So what did we learn?
- Well, Westpac isn’t too enamoured with the changes the commission has recommended so far, and doesn’t think the regulators need to be too formalised in their processes.
- That Nicholas Moore seemed to have an easy go of it at the commission – one of the shortest times in the chair for a banking executive by far. It wasn’t so much that his performance was great, but the questions centred around Macquarie’s renumeration practices, so he didn’t have too much to answer.
- And the commission is a little worried with how Asic deals with the banks, and the other institutions it is charged with regulating.
We’ll have more answers from James Shipton on that tomorrow. Keep an eye out for Gareth Hutchens’s wrap report on the day’s events which is coming very soon, and we will be with you when all the action begins again in the morning.
Thank you for joining us and, as always, take care of you.
Updated
The commission adjourns for the day, on that note, but James Shipton will return tomorrow morning
Rowena Orr has turned to part of an email correspondence between Kevin Foo, a senior manager in the deposit takers credit, about NAB loan fraud matters:
Further to the FSE catch-up on Thursday last week, the NAB loan fraud matters were before the enforcement committee today. The full commission was there, including Daniel Crennan.
Although supposed to be an update on FSEs GWS – Greater Western Sydney: **... banning actions, the discussion turned to the royal commission and what action we should or could take against NAB.
The enforcement committee asked why we have not taken action against NAB. Comments from FSE, Peter, Peter Kell and myself included.
The matter was breach reported to Asic (in a fairly timely matter – although the royal commission suggested otherwise).
NAB was taken the matter seriously, were conducting a wider review, having their internal review tested by KPMG and developing a remediation program. These are the things DCI would have asked for if they were not already doing these. We have reviewed KPMG’s review and are comfortable they have done a reasonable job (or not a bad job to cause us concern).
The conduct was viewed as particular employees defrauding the bank. FSE has taken action against the individuals. NAB is not the only bank that has a loan fraud problem (although Peter suggested we be careful not to relay any message the loan fraud is not a very small minority of behaviour).
FSE has taken other action that has penalised loan fraud and banks responsibilities - Esanda/ANZ.
Cathie (the enforcement committee chair) was of the view that we should seek an enforceable undertaking from NAB with a community benefit payment. What do we have to lose from doing this.
James and John were supportive on taking some action against NAB to send the message that dealing with loan fraud is important. Peter wanted to test these ideas and tempered the discussion with comments that taking no further action might be the right decision. We just need the right narrative.”
Orr asks if that is the message Asic wants to send, that by an institution following the law and raising issues of breaches or misconduct, it gets brownie points with the regulator.
James Shipton says that Asic did end up going harder on NAB: In my view, and I expressed this when this conversation was happening, we should be pursuing much harder, much tougher action and we ultimately did.”
Orr: It’s the antithesis of that, isn’t it, Mr Shipton, the view that’s expressed here, let’s not investigate further, let’s just ask NAB for an enforceable undertaking with a community benefit payment. We’ve got nothing to lose from doing that and we will then be seen to have publicly responded to the evidence in the royal commission?
Shipton: Well, that was a view – that may have been – that may have been a view expressed. Again, I cannot respond with absolute confidence as – as to what was said. All I can say is that there were, from my recollection and from what Mr Foo writes, a range of different views which were thrown around, views which were explored and tested, but ultimately we decided to pursue an investigation and an investigation has commenced in this matter.
Orr: Well, the view that I’ve directed you to was the view of the chair of your enforcement committee. Does that concern you, Mr Shipton?
Shipton: It is a view that I do not agree with. It is a view that, clearly, that I – I – I suggested and an alternative approach. All I can say is that this was a – that’s why I used the expression premature, because there was not before the committee at that particular time a broader, more thought out, more thoughtful and more structured discussion in relation to NAB itself.
That came later. It came too late but it came later. I think we should just put an element of caution of reading too much into this discussion which was at a albeit late occurrence in the timetable but, nonetheless, was not a fully informed one.
Updated
But Rowena Orr is not having any of it.
Rowena Orr:
You oversee an organisation in which numerous people make these decisions. And you tell me that it was a reasonable decision, a reasonable regulator would have made that decision, despite NAB having given you that information in its first breach report and then lodging a second breach report with Asic on 31 August 2016, which made clear that the conduct was even more extensive than that covered by the first breach report?
James Shipton:
I do not disagree with the facts and I am disturbed and disappointed by the facts. That is why – you are right. I can’t make every decision but that is why processes and decision-making structures are so important. And that is why I was explaining to you the difference between processes and decision-making structures and strategy. Asic needs to do a better job on both.
That’s my key point here.
When I came and took up this role, that was a key part of my reform agenda, because I cannot make every single decision, so how can I look at a case study like this and do my level best to ensure that it doesn’t happen again.
And that level best is having improved processes and procedures, decision-making structures, that’s enforcement review, and some other things that we’re doing, but equally, being very clear at a commission level that we have a strategy and priorities clearly articulated so that when these decisions are being made that type of decision wouldn’t happen again.
Updated
Rowena Orr presses Shipton on NAB:
Orr: “Now, Mr Shipton, prior to the evidence that was given by NAB in the first round of hearings in the royal commission in March, had Asic contemplated investigating NAB for its conduct in overseeing its introducer program?”
Shipton: “Not – I – I do not believe that that was a decision to expand that investigation. That decision at that time, that decision was made, I believe, only in the last couple of months.”
Orr: “In the last couple of months?”
Shipton: “Yes.”
Orr: “So do I understand from your answer that Asic had not contemplated investigating NAB for its conduct in overseeing the introducer program prior to the evidence?”
Shipton: “Contemplation – let me just – let me just sort of say a decision was made so that it was – it was contemplated, but a decision was made, as I understand it, to focus in on the wrongdoing of the individuals and to investigate … the individuals, and that investigation is continuing ... that was then – that investigation was expanded to include NAB in recent times. So yes, there was a contemplation but there was a decision – again, with resource constraints in mind. Also in mind that there was a number of other things going on at that time, and that’s why I was talking about resource constraints, and the regulatory decisions that we have to make. But I will most certainly say that we should have made that decision earlier.”
Orr: “Was that a failing, Mr Shipton?”
Shipton: “That was unfortunate, and that would have been a decision that I believed should have been made otherwise. So that was – that was highly regrettable.”
Orr: “You’re reluctant to call it a failing, Mr Shipton?”
Shipton: “I’m – I’m reluctant to call it a failing for the following reason. The reason why I’m reluctant is because a reasonable – it is a reasonable – it was a reasonable held view at that particular point in time to make that decision.
“A reasonable regulator would make that decision. That doesn’t mean that I, myself, would have made the same decision, but what I am saying is that it was reasonable in the circumstances at the time but it is not something that I would have decided myself because I believe that we should be acting quicker when it comes to financial institutions.
“And that’s – looking not just at the bad apple but looking at whether the barrel is faulted itself.
Updated
Asked if Asic has failed to launch investigations into some of the banks, given the stories the royal commission has heard, James Shipton says he wouldn’t call it a “failure”.
What I would make the observation is that we get approximately 2,000 breach reports a year. We get, I think, approximately 12,000 complaints a year.
And we have approximately 240 staff in enforcement. So we have to make realtime decisions as to which matters we can investigate. I would not consider the very difficult realtime choices and very hard choices as a failure.
And to put that number – I think it’s important to give context – and this isn’t a like for like – but when I say 240, without reference, that’s probably, that doesn’t mean anything.
So, again, this isn’t a like for like reference, but we have less staff in enforcement of that 240 than there are sworn police officers in the Australian Capital Territory.
In fact, there are nearly three times as many sworn police officers in the Australian Capital Territory than we have staff members in enforcement.
Now, I just say that not because it’s a like for like reference, but to give you a context of the volumes – the tens of thousands of complaints we receive, the number of resources that we have, which means we have to make very difficult choices.
