in commissions “despite doing much less”, according to the financial services regulator.

ASIC’s Review of mortgage broker remuneration, which was released for consultation last week, included 13 findings about mortgage distribution and the home loan market.

Notably, the regulator highlighted that those who merely refer consumers to lenders are paid “almost as much as brokers”, despite “doing much less”.

The regulator described mortgage referrers as individuals or businesses that provide a referral service to lenders or brokers.

“Some of the most common referrers are real estate agents, financial planners, accountants and lawyers. However, referrers may also include other types of individuals and organisations, including property developers and non-profit organisations,” ASIC said.

The number of referrals being made to lenders, either by the referrer directly or through a referrer aggregator has increased significantly.

According to ASIC, the total number of home loans sold after a referral increased from 8,124 in 2012 to 26,106 in 2015, representing an increase in value from $3.3 billion to $14.6 billion (22.6 per cent).

ASIC noted that more than 87 per cent of those sales were by two major banks.

Referrals by professional services businesses (either directly or through a referrer aggregator) made up the bulk of referrals, with one out of three of these referrals coming through a referrer aggregator.

“We found that referrers are paid almost as much as brokers. Like brokers, they receive an upfront commission when a loan application is successful.”

ASIC found that on average, lenders paid 0.46 per cent of the loan amount as an upfront commission, although for some groups of referrers this was as much as 0.56 per cent.

“This level of commission-based remuneration is paid even though referrers play a very limited role,” the regulator said.

“The referrers we reviewed all operated under a licensing exemption. Under this exemption, they are permitted to merely refer a consumer to a lender, and in doing so they are required to disclose what remuneration they may receive. They cannot provide advice to consumers, or assist them in applying for a home loan. Referrers are also not subject to the responsible lending conduct obligations in the National Credit Act.”

ASIC asked lenders and aggregators whether they sought to restrict brokers from passing on some of their commission to referrers. No lenders reported that they sought to impose such restrictions.

“Around one-third of aggregators reported that the referral agreement with the broker did include limitations,” according to ASIC.

“However, based on aggregators’ additional comments, these provisions did not appear to prohibit a broker from making such payments; rather, they appeared to require the broker to comply with the relevant legislative provisions.”

ASIC accepts enforceable undertaking from Barclays entities

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

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

collectively ‘the Barclays entities.’

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

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

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

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

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

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

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

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

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

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

ASIC releases findings of CommInsure investigation

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

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

Key outcomes of ASIC’s investigation are:

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

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

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

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

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

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

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

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

The investigation

As part of our investigation, ASIC:

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

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

Wider industry reforms to insurance claims handling

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

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

Consumer advocates call for further ASIC reviews into brokers

From Mortgage Professional Australia.

ASIC’s Review into mortgage broker remuneration does not go far enough, according to consumer advocacy group CHOICE. In a panel hosted by ASIC at their 2017 Annual Forum, CHOICE’s head of campaigns and policy Erin Turner argued, “we can’ just settle for tweaks to the system…I hope this is the first report of many”.

Turner highlighted three issues in mortgage broking: a gap between consumer expectations and reality; conflicts of interest; and the need for system wide reforms beyond commission. In particular she criticised the current regulation for its stipulation on providing ‘not unsuitable’ advice. Mortgage brokers who provide advice on investments, tax and SMSFs should be ASIC’s next target, Turner said.

Turner’s comments did not go unopposed on the panel. Sitting with her was the MFAA‘s Cynthia Grisbrook, NAB’s Anthony Waldron and AFG‘s Brett McKeon. One awkward encounter saw Turner use an extravagant broker conference on a cruise ship as an example of banks’ soft dollar benefits, only for McKeon to explain that in fact it was AFG who ran the cruise.

One point that most parties did agree on (NAB excepted) is that the ongoing Sedgwick Review by the Australian Bankers Association should not be allowed to determine changes to commission. This was despite ASIC’s report referring to the Sedgwick Review at several points, and Stephen Sedgwick himself moderating the panel.

ASIC acts against alleged contraventions of FoFA obligations

ASIC says it has commenced proceedings in the Federal Court of Australia against Wealth and Risk Management Pty Ltd (WRM), and related companies Yes FP Pty Ltd (Yes FP) and Jeca Pty Ltd (trading as Yes FS) (Yes FS), in relation to various alleged breaches of the Corporations Act 2001 and the Australian Securities and Investments Commission Act 2001, including alleged breaches of best interests obligations. ASIC is seeking injunctive relief, declarations of contraventions and financial penalties.

 

WRM is licensed to advise retail clients about, and deal in, life risk insurance and superannuation products. WRM authorises advisers, generally employed by WRM’s corporate authorised representative Yes FP, who provide personal financial advice to retail clients referred to them by Yes FS, via the website yesfs.com.au.

ASIC alleges that:

  • on numerous occasions since December 2015, WRM Advisers have provided advice that is conflicted and in breach of the best interests obligations contained in the Corporations Act;
  • WRM has breached s912A(1) of the Corporations Act by not:
    • doing all things necessary to ensure that the financial services covered by its licence are provided efficiently, honestly and fairly; and
    • has not taken reasonable steps to ensure that its representatives comply with financial services laws;
  • Yes FS has contravened s911A and/or s911B of the Corporations Act by carrying on a financial services business without holding an AFSL;
  • Yes FS has contravened s1041H of the Corporations Act 2001 and s12DA of the ASIC Act by engaging in misleading and deceptive conduct; and
  • WRM, Yes FS and Yes FP contravened s12CB of the ASIC Act by engaging in unconscionable conduct in connection with the supply or possible supply of financial services.

The first hearing of the matter is listed before the Federal Court of Australia at 9:30am on 31 March 2017.

Background

Part 7.7A of the Corporations Act 2001 (Cth) was enacted as part of the “Future of Financial Advice” (FoFA) reforms which are aimed at ensuring that financial advice companies and their advisers act in the best interests of the client. ASIC alleges in this case that WRM has breached s961L of the Corporations Act.

Regulatory Guide 175Licensing: Financial product advisers – conduct and disclosure provides guidance to help licensees understand ASIC’s expectations for meeting the best interests duty, and to ensure that it is consistent with ASIC’s guidance in Regulatory Guide 244Giving information, general advice and scaled advice.

Section 912A of the Corporations Act 2001 sets out the general obligations of Australian Financial Services Licensees.

Section 911A of the Corporations Act 2001 requires any person carrying on a financial services business in Australia and providing financial product advice to hold an AFS licence or be a representative of an AFS licensee.  ASIC contends that the conduct that is the subject of this action required Yes FS to have an AFS licence or be an authorised representative of an AFS licensee.

Mortgage Brokers Are Essential To The Home Loan Industry

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

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

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

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

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

ASIC also says:

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

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

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

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

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

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

The Financial Markets Authority in New Zealand says:

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

They do not have this bifurcation.

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

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

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

How large financial advice firms have dealt with poor advisers

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

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

The review looked at:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

ASIC Review of Mortgage Broker Remuneration Released

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

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

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

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

Here is the Treasury release.

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

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

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

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

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

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

ASIC briefs O’Dwyer on remuneration review

From Australian Broker.

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

 

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

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

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

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

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

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

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

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

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

Westpac

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

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

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

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

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

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

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

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

ANZ

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

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

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

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

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

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

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

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

***********

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

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

Background

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

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

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

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