Big 4 Bank Inquiry reports
The Report of the inquiry into the Big 4 banks in Australia has raised concerns with the banks' market dominance and their use of market power. A copy of the Report can be found here.
The House of Representatives Standing Committee on Economics (Committee) has also drawn attention to the number of scandals that have occurred over the past decade and the allegations that have been raised in relation to poor financial advice, the maladministration of life insurance claims and market manipulation. The Committee believes that this highlights an institutional culture that is not focused on clients.
The Committee has therefore released a report detailing ten recommendations to reform the banking industry and designed to deliver better outcomes for consumers. These recommendations were not supported by the Labor members of the Committee which had only one recommendation: to establish a Royal Commission into the banking industry.
The ten recommendations of the Committee are:
- Establish a Banking and Financial Sector Tribunal by 1 July 2017 to replace the Financial Ombudsman Service (FOS), the Credit and Investments Ombudsman (CIO) and the Superannuation Complaints Tribunal (SCT).
The Committee expressed concerns that the current system of external dispute resolution is too complex and legalistic and overlapping jurisdictions create confusion.
The Committee’s recommendations for the Tribunal include that it should operate without lawyers to the extent possible. However, it is not clear whether the Tribunal would be established by statute (as is the case for the SCT) or by industry (as is the case for FOS and CIO).
- ASIC should require Australian Financial Services (AFS) licence holders to publicly report on any significant breaches within five business days of reporting the incident to ASIC or ASIC or another regulatory body identifying the breach. The public report will include:
a)a description of the breach;
b)the steps that will be taken to avoid the breach in the future;
c)the names of the senior executives responsible;
d)the consequences for the senior executives, and if they were not terminated, why termination was not pursued.
It is disturbing that the Government members have made this recommendation. While there is no doubt that financial institutions and responsible senior executives should be held to account for breaches, this is most appropriately done by the regulator and not before the court of public opinion.
- The Australian Competition and Consumer Commission (ACCC), or the proposed Australian Council for Competition Policy, should make recommendations to the Treasurer every six months to improve competition in the banking sector, including why no changes are required, if applicable.
The Committee expressed concerns about the lack of regulatory oversight of competition in the banking sector.
- Deposit product providers should be required to provide open access to customer and small business data by July 2018. ASIC should facilitate this through a binding framework, with appropriate privacy safeguards.
Terms and conditions for banking products should be required to be published in a standardised format.
Penalties should apply to non-compliance.
It is ironic that the Committee is making this recommendation to facilitate competition when imposing standardised requirements means that there is no room for competition to produce better outcomes for consumers.
- The Government should consider whether additional account switching tools are required to improve competition in the banking sector following the introduction of the New Payments Platform (NPP), which will simplify the process for switching payments from one account to another.
The Committee believes that the current measures introduced in 2012 have failed because they take up to two weeks which is too long (para 5.45) and do not apply to regular BPAY transactions, ‘internet pay-anyone’ transactions, or payments to and from debit and credit cards (para 5.44). While this may be addressed by the NPP, the Committee is concerned that ‘it is too early to judge whether it will be enough to increase competition on its own.’ (para 5.58)
- To address barriers to entry to the banking sector, the following should occur by the end of 2017:
a)review the 15 per cent threshold for substantial shareholders (without Government approval) in Authorised Deposit-taking Institutions (ADIs) imposed by the Financial Sector (Shareholdings) Act 1998;
b)review the licensing requirements for ADIs to consider whether the adoption of a ‘two-phase’ licensing process similar to the UK would improve competition;
c)APRA should improve the transparency of its processes in assessing and granting a banking licence.