So I don’t think that’s a failure. What I do think, though, it is a very difficult process to make the right decisions. And that’s why we are reviewing the processes around our decision-making in this area.
Updated
James Shipton says Asic is now “doing things differently”.
... We are doing things differently from … how we handle a matter from a work basis, but we’re also applying new ideas, new methodologies, and the final point that I have said to Mr [Tim] Mulally on this, we should be thinking about sequencing the publication of our enforcement or going live with our enforcement matters. In other words, there has been a convention or a tradition or a business practice whereby everything in relation to a matter, in relation to an entity, is gathered up and all of the different component parts are gathered together.
I’ve encouraged Mr Mulally, and he agrees, if there could be a component of the broader issue – there could be an action or court action that could be separated – that we wouldn’t wait for those other component parts to be finished if that investigation was complete and we were good to go.
Updated
So how does Asic need to improve? What does it need to do better?
Shipton:
We need to do more ... enforcement actions in relation to this misconduct.
... More of it and quicker and more robust, utilising court-based tools, utilising court-based tools because that would be at the apex of the enforcement pyramid, as it were, and realising that in the case of a number of financial institutions or segments of the financial institution, that we …that the previous tactics have not been as successful as they – as we hoped them to be, and, therefore, we need to up our ante and be more agile in the … deployment of that enforcement tool.
Orr follows up with: “So do I understand that answer to mean there needs to be more enforcement action taken by Asic, it needs to be taken more quickly, and it needs to involve more court-based tools?”
Shipton: “Yes. That’s exactly right. The only limitation to that, of course, is resource constraints, but that is certainly our intent and that was the intent behind some of the structural changes that we’ve put into place in and around enforcement and enforcement decision-making.
“That was certainly the intent of the government and myself in bringing on board a deputy chair who has a leadership role in enforcement matters.
Updated
Orr picks up on Shipton’s use of “timely” and asks him to consider whether Asic has been “effective” and asks him to consider it through the lens of what has been revealed at the royal commission so far.
Shipton:
Yes. So I think if I was looking at the word “effective” through that lens, I would anchor that – my response on deterrence, both specific and general. And I think, both through being informed by the – the work of the royal commission, but also in my observations returning to Australia, that the utilisation of tools with a particular and robust deterrent capability is something that needs to be utilised more frequently, more often, and, as I said earlier, more quickly in relation to larger financial institutions as well as others.
Updated
Rowena Orr then moves on to what the government expects from Asic:
The government expects Asic to use its full regulatory toolkit and to direct a substantial proportion of its resources to surveillance and enforcement. Timely and effective enforcement strategies will deter misconduct and maintain confidence in the financial system.
Asic should clearly articulate publicly when it will and will not take certain enforcement action, so as to manage the public’s expectations and to promote confidence in Asic.
Now, Mr Shipton, can I ask you, firstly, in the time that you have been with Asic, do you consider that Asic has used its full regulatory toolkit and directed a substantial proportion of its resources to surveillance and enforcement in the way contemplated by the statement of expectations?
James Shipton:
The starting point is yes but I do believe that there could be builds and improvements.
I believe that we need to be using our enforcement tools more effectively and more – on a – on a more timely basis moving forward, amongst other things, and I also believe that we should be utilising new types of regulatory tools like supervision – on-site supervision, the close and continuous monitoring program that no doubt we will speak about later.
Updated
Essentially, after some back and forth, James Shipton doesn’t concede the point – that Asic provided Westpac with its draft recommendations before releasing the report, because it wasn’t a “back and forward” conversation.
Shipton:
Well, there was a discussion but what I am – the – what I am trying to make the point of is that often there is one-way discussions. Often, a matter can be put to us which we reject.
In fact, that happens to us in our – in our – in our existence on a very frequent matter.
There are representations and submissions made to us. I cannot – I cannot conclude with the – the documents before me that there was a back and forth discussion, a full connotation of a full back and forward discussion.
That’s why I wanted to be quite precise about the one – the apparent one-way nature of this interaction.
Updated
James Shipton responds:
I don’t think it’s inconsistent.
I would point out – I point out that these are briefing notes of a meeting that I didn’t attend.
I point out that the conversation about that feedback was in October in 2017.
And if there was – if there was a back and forth, I’m – I’m not aware of it, and I do not know what happened in relation to that correspondence or that interaction.
I would also point out that often is the time that – it’s very often the case that financial institutions put us – put to us many things that we don’t necessarily ... take on board.
Orr: But I asked you earlier if Asic ever discusses the recommendations or findings in these reports with the entities prior to publication. This shows that in this instance, that sort of discussion did occur?
Shipton: Let me emphasise the point. Not that I was aware of. And I was also talking about at the time – during the time at my tenure here at Asic. So that was the context in which I was responding to your question earlier.
Orr: Did you review this document before you gave evidence, Mr Shipton?
Shipton: Yes, I did look at this document before I gave evidence, but I reviewed - had to review thousands of pages of documents before I gave evidence ... So it’s difficult for me to know – have knowledge of each and every paragraph in each of those documents.
Updated
Rowena Orr makes reference to a particular document:
Orr: Following a review that we see under the table had been commenced in April 2017, which involved five banks, including Westpac ... Now we see the two pages as they appear in the report, Mr Shipton. And under Asic’s review and report, the second dot point we see that:
**DCI met with Westpac on 18 October 2017 to discuss the practices we observed across all banks in the review.
Following the meeting, Westpac wrote to Asic setting out its position on the findings and recommendations, and rejected some of the recommendations.
Asic has not responded to this yet as we are finalising the report.
Shipton: Yes.
Orr: Do you see that?
Orr: So this was in June this year, engagement with one of the entities who was the subject of the review about the findings and recommendations resulting in Westpac writing to Asic with its view of those findings and recommendations prior to publication?
Shipton: Yes.
Orr: Do you wish to comment on that? That appears to be inconsistent with the answer you gave earlier.
Updated
But then ...
Updated
Orr follows up with a question about whether Asic discusses any of its recommendations with the banks and institutions before it makes its finding public.
Orr: Has Asic at times discussed the recommendations that it proposes to make in these reports with the entities involved in the review?
Shipton: Not that I’m aware of.
Orr: Does Asic invite at any time the entities involved in the reviews to comment on the findings in the review before finalisation of the report?
Shipton: Not that I’m aware of.
Updated
So the regulator gives the institutions it is meant to be policing advance knowledge of its reports’ findings, and that the entity will be named, before it makes its finding public.
Which, and admittedly I am just a pleb, seems outrageous to me.
Rowena Orr seems to be having a little bit of trouble understanding the reasons why, as well.
Orr: Why do you need your regulated entities awareness of these matters before you release them to the public?
Shipton: I – as I said, I – I would regard it as – as a matter of fairness.
Orr: Well, I just want to try and understand this more and why you’re concerned about fairness with your regulated population, when you have brought in information that yields very disturbing results about the conduct of your regulated population, why are you concerned at that point to be fair by giving them advance notice of your findings?
Shipton: I – I do not believe that giving advance notice of our intent to publish their names in any way distracts from the importance and the impact of this particular report. And as an administrative body, I – and as an – as the administrator of an administrative body I, and I know my colleagues keep in mind, in procedural fairness type concepts in the execution of our work. I do not believe that providing notification – advance notification that we are going to publish this in any way detracts from the impact or the importance of it.
Orr: Does this come back to the relationship that you’re trying to cultivate and maintain with the entity, Mr Shipton?
Shipton: Absolutely not. Absolutely not. I see it as the exercise of professional judgment. I – I see it as ensuring that we are tough, we are resolute, we are strong, but we also apply principles of fairness and – and follow due process. I – I do not see that there is an inconsistency in those two concepts.
Updated
Now we find out that Asic lets the institutions it is regulating have advance notice of its findings. James Shipton says he does it out of “fairness”.
