Insights / March 22nd, 2018

Banking Royal Commission first public hearing begins

This round of hearings will consider the treatment of consumers by banking and financial service providers with respect to mortgages, car loans, credit cards and other credit products.

The Commission will be using case studies to identify various types of misconduct and will hear evidence from a number of consumers, as well as a representative of a consumer advocacy group. The case studies the Commission will consider in the first hearing are outlined below. The accompanying figures, as provided by Ms Rowena Orr QC on the first day of the hearing, outline the scope of the issues. Ms Orr states that banks have acknowledged aspects of their conduct in connection with home loans have been unacceptable and have caused detriment to consumers. As a result of that conduct, millions of dollars in remediation has been paid to affected consumers, overseen by ASIC.

The case studies are as follows:

Residential Mortgages

  • NAB Introducer Program and fraudulent loan applications

  • Aussie Home Loans fraudulent brokers and broker arrangements

  • CBA accreditation of brokers and broker arrangements

Authorised Deposit-taking Institutions (ADIs) provided $1.6 trillion in residential mortgages in 2017. Residential mortgages are ADIs’ largest assets.

Since 1 July 2010, lenders have paid almost $250 million in remediation to some 540,000 consumers as a result of conduct in connection with home loans. This is a result of three primary sources of conduct, being reliance on fraudulent documentation, processing or administration errors and breaches of responsible lending obligations.

In addition, issues with inaccurate assessment of customers’ ability to repay their home loans continue to persist, with use of inappropriate benchmarks of household expenses being used instead of assessing customers’ actual expenses.

In a witness statement given by Karen Cox, (Coordinator of the Financial Rights Legal Sector), a number of complaints about practices of mortgage brokers were detailed, with Ms Cox identifying broker remuneration creating a conflict of interest as a common feature of these complaints. Ms Cox also referred to APRA statistics which show a materially higher risk of default in loans arranged by brokers.

ASIC has banned 51 individuals or companies for engaging in home loan application fraud.

Car Finance

  • Westpac/St George car finance practices

  • ANZ/Esanda car finance practices

As at March 2017, ASIC estimated that 90 per cent of all car sales were arranged through finance with the average loan size being $39,445.

Almost $90 million in remediation has been paid to almost 17,000 consumers by lenders since July 2010, primarily due to breaches of responsible lending obligations. Over $5.7 million has also been paid in civil penalties by financial services entities in relation to car loans as a result of ASIC action.

Concerns have been raised, articulated in Ms Cox’s witness statement, about add-on insurance products sold with car finance and high pressure sales tactics.

Credit Cards

  • Westpac unsuitable credit card limit increases

  • Citi imposition of international transaction fees

As at November 2017 there were around 16.7 million credit and charge card accounts in Australia. These accounts had total balances of around $52.2 billion. Over $11 million in remediation has been paid to over 34,000 consumers by financial services entities since July 2010 due to breaches of responsible lending obligations in connection with credit cards.

Add-On Insurance Products

  • CBA credit insurance in connection with home loans, personal loans and credit cards

Over $128 million has been paid in remediation to consumers as a result of particular conduct in connection with add-on insurance since July 2010, primarily in connection with car loans.

Credit Offers

  • ANZ unsuitable pre-approved overdraft offers

The issues surrounding personal overdrafts are similar to those surrounding credit cards. Overdrafts often attract fees and interest in certain circumstances, which are not always communicated appropriately to consumers.

Account Administration

  • ANZ account administration errors

  • CBA unsuitable overdraft facilities and failure of automated systems

Account administration errors such as failures to link offset accounts and failures to apply correct interest rates have been financially significant to both consumers and providers. Approximately $239 million has been repaid to almost 540,000 consumers who have been affected by account administration and processing errors in connection with home loans since July 2010.

Looking ahead

Serious questions have already been raised about compliance with existing responsible lending laws across the credit sector. A key issue raised is continuing failure to accurately assess customers’ ability to repay their loans, which in turn threatens the integrity and ongoing health of the credit sector. Also on the radar are concerns about commission payment structures which appear to encourage brokers to recommend unsuitable or more expensive products to their customers.

Credit card regulatory reform has recently been made law, which includes tighter assessment of the customers’ ability to pay and prohibiting unsolicited offers to increase credit card limits. However, because credit is an integral part of the Australian financial system, further regulation seems likely.

The second round of hearings, which will focus on financial planning and wealth management, is expected to commence on 16 April 2018.

Read our previous article on the Banking Royal Commission here.

Please contact Richard Beissel, Hillary Ray or Richard Hopkin our Financial Services Team if you need any assistance or want to know more information.