The much-awaited first week of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has concluded with Commissioner Hayne hearing case studies on a number of consumer lending issues involving the National Australia Bank, the Commonwealth Bank of Australia, and Aussie Home Loans.
The key issues that were considered are summarised below.
NAB criticised for "Introducer Program" scandal
The week began with an intense examination of NAB's Anthony Waldron (Executive General Manager of Growth Partnerships) regarding the Bank's "Introducer Program" — an initiative that paid a 0.4% commission to members of the public who referred future mortgage customers to NAB.
According to Waldron’s evidence to the Commission, a "breakdown of controls" at NAB resulted in 20 staff being dismissed for accepting cash-in-hand payments from introducers, in exchange for approving loans that were incomplete, contained incorrect information, or were supported by fraudulent documentation. Approximately 2,480 loans are estimated to have been subject to these referral arrangements.
Waldron explained to the Commission that members of NAB’s board were first informed about the issues with the program in November 2015. NAB made a statutory report to ASIC about the conduct in February 2016. The program has since been limited to third-party professionals who work in relevant industries, including financial planners and accountants.
The Royal Commission's examination of the introducer program continued on the second day, when Waldron was asked about the implications for the 1,300 customers affected by the misconduct. Waldron's evidence confirmed NAB expects to pay between $9 million and $23 million to affected customers by November 2018, when the remediation program concludes.
CBA admits conflicts of interest in the remuneration of mortgage brokers
On Thursday, CBA's General Manager of Home Buying, Daniel Huggins, was examined by the Commission regarding his knowledge of the issues associated with the remuneration of mortgage brokers. Huggins' examination included the revelation that CBA's CEO, Ian Narev, had admitted that the remuneration model for brokers caused a conflict of interest in a confidential submission to Stephen Sedgwick, who undertook a review of retail banking remuneration in 2017. Narev’s submission also included analysis that loans sourced by brokers were, on average, more likely to be highly leveraged, risky, and have a higher loan to value ratio than loans sourced through other channels.
Under questioning, Huggins' admitted there was a conflict in the way mortgage brokers were remunerated by the CBA, stating that "[t]he larger the loan, the larger the upfront commission. The longer the loan and the longer it takes to pay off, the larger the trailing commission and that is a conflict."
When asked about the delay in the CBA dealing with the conflict issues, Huggins indicated it was possible that reluctance to damage an integral line of business to the CBA had been a reason for the delay, as was the need to ensure the brokering industry remained viable. In response to this contention, Commissioner Hayne asked a series of questions about why it was necessary for the broking industry to remain viable and why CBA wasn't able to make a change to its remuneration arrangements ahead of other financial institutions. Huggins' answers revealed a key concern for the CBA was that it would lose access to a significant part of the market if it moved first and other institutions did not follow.
Aussie Home Loans failed to report illegal conduct of brokers
The first week of the Royal Commission concluded with Aussie Home Loans admitting that it had failed to report a number of its brokers who were either convicted or banned for submitting loans with false or misleading documents. In evidence given by Aussie's Lynda Harris (General Manager, People), the mortgage broker acknowledged that "in hindsight", it should have had more robust compliance systems in place to identify and report any conduct of its brokers that was in breach of the law.
The admissions related to the news that four brokers had engaged in fraudulent activities to complete loan applications on behalf of Aussie customers between 2013 and 2015, including relying on false letters of employment. In at least one case, Aussie became aware of the conduct when a bank ceased paying the broker commissions as a result of the conduct.
Hearings will continue over the coming weeks with witnesses from ANZ, CBA, and Westpac anticipated. We will continue to keep a watch on proceedings and keep you up to date.