Rowena Orr: Does Asic discuss the findings in these sorts of reports with the entities involved before it releases the findings?
Shipton: I believe in this particular case, in the interests of fairness, we informed the financial institutions, yes.
Orr: I want to understand that. So what do you mean “in the interests of fairness”? You’ve exercised your compulsory information gathering powers to bring this information in. You have analysed it. You have prepared a report. Why is it in the interests of fairness for you to discuss the results of the report with the entity before you make those results public?
Shipton: I wouldn’t say “discuss”, I would say notify so they have an awareness so they have an awareness we’re going to publish their names.
Updated
Asic head told 'you are not naming enough names'
Rowena Orr: I want to be very clear, Mr Shipton. I put to you you are not naming enough names.
James Shipton: Well, I think you made a good point, Ms Orr.
Updated
Orr is moving to reports Asic has issued, where it has detailed reviews where it has used its compulsory powers.
It details the numbers of institutions. But, in some reports, it doesn’t name names. Rowena Orr wants to know why.
Shipton: We refrained from speaking about individual cases in relation to that report because we were – this is a thematic industry-wide report. That was the intent and purpose.
And I believe that the intent and purpose of that report was duly served.
Orr: You said to me a short time ago, Mr Shipton, that you agreed that an entity that’s publicly identified in a particular way, such as being the worst performer, is likely to have a strong incentive to improve their practices?
Shipton: Yes.
Orr: So why not identify the entities, the two entities who you called out in this report as having referred to customer remediation as a distraction?
Shipton: Because, as I said before, the main purpose was to talk about systems and processes in financial institutions on a relative basis. That was the main purpose.
Orr: You don’t think that purpose would have been well served by naming names throughout the report?
Shipton: I – I don’t – I don’t – I don’t think that it would have necessarily added to the broader impact and purpose of that particular, of that important report. Again, the purpose was not to speak about case-by-case basis.
The purpose and intent of that report was to talk about themes and processes as opposed to case specific matters.
So there is a difference between the purpose. If it was a matter which was primarily aimed at case specific matters, then perhaps that would be a more appropriate forum, but this was a report about processes, procedures, systems and decision-making inside financial institutions that were found wanting.
But I am disturbed by that response. I agree with you. And I know that the team followed up directly with the institution on that.
Orr: What’s the point of having case studies then in a report of this nature?
Shipton: Case studies show – are examples of that – as I said, the purpose of this particular report was to identify systems failures, cultural failures, decision-making failures. That was the point. So having individual case studies in relation to that were examples of those failures.
I think what we’re – what we’re speaking about here is, you know, an exercise of judgment as to whether we make mention or name names of that particular incident is one that we, we exercise.
For what it’s worth, there are a number of examples also mentioned there that would trigger the same line of questioning that you mentioned, and if we were to name names on each of those individual – let’s call them triggers or catalysts – the report would probably just be far too long.
Orr: Well, it wouldn’t increase the length of the report at all to use the name of the entity in each of the case studies, would it?
Shipton: I think what we did – in fact, what I know we did was exercise judgment as to what we thought was meaningful disclosure. You are making a case, which I can certainly understand, that we should be disclosing each and every reference to incidents and observations.
That is a degree of professional judgment. I believe that the report was incredibly impactful and effective.
And, you know, usage of examples and case studies are important. You make a good point. I – I see the point that you’re trying to make.
But what I’m trying to also say is that we’re trying to exercise – let’s call it editorial judgment as to these types of reports moving forward.
Updated
So far, the line of questioning has been centred on whether or not Asic, as the regulator, risks being too buddy buddy with the groups and people it is meant to be regulating.
Now, Rowena Orr moves on to transparency.
Commissioner head Kenneth Hayne pops up during this line of questioning.
He also wants to know why there isn’t records of these meetings.
Hayne: Would not having a note-taker at these meetings ensure that there was a method of preserving the corporate memory within the organisation of what has been said, when it has been said, and what was said?
Shipton: Yes. I agree with that, commissioner, and I think, in part, that was the intent behind having one of our senior executives for the first time attend these meetings in recent times.
Hayne: But the preservation of corporate memory of contacts of this kind is itself, surely, a matter of very considerable importance to the proper governance of Asic?
Shipton: I certainly agree with that. I most certainly agree with that. And that is – that is, in part, why I initiated having a senior executive leader accompany us on these types of engagements.
Hayne: Yes. As I recall your answer to one of the questions, it was that he or she would take a note of matters of significance. What I’m talking about is a note-taker as more generally understood, a note-taker who took a note of all that was said at the meeting?
Shipton: Yes, it’s a suggestion that I think is very worthy and I am minded now to ensure that this happens from here on.
Updated
Shipton says he does most of the talking during these meetings:
These board meetings – these liaisons with the board, to be frank, the ones that I’ve attended to, I’ve done most of the talking, to be frank.
To be frank, I’ve been passing on the messages, my expectations, and it has been a bit of a one-way dialogue. So no matters of significance, at least coming from a financial institution, have been raised because I have been very forthright in using these platforms and forums to tell these people what I think.
Updated
James Shipton admits that he does not take formal minutes or record of these meetings with the banks – because the conversation should be “free flowing”.
“Formal minutes are not taken but my practice in relation to meetings, whether they be a board – meeting with a board or meeting with another senior leader, if there is a matter of significance, particularly a matter relating to an enforcement matter, for me to take a note and to brief my colleagues involved directly on that as soon as possible.”
Orr: “Wouldn’t it be better, Mr Shipton, for the sake of transparency, for there to be a formal record of the meetings that you and the commissioners have with the leaders of these organisations?”
Shipton:
It may very well be. These meetings were designed originally and have been – have been pursuing along these lines where they are meant to be a free-flowing dialogue between the board members and the commissioners of Asic. I believe that the reason why there is no formal minutes, at least from our side, is to enable that dialogue to be free-flowing.
But I will make one amendment to that, because I, after attending one or two of these board meetings, I thought it entirely appropriate to have somebody there who was not a commissioner, who is in – in the cases that we’ve had in recent times – a senior executive leader, who observes the meeting and is not a commissioner but observes the meeting, in many respects to ensure that we have a record and a witness to those discussions.
And this is something that I’ve instituted in recent times.
And it is also now correlated to the senior executive leaders who are involved in our close and continuous monitoring program.
Updated
Back to Rowena Orr’s questioning – we are getting to the nub of the issue – is James Shipton, and therefore Asic and the other commissioners, too close to the banking heads because of these meetings?
Orr: “Do you think, Mr Shipton, that there are any risks associated with frequent personal contact between regulators and the leaders of the entities that they regulate?”
Shipton: “I do, and that is why I personally exercise the highest degree I can possibly apply of professional judgment when I have these interactions, when I have these meetings.”
Orr: “What are the risks that you’re aware of, Mr Shipton?”
Shipton: “For – I think I’ve alluded to it with my clarifications earlier, that somehow this would be seen by the other side as too familial, too friendly, too social, and ensuring that these remain, as they are in my mind, professional and very much anchored in the purpose in which I do them, which is, as I said, information – information accumulation, regulatory messaging, and baseline assessment as to the – to be brutally honest and blunt, their performance as regards compliance with our laws and regulations.”
Orr: “It’s the commissioners who have the ultimate responsibility for making decisions about whether to take enforcement action against these entities, isn’t it?”
Shipton: “Ultimately that – the commission is the – the ultimate decision-making body in matters like that, yes.”
Orr: “But through these frequent meetings with the leaders of these entities, you and the other commissioners necessarily develop a relationship with the boards and the senior executives of the organisations?”
Shipton: “A professional relationship and a professional engagement, yes.”
Orr: “Well, it’s part of human nature, isn’t it, Mr Shipton, that when we have a relationship with someone, it’s usually harder for us to do something that might harm that person’s interests?”
Shipton: “That’s why I am emphasising the importance of having a professional relationship and, as I emphasised earlier, exercising the highest degree of professional judgment in relation to these interactions.”
Orr: “And what about the professional judgment of your fellow commissioners; what do you do to oversee how they exercise their professional judgment?”
Shipton: “I have mentioned to my colleagues the importance of treating carefully and with a healthy dose of scepticism some of our interactions with the regulated population. In my interactions and feedback from my colleagues, it’s very clear that they share that, that mindset, as well.”
Updated
Just a reminder.
In this year’s budget, the Turnbull government – with Scott Morrison as treasurer – decided to cut Asic’s permanent funding from $346m to $320m by 2020-21.
It also budgeted for Asic’s staff numbers to be slashed by 30 in 12 months, from 1,749 to 1,719.
That was in May, after the royal commission had already exposed some appalling behaviour by the banks.
The Coalition and Labor argue constantly about job and funding cuts at Asic, with both parties trying to blame the other for the regulator’s failings.
One thing is for certain – Asic has had to deal with a very uncertain funding environment.
Just two years ago, Morrison gave Asic an extra $121 million to try to boost its resources and ward off the royal commission. But the royal commission happened anyway, so a few months later the government cut Asic’s long-term funding. But this month, the government announced it was boosting Asic’s funding again by $70m over two years to help it deal with the royal commission.
Shipton argued in his submission to the royal commission how difficult it was dealing with such up-an-down funding.
He said Asic was woefully underfunded compared with its international peers.
In 2016–17, Asic’s actual total budgeted resources were $402.393 million.
In 2017–18, its actual total budgeted resources were $431.969 million.
In 2018–19, its total budgeted resources are $380.434 million.
The 2020–21 forward estimate-based total budgeted resources figure is substantially lower at $349.509 million.
Shipton said Asic’s staff numbers and budget have increased only modestly since 1991 (FTEs 1,492 then and 1,698 now) but there have been frequent increases in its mandate – that is, the government wants it to do more and more.
He asked: “A central question is: what level of funding and resources best enables a re-balancing of priorities, alteration of practices and implementation of decisions weighted more heavily towards litigation-based enforcement or a ‘deterrence strategy’, taking into account the real resource impacts and real resourcing risks of that those approaches?”
Updated
Shipton doesn’t say he has a “good” relationship with the banking CEOs, instead describing it as:
I would say we have an open working relationship and a professional working relationship.
Orr is now trying to get to the bottom of why he is holding these meetings, given that the law states the banks are required to report breaches.
Because 912D imposes a legal obligation on these financial services entities to report information about significant breaches or potential significant breaches of their legal obligations to Asic in a timely way?
Which is the lead into Orr asking, given the banks are required by law to report misconduct, why are these meetings happening. Shipton replies:
Meetings are not held for that purpose. These meetings are not breach reporting meetings. They are not a substitute for breach reporting. I’m not aware that they ever have been, nor should they ever be so into the future.
Updated
Rowena Orr is asking James Shipton about some of Commonwealth CEO Matt Comyn’s testimony from earlier in the week, where he described his contact with Asic as getting together.
Shipton doesn’t like that descriptor.
“I would not clarify them as get-togethers,” he says.
Asked why, he replies: “Well, just in my own interpretation – and maybe I’m being pedantic, so apologies. I took get-together – I personally interpret it and maybe it’s my own interpretation – as a more familiar or more social gathering. And I just wanted to clarify, at least in my own mind, that I have very structured – I aim to have very structured – formal meetings with people like Mr Comyn.”
As for the “less structured way” Comyn described other chats as, Shipton says:
Well, less structured way – my take of the less structured communication with Mr Comyn is that we often speak by phone.
Often pre-market, as I said, because Mr Comyn is giving us, as a markets regulator, the heads-up of a – a market announcement which is coming the next day.
That’s important for us as a market regulator but it’s also very important for us to be aware of business developments inside a financial institution as important as the Commonwealth Bank.
Shipton says he has similar interactions with the other CEOs of the major banks.
Updated
Shipton says he also gets involved, by contacting leaders’ directly, if they are taking too long to respond to Asic over any concerns it may have. He says he doesn’t get involved with the matter itself, but strives to get them moving faster:
They have been receptive to my approach, and it has had a operational impact to speed up the response.
And it speaks to a broader point that I firmly believe that CEOs, chairs and other leaders of these financial institutions should be more engaged and more aware of some of these issues that are taking place between their organisations and our agency.
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James Shipton says part of his job is to stay in touch with banking CEOs. Here is some of what he has said to them:
I’ve called CEOs to express dissatisfaction on a number of occasions as regards the handling of particular matters that are being handled by our – our enforcement teams.
I have called CEOs and spoken at meetings about my dissatisfaction about what I call legal trench warfare.
I have also expressed my dissatisfaction to these leaders about the lack of professionalism in the Australian financial sector, and I have also spoken to these leaders, to a man and a woman, about the fact that I believe that they have forgotten that they are dealing with other people’s money.
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James Shipton is asked about Asic’s funding.
Orr: “How do you think that Asic’s resourcing compares with that of conduct regulators in other jurisdictions?”
Shipton: “In my own experience, I believe that Asic is under-resourced compared to some of our peers globally.”
Orr: “And how does the level of resourcing that you have affect the way that you perform your functions and exercise your powers?”
Shipton: “Well, it weighs very heavily on the regulatory choices that we have to make, because it means that we are restricted in our ability to take on matters or to pursue matters in a way that, perhaps, we would like to.”
Orr: “And could you explain further how that plays out, Mr Shipton? Does it mean that you are not able to investigate matters that you would like to investigate?”
Shipton: “It means – it would be across the – the full spectrum of our regulatory activity. We are constrained in probably every aspect of our regulatory work. It’s certainly in investigations, certainly in other matters relating to enforcement, but I would also make the case that we are constrained in our surveillance, our supervision, our important work on financial capability, and – and other work that we undertake.
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Senior counsel assisting Rowena Orr QC has taken over questioning here.
She has begun by establishing what exactly Asic sees its role as, and what tools it believes it has at its disposal.
Asic head faces the commission
We’re back, with James Shipton, the chair of Asic, in the hot seat.
Towards the end of Nicholas Moore’s evidence, Hodge asked him what would happen to Macquarie’s profits if it was prohibited from paying commissions to mortgage brokers and brokers were only able to get paid by charging customers fees for service.
Moore said he’s wasn’t sure. But, speculating, “it doesn’t sound as attractive as the current structure.”
Hayne then interjected: “Attractive to whom?”
Moore said: “I think the expression used is the ‘stick of shock’ of actually seeing the upfront fee.
“One of the other issues discussed is whether the fee should be upfront or over the life. And our position is, we would like it … to reflect the value of [the service] being delivered, which is over the life of the loan.
“So there is an issue, obviously, for – if you have an offer without a broking fee versus with a broking fee – that makes a difference in the mind of the consumer.
“Economically, of course, the fee is being borne.”
So, the customer will bear the cost of the fee regardless, but Macquarie doesn’t particularly want the customer to see that fee written on a piece of paper at the point of sale, because they may lose business.
Unremarkable, I guess. That’s what all businesses do. But it’s nice to see the admission sometimes.
Updated
We are done with Nicholas Moore now. We’ll recap the last part of that for you in this next break (the commission is now adjourned until 2pm) but it was about mortgage brokers, the products they are incentivised to sell, and what would happen if they no longer received those incentives.
James Shipton from Asic is up next.
We will see you at 2pm.
It has to be said that out of all the executives I have seen sit in the grilling seat, Nicholas Moore looks the most relaxed. Some could even say well-rested.
But he did make more than $18m in the past financial year and he is finishing up next week, so I guess there is not a huge amount to lose sleep over.
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Commissioner Hayne is very, very interested in Macquarie’s remuneration system, particularly how different it is to the other banks.
You can see his mind ticking over.
Remember, Hayne is using this round of hearings to think about how future policies ought to be constructed. Remuneration will be one of them.
Hayne: “I understand the remuneration system is unique to Macquarie and it has been tailored for Macquarie and its businesses. What, if anything, is generalisable from the Macquarie experience?
“Are there either principles or elements of the remuneration model that Macquarie adopts that you think yield more generalisable ideas?”
Moore: “I think the idea of profit - a profit share is more powerful than bonus. Bonuses often relate to revenue rather than bottom line outcomes. A deferral, I think, is very important. I think deferral - to see the outcome of decisions being made in finance, as we know, decisions being made today have consequences over many years. And so making sure there is that alignment over a period of time I think is - is very important. And the third element as we’re talking about, it’s not just being driven off a financial metric; it has a broader application to all the other elements that are critically important to the success of an organisation to the success of clients.”
There is no limit to the bonuses you can be paid at Macquarie. And they are not fans of that word – they tend to call it variable remuneration.
But there is no limit to the variable renumeration you can be paid there. Hence – the millionaire factory.
Hodge: “And the variable remuneration then for senior executives is set each year as a percentage of profit share?”
Moore: “That’s correct.”
Hodge: “And the way in which that occurs or is fixed is by taking into account four factors?”
Moore: “That’s correct.”
Hodge: “And the first of those factors is financial performance?”
Moore: “That’s correct.”
Hodge: “The second of those factors is risk management and compliance?”
Moore: “That’s correct.”
Hodge: “The third of those factors is business leadership, including client outcomes?”
Moore: “Client outcomes, that’s correct.”
Hodge: “And the fourth of those factors is people leadership and professional conduct consistent with Macquarie’s code of conduct and what we stand for?”
Moore: “That is correct.”
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Macquarie is known as the “millionaire factory” because of the way it structures pay for its employees, mostly the executives. Michael Hodge is asking about that system now:
Hodge: “In relation to executive remuneration, the way in which Macquarie executives are paid – and in fact perhaps, effectively, all Macquarie employees are paid – is quite different from the way in which employees and executives within the retail banks we’ve been dealing with are paid, as I’m sure you know.”
Moore: “Yes.”
Hodge: “And Macquarie has a, or employees at Macquarie have a relatively low fixed salary?”
Moore: “That’s correct. At a senior level, that’s correct.”
Hodge: “And can you explain to the commissioner at what level is it fixed? What is the purpose that is attempted to be achieved by the particular level at which it’s fixed?”
Moore: “It depends upon the role and the person. So it does vary role by role. And as you suggested, at junior level it’s – it’s higher than at a senior level. At a senior level, it more reflects the underlying performance of the business.”
Hodge: “So the way the, the profit-sharing system is set up, is a sharing of the profits between the staff and the shareholders … and the variability increases the more senior you are in the organisation.”
Moore: “With risk functions, central functions, that variability is less, for obvious reasons.”
Hodge: “And so, for example, when it comes to the way in which you are remunerated, you’re paid a fixed salary of something in the order of $800,000, a bit more. But then you receive a substantial profit share that’s deferred over a number of years?”
Moore: “That’s correct.”
Hodge: “And if we were to, to attempt to compare it to the way in which the CEO of one of the retail banks is paid, really, they’re entirely different systems of pay. There’s no – there’s no fixed relationship between the maximum amount of variable remuneration that you can receive and the fixed salary that you receive?”
Moore: “I believe our system is unique.”
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Following Asic’s inquiries, Macquarie asked Deloitte to undertake a “risk culture review”.
The report painted a concerning picture about the risk culture within Macquarie Equities.
Hodge says: “And in your view, what did it show fundamentally about the risk culture within Macquarie Equities Limited?”
Moore: “Well, there were a number of findings in the report. And these – I mean, I wasn’t a direct recipient of the reports, but the – the story – I don’t know if you are going to bring it up but it’s a pretty clear story of a, a lack of control, a lack of challenge. I think one of the expressions used is freedom without boundaries. That general nature of a – an environment.”
Hodge: “And the consequence, then, having done this licensee risk - licensee risk framework assessment – and also having the Deloitte report in relation to risk, was that Macquarie then went about attempting to make a number of changes in relation to the risk culture within that business?”
Moore: “Certainly.”
Hodge: “And some of those changes were structural changes?”
Moore: “That’s right … we changed the management, obviously, of the organisation; we changed compliance reporting, we made it report centrally.
“We embarked on a whole range of new systems, processes and procedures in terms of how the business managed itself and, of course, as part of the EU [the enforceable undertaking from Asic] we sought to compensate any clients who may have suffered.”
Moore says a number of Macquarie staff lost their jobs as a consequence, including the senior executive responsible for that business line (the executives also saw their variable remuneration halve).
Updated
Gareth is doing you up a post about some of the issues with Macquarie which have been previously identified.
Michael Hodge has moved on to asking Nicholas Moore about Macquarie’s’ culture with dealing with those issues.
Moore: “We have one of our key tenets is accountability and key principles in terms of how we run our business.”
Hodge: “And what does that mean, exactly?”
Moore: “We say to every person in the business they’re accountable for the outcomes that they deliver, particularly for business managers. So every business manager is accountable for all the outcomes of the business. And so that’s a – all the outcomes, financial outcomes, conduct outcomes, regulatory outcomes, client outcomes, all the outcomes.”
Updated
Okay, so we can see where Hodge is going here.
He says in 2012 Asic identified some advice misconduct and cultural failings at Macquarie Private Wealth – which is Macquarie’s wealth management/financial advice arm.
Asic had become concerned about what was happening inside Macquarie Equities, where its stockbrokers were evolving also giving financial advice.
Moore confirms some of the things Asic was concerned about.
Hodge says: “Compliance with obligations regarding the provision of personal advice?
Moore: “That’s correct.”
Hodge: “Whether representative conduct had been dealt with consistently and appropriately?
Moore: “That’s correct.”
Hodge: “The adequacy of record-keeping?”
Moore: “That’s correct.”
Hodge: “The effectiveness of monitoring and supervision?”
Moore: “That’s correct.”
Hodge: “Whether compliance, training and education had taken place?”
Moore: “That’s correct.”
Hodge : “The identification recording assessment and reporting of breaches?”
Moore: “Yes.”
Hodge: “We can see that there now. And whether Macquarie Equities management had failed to foster and maintain a proper commitment to and culture of compliance?”
Moore: “That’s correct.”
Updated
Again, a change in core operations – from a stock brokerage to an advice business – appears to have been one of the main drivers of problems.
The business didn’t move as fast as it should have in making that change, Moore said.
Updated
We open by talking about one aspect of Macquarie’s business dealing, Macquarie Equities Limited, which is basically a stock brokerage.
It contributed 0.5% of Macquarie’s profit in 2013, which is not a huge amount. So it is interesting that this slice of the business is what the commission wants to concentrate on.
Now it’s on to the private wealth arm.
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Just how big is Macquarie?
It is operating in more than 25 countries. It has a market capitalisation of $39bn and consolidated net assets of just over $18bn.
It also manages about $500bn. That’s half a trillion dollars’ worth of assets.
So, big.
Updated
Australia's highest paid executive faces grilling
It’s now time for Australia’s highest paid chief executive, Nicholas Moore, who heads up Macquarie, to take the stand.
Moore received a total reported renumeration of $18.9m in the last financial year, after Macquarie posted a $2.6b profit.
He will be stepping down as the CEO at the end of next week, after 32 years with the bank.
Just to go back to some of the recommendations for change that Westpac opposed, Michael Hodge took Brian Hartzer back to a meeting the bank held with Apra, where some of the regulation changes were discussed.
Hodge asked Hartzer about a minute in the meeting, which said:
“Brian thinks unfair everyone has to go through CBA exercise when nothing has gone wrong to CBA’s scale.”
Hartzer said he saw that dot point, but doesn’t remember expressing his view “quite like that”. But the main point – that being that he believed the Commonwealth’s screw-ups, which were in the public domain, were worse, and doesn’t think that everyone should be punished for them – stands.
My point was CBA had had a series of massive public and customer issues that were well understood – Storm Financial, CommInsure, Austrac. These had been very large, very significant things, and there had been – it had been well reported that those hadn’t been addressed very well.
And my point was simply, ‘We haven’t had that. We have issues. We’re dealing with them.’
And my concern was that the very extensive exercise that CBA was asked to undertake by Apra, which was very large and very comprehensive, seemed – it didn’t seem obvious to me why we should have to do the same exercise.
I wasn’t resistant to us looking at the issues that came out of the report.
In fact, I sent the report to our entire staff and said, ‘Everyone should read this.’
So I – that characterisation is not, I don’t think, a fair summary of how I thought about it.
Updated
Brian Hartzer gets to step down. The commission is taking a 10 minute break.
One of the things which has come out of this process is that Westpac had reported “fewer significant breaches than other entities and those breaches had more affected customers and higher financial effects”.
That was largely down to Westpac’s idea of what was a “significant” breach – it’s threshold was much higher.
That’s been changed, Brian Hartzer said, adding that part of the reason was before the commission started, Westpac didn’t have a huge insight into how other banks operated.
Asked about Westpac’s collective culture could have contributed to some of the issues, as well as making cultural change more difficult (because it is not just a few people at the top who have to change how things are done, it’s everyone) Hartzer said this:
I - I could see that collective decision-making could have contributed to slowing down the process of working breaches through the system. And - and I - I can completely understand why from ASICs point of view, if it’s taking longer for breaches to come, they can draw the conclusions that you describe. My perspective being in the organisation is it’s not a lack of intent. But that collective decision-making and not strong enough process around breach reporting could have contributed. It’s something, as I said before, we’re trying to fix.”
Brian Hartzer agrees that the points he has laid out don’t take into account any cultural changes.
The only aspect that I might put in that category would be around, particularly going back a few years, when we had issues related to a particular staff member or something, and legal privilege was looked at before communication to Asic happened.
And so there may have been a sort of over – I know one of the issues we’ve done to try to address the breach thing has been to talk about how we can limit the number of cases when legal privilege would be claimed in the process of working through an issue.
Updated
The Westpac boss is now talking about how the bank’s relationship has changed with Asic, and the steps Westpac has taken to change – and why he thinks the bank didnt have that relationship with Asic in the past:
There have been a couple of things. I think – we spoke yesterday about the regulatory team that we’ve beefed up – I think historically we had a little, we were a little too centralised in the relationship with Asic. What that meant was that some of the frontline businesses were not necessarily as plugged in and aware of what was going on or what Asic’s concerns were, so there’s a bit of telephone tag going on. And so businesses might do things that Asic would think, ‘Hey, we told the company that’ but that message wasn’t getting through well enough.
So we’ve taken steps to have more direct meetings between the line executives and Asic counterparts which helps keep that dialogue going. I think that’s, that has been really important.
We’ve had a number of significant legal cases. We don’t like to go to litigation if we can avoid it but we have had a couple of occasions where key [parties] couldn’t agree and ended up in litigation. And that, inevitably I imagine, colours things.
And clearly, there has been some questions around how we deal with notifying Asic of matters and breach reporting, and getting more clarity and control of the process of that, which I suspect has contributed – and that, again, is something we’ve taken steps to address.
Updated
Brian Hartzer also doesn’t want the regulator, Apra, to “devolve into too formalistic a mechanism”:
I think Apra is a very good regulator that serves the country well and performs its role very well. I think a bit more formality around the Bear has been broadly helpful. I think it’s important that it not devolve into a box-ticking exercise, which I’m sure we would all agree. But if you start with the premise – and it is my premise – that we set out to do the right thing, we set out to manage our company in a good way.
We set out to have a strong balance sheet, we set out to deliver good outcomes for customers.
Then an interactive relationship with the regulator – where they do poke and prod and it is back and forth and what do you think about that, we’re worried about that – is very helpful.
We find that incredibly valuable. From time to time, appropriately, they pull us up where they think we’re not meeting a standard and they give us a hard time or take more formal action.
That’s fine.
And I think that’s appropriate.
But I would not want it to devolve into too formalistic a mechanism, because the – the – again, if you start with my premise that we’re trying to do the right thing having an interactive dialogue is incredibly helpful.
Updated
Westpac opposes many potential reforms
Michael Hodge lays out Westpac’s submission and asks Brian Hartzer, one by one, about the recommendations for change.
Hodge: It opposes preventing authorised representatives from recommending a product manufactured or sold by the licensee?
Hartzer: Yes.
Hodge: It opposes prohibiting remuneration of financial advisers based on value or volume of sales?
Hartzer: Entirely, yes.
Hodge: It opposes requiring annual as opposed to biennial opt-in notices for ongoing fee arrangements?
Hartzer: Yes.
Hodge: It opposes structural separation between product manufacturers and advisers?
Hartzer: Yes.
Hodge: In respect of consumer lending it opposes any duty being imposed on intermediaries beyond that imposed by the industry forum?
Hartzer: Yes.
Hodge: It opposes a ban on trail commissions for intermediaries?
Hartzer: Yes.
Hodge: It opposes a ban on introducer programs?
Hartzer: Yes.
Hodge: It opposes industry codes being given legal or further legal effect?
Hatzer: Yes.
Hodge: And do you think that one of the reasons that Westpac opposes each of those changes is because there will be an effect on the profitability of Westpac’s business?
Hartzer: That’s - that’s a component of it but that’s not the main driver. You would have to go through each one and I’m happy to explain our view on them. The way you described that sounds like we’re completely opposed to change, which we’re not, but each of those points has subtleties around them.
Updated
We move onto the ethical culture within the bank, and Michael Hodge lays out every suggestion Westpac has opposed in its submission to the commission.
In plain terms, Westpac responded to the draft recommendations in the interim report. And they don’t really want any of the changes.
Updated
Hodge: If you reward somebody based on a particular outcome, then you expect an increase in whatever the metric is for that outcome?
Hartzer: Broadly speaking, yes.
Hodge: And for a bank, the way to increase financial performance is to get – one of the ways is to get a customer into a product?
Hartzer: That’s one of the ways, yes.
Hodge: And one of the things that Westpac wants is more customers acquiring products that they want, within the risk appetite of Westpac?
Hartzer: Yes.
Hodge: And therefore, variable reward is a way of incentivising your staff to contribute to that outcome?
Hartzer: Yes.
Hodge: And the challenge then that you’ve recognised already is that variable reward can encourage more conduct in order to achieve the outcomes?
Hartzer: If it’s structured badly, yes.
Hodge: And the problem is it’s easy to measure pure financial performance?
Hartzer: Yes.
Updated
So now we are getting into how employees are incentivised.
It’s an arduous process. Brian Hartzer very clearly does not want to say that getting more money/business from customers is the behaviour staff would be incentivised for.
So everything Gareth has just laid out is why this line of questioning is so important, as the commission attempts to deep-dive into the banks’ policies.
Updated
And then:
Improper conduct by advisers:
Westpac acknowledged that a BT Financial Group adviser had established 72 life insurance policies in the names of clients with no existing accounts, with a view to dishonestly obtaining a benefit through the sale of these policies.
Criminal charges were laid by Victoria police and the adviser was permanently banned by Asic.
Westpac also identified that a financial adviser employed by an authorised representative of Magnitude had performed unauthorised transactions in accounts of five of her clients.
Three of these clients suffered losses as a result of these transactions. The adviser was criminally prosecuted and sentenced for charges including theft.
Westpac acknowledged that $2.75 million has been paid to 1,996 impacted customers as a result of advice fees paid between 1998 and 2012 for BT ‘Investment Wrap’ or ‘SuperWrap’ products that may have been higher than the maximum fee ranges noted in some disclosure documents.
Updated
Further to that:
Inappropriate advice:
An Asic review, established in 2015, called the Advice Compliance Program, identified 22 Westpac financial advisers who had provided inappropriate advice and who were reported to Asic.
BT Financial Group participated in Asic’s Advice Compliance Project, as a result of which a further 11 financial advisers were identified as potentially providing ‘problematic advice’.
Since 2015, BT Financial Group has identified a further 15 advisers who may have given inappropriate advice.
As at 29 January 2017, Westpac had paid a total of $12.568 million in compensation to 205 clients, with a further $1.024 million in compensation offered but not yet accepted.
When Westpac made its initial submission to the commission on 29 January 2018, Westpac had not completed its review of the advice received by 468 customers who had been given advice by the initial 22 advisers.
Westpac also provided to the commission some specific examples of the inappropriate advice of four advisers, being:
• an adviser who provided inappropriate personal advice primarily relating to gearing recommendations, with 116 clients requiring remediation;
• an adviser who had provided inappropriate advice relating to establishment of SMSFs and using limited recourse borrowing arrangements to fund the purchase of real property;
• two advisers whose conduct gave rise to concerns of inadequate disclosure, charging of ongoing fees without providing the relevant services, inadequate documentation of client goals and objectives, inadequate risk profiling and no documented reasonable basis for advice provided or superannuation switching; and
• an adviser who had provided standardised advice across his client base and recorded identical goals and objectives for many of his clients.
These four advisers were reported to Asic, and three have been the subject of banning orders.
Updated
Want some context for the discussion about Westpac’s behaviour?
Here’s what Westpac told the royal commission at the beginning of the year.
Fees for no service:
Westpac’s financial planning arm – BT Financial Group – began an Ongoing Advice Services review program in 2016. The program identified retail clients who, in the period from 1 July 2008 to 31 December 2015, had been charged fees for ongoing advice, where they had not received the service paid for, or evidence of such service being provided could not located.
As at 31 December 2017, BT Financial Group had paid compensation in excess of $3.2 million to 435 clients as a result of issues identified by the Ongoing Advice Services review program.
Westpac also noted that its 2016-2017 annual results provisioned approximately $24 million (including interest) for refunds of fee payments identified in the Ongoing Advice Services review program.
Updated
And we’re back.
Updated
We are on a five-minute break. Go get a cup of tea, or something stronger. We’ve got a lot of hours to go.
Updated
But Brian Hartzer is not entirely married to the idea of getting rid of the service:
We have a large number of customers who do – it’s not all customers, by any means, but we do have a significant number of customers who do look to us as a trusted source of advice, and we would like to be able to help them with that.
So to just walk away from it entirely to a certain extent is to abandon our customers in an important respect.
Updated
Banks didn't fully think through financial planning service, Westpac boss admits
And from these questions we get our first big admission of the day – that in moving away from traditional banking services, and into financial planning, banks didn’t really think through what that model would look like.
Because the end game here is profit.
Hodge: Because – and I think one of the points you’re getting at is you – when we talk about this idea of aspiring for a share of a customer’s wallet, what you don’t want is somebody after five years switching from Westpac and going over to one of your competitors?
Hartzer: Correct.
Hodge: You don’t want to lose the, effectively, the profit from that customer?
Hartzer: Correct.
Hodge: ... because you are a profit-making business?
Hartzer: Yes.
Hodge: And do you think that from the consumer’s perspective, the way in which Australian banks have gone into wealth management has been a success?
Hartzer: I think at a high level, clearly not.
Hodge: And what does that suggest to you about the bank assurance model?
Hartzer: I don’t think banks fully thought through how the model needed to evolve to be consistent with being part of a service business that focuses on long-term relationships.
Hodge: Is it the case, do you think, that the movement into wealth management assumed a capacity on the part of banks to provide compliant financial products and financial advice – I’m sorry, not financial products, I will say wealth management products and financial advice when, in reality, the expertise of most banks is only in providing compliant deposit accounts and loans?
Hartzer: That’s one way to look at it. I think banks just underestimated how different the models were and how the model needed to evolve to be consistent with the way banks should run themselves.
Updated
Hodge is asking Hartzer lots of questions about the role of financial advice in Westpac’s business.
You can see these questions aren’t really directed towards Hartzer. They’re for the commissioner, Kenneth Hayne.
Remember: this round of hearings, where we’re finally hearing from the bank bosses, is dedicated to understanding policy issues.
The royal commission is trying to figure out what banking practices ought to go in the dustbin of history.
Financial advice, financial planning, the manufacture of worthless wealth products – these things are all in the line of fire for an overhaul or a shredder.
Updated
Does Westpac even need a financial advice service?
So it doesn’t sound like Brian Hartzer, the boss of the bank, is aware of whether anyone in the bank has looked into whether their customers need to have an ongoing advice service agreement (an Oasa).
That’s important, because Michael Hodge is attempting to get at whether the bank has checked whether it is charging customers for services they don’t actually need. And locking customers into two-year agreements is potentially an issue there.
Hodge: Are you aware of how Westpac evaluates whether or not clients who have gone into an Oasa should have gone into an Oasa?
Hartzer: Well, my understanding is that would be part of the pre-vet process that we go through and the quality assurance process we go through when we look at the files, the statements of advice.
Hodge: Do you know whether Westpac has performed any analysis to try to determine what the characteristics are of customers in a general way for whom an ongoing advice service agreement is appropriate?
Hartzer: No, I don’t.
Hodge: Does that seem surprising to you?
Hartzer: I’m not saying it hasn’t happened. I’m just saying I’m not aware of it.
Hodge: You just don’t know?
Hartzer: No, I just don’t know.
Hodge then asks whether Westpac is considering if it even needs to have its financial planning business: I just wonder when you’re forming a judgment about whether it makes sense for Westpac to continue with a financial planning business, whether, necessarily, part of that is trying to figure out how many of our customers actually genuinely need a – to have an ongoing advice agreement?
Hartzer: Yes. That – that forms a part of it, certainly.
Hodge: And when you say “that forms a part of it, certainly”, is it something then that you’ve taken into account thus far in your thinking?
Hartzer: Well, I – I’ve said publicly recently that we’re thinking through how we make advice available to different segments of customers, and implicit in that statement is that we have to look at the different segments and understand where that sort of an advice relationship makes sense for them, as well as for us.
Updated
So back to the two-year contracts, Michael Hodge puts forward that a lot of Australians don’t actually need an ongoing advice relationship with their financial adviser.
The subpoint there being that most people are not hugely wealthy – they are trying to pay off their mortgage or work out their retirement plans.
Brian Hartzer:
Possibly. I’m not sure most Australians have one. But there’s a reasonable portion of Australians that would see value in that.
Updated
So why are Fofa and financial advisers becoming a profession important?
This interaction gives some insight:
Hartzer: I would observe that financial advice evolved over the last 20 years, starting very much in the way you characterise it as a distribution channel, and gradually transitioning into more of a profession.
Hodge: And that change is relatively fundamental because for a long time financial advisers were receiving ongoing commissions in relation to the financial products that they were acting as the distribution mechanism for?
Hartzer: Yes.
Hodge: And what then happened was that, particularly with the advent of Fofa, they were, by legislation, no longer permitted to be a distribution mechanism?
Hartzer: That’s a good way to characterise it, yes.
Hodge: They were being forcibly transformed into a profession?
Hartzer: Yes.
Hodge: To provide advice to customers?
Hartzer: I think it was all – the subtlety, I would say, I think it was already moving in that direction but Fofa formalised that.
Hodge: The writing had been on the wall for a few years?
Hartzer: Yes, indeed.
Hodge: And the discussion about whether or not – I’m sorry, I withdraw that. The concerns about the commissions being paid to financial advisers had been known for some time?
Hartzer: Yes.
Hodge: And the possibility of legislative reform had been foreshadowed since probably about 2010?
Hartzer: I wasn’t in the country then, so I don’t remember.
Hodge: All right. And at least one institution had moved, in about 2010, to try to switch new arrangements from being commission arrangements over to advice arrangements, but you’re not aware of that?
Hartzer: I’m not – I don’t know.
Hodge: All right. In any event, can I suggest what all of this – what the fees-for-no-service problem suggests is that the switch from commissions to ongoing advice, which was intended to be a profound shift in the nature of the relationship between the adviser and the client, didn’t actually result in that profound shift?
Hartzer: I think that’s too broad a statement.
Hodge: That is, you think in some cases it did result in the shift?
Hartzer: Yes … I think in the vast majority of cases, my sense is that the financial advisers are trying to do the right thing. But, clearly, there are cases where that hasn’t happened or people haven’t gotten the memo about the shift that – that you describe.
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So much of what we’re seeing in the royal commission goes back to Fofa, the “future of financial advice” laws.
The Fofa laws were introduced by the former Labor government in 2012, and the financial industry hated them.
Why? Because they introduced a duty for financial planners and advisers to put their customers interests first, and ban the payment of sales and trail commissions, among other things.
The Abbott government worked incredibly hard to water them down. Incredibly hard.
After inheriting the Future of Financial Advice Act, which was legislated in 2012 and which came into effect in July 2013 but which didn’t take proper effect until mid-2014 – because that’s when Asic decided to start enforcing it – the Abbott government tried to add significant amendments to the bill.
It didn’t want an overarching requirement for advisers to act the best interests of their customers, and it didn’t want customers to have to “opt in” to having fees deducted from their accounts regularly.
It argued that he laws placed too many restrictions on financial advisers.
Long story short, the government ultimately failed. It only managed to buy the industry two more years before the laws were introduced.
So when you hear about “pre-Fofa” and “post-Fofa,” we’re talking about two very different financial regimes.
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So we circle back round to Brian Hartzer saying he is not fundamentally opposed to customers opting in to that agreement with Westpac’s financial advisers every year, so they know what they are paying for, but he still thinks it would be a burden to the financial advisers.
His argument is basically that the more time they spend doing that, the less time they have to advise.
Michael Hodge doesn’t seem to be having much of that argument, given that, well, most professions have regular oversight requirements.
Hodge: Do you regard financial advisers as a profession?
Hartzer: I think it should be. I think it’s moving in that direction. And I think more reform would be helpful to make that happen.
Hodge: All right. Can you think of other professional services where it is regarded as too burdensome to ask clients each year if they still agree to pay for and receive an ongoing service?
Hartzer: I don’t know.
Hodge: I’m sorry?
Hartzer: I don’t know.
Hodge: Does that mean you can’t think of one?
Hartzer: I haven’t thought about it. I haven’t thought about it.
Hodge: Does it seem to you that fundamental to the nature of a profession is if you’re providing a service to a client you will agree on exactly what that service is and agree on how much you’re going to charge for that service?
Hartzer : Yes.
Hodge: And that in any other profession, it would be very surprising to hear a member of the profession say, “It’s too burdensome to have to have that confirmed even on a yearly basis”?
Hartzer: I don’t know.
Hodge: You don’t have a view about that?
Hartzer: I haven’t thought about it.
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Michael Hodge then asks whether or not Brian Hartzer is talking about wealthy clients.
Hodge: I’m going to ask you this and not facetiously, these are very wealthy people you are speaking about?
Hartzer: Relatively speaking, that would be true, yes.
Hodge: And can I suggest to you that’s quite an important point, because the subset of clients that need to have an ongoing advice relationship and are in a position where they’re happy to just leave somebody to monitor their no doubt very substantial investments, are going to be very wealthy clients?
Hartzer: It depends on your definition but broadly, I would say yes.
Updating customers about fees was 'administrative burden': Westpac boss
Michael Hodge, who is still questioning Brian Hartzer, seems a little confused by that explanation:
Hodge: Now, I’m struggling with the idea that it would somehow be a distraction for the planner from working for the client to have to call up the client and actually talk through with the client what the client’s needs were and whether they still needed an ongoing fee agreement?
Hartzer: Well, some of these clients are being spoken to on a regular basis by their advisers anyway. So they would view it as an unnecessary administrative burden. The advisers have a – in some cases, reasonably sizeable portfolio and of customers they would have to ring. So I’m just saying it – you know, if you spend time doing that you’re not spending time doing something else.
Hodge: Presumably, though, you need to be contacting your clients anyway and talking with them about what their needs are?
Hartzer: In some cases. It – largely, yes, but it depends on the nature of the relationship with that adviser and their client.
Hodge: But it must be every case. That’s the entire point of having an ongoing fee agreement is that you are receiving ongoing advice and there’s an ongoing monitoring of your needs?
Hartzer: Well, different clients view it differently. Some clients do want an active set of meetings frequently. Some clients view it, as I mentioned earlier, as a bit of a retainer relationship where they can ring up and bounce things off their adviser when they want to, and sometimes they’re quite happy not to do that for quite a long time. But still like to know that the adviser is there. I know people like that.
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So why can’t customers opt in to that agreement every year, instead of every two years?
Brian Hartzer essentially says it’s a paperwork issue.
Just administrative burden, in short. Not sure that it would add a lot of extra value. I don’t profoundly object to it, just think that it would be an extra administrative exercise that clients wouldn’t necessarily welcome. They would add cost, that would ultimately be borne by customers and would distract time that clients could be spending with their clients giving them advice.
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Michael Hodge is straight into it.
He asks Brian Hartzer about an internal review undertaken by Westpac in January.
Westpac called it an “ongoing advice service and consequence management thematic review”.
In plain English, that means Westpac conducted a review of financial advisers employed by Westpac, to see what “ongoing advice” they were providing customers.
Ongoing advice is a big problem in the industry, because the banks have been claiming they’re providing “ongoing advice” and charging fees for that advice when they haven’t been providing any advice.
Hodge asks: “The review found 50% of the samples tested had no appropriate supporting documentation on file to match the review status recorded in the fee disclosure statement and ongoing advice delivery report?”
Hartzer replies: “That’s possible. You might need to show me which report you’re referring to.”
Hodge shows him the report. It’s from BT Risk (BT Financial is Westpac’s wealth arm).
Hodge: “What I want to ask you to consider and help us with first is, why do you think it had reached the point that these problems, very significant problems, persisted all the way until the beginning of this year before active steps were being taken to address them?”
Hartzer:
Well, I think one of the bits of background to this is there had been an over-reliance on the fact that customers had – were opting into – an advice relationship every two years.
So every two years customers were signing a contract saying, ‘I want an ongoing advice relationship and I’m agreeing to this set of fees.’ And then every year we were providing a fee disclosure statement that reminded customers what they were paying and what they were entitled to.
So I think the business, and perhaps the planners themselves, were overly reliant on that as being sufficient to demonstrate that they were providing the service that customers were paying for.
And – and that clearly was insufficient.
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Good morning
It’s the fourth day of the final block of hearings and Brian Hartzer is back in the chair after a shocking day for the Commonwealth Bank.
You can read some of the revelations from yesterday’s hearings, from Gareth Hutchens, here.
But now it’s Westpac’s turn in the chair and Hartzer, who began his testimony yesterday, is back, being pressed on the bank’s advice services.
Gareth Hutchens and I will be watching and blogging the day’s events, live, so make sure you check back.
The senior counsel assisting, Michael Hodge QC, is back on the case, so let’s get into it.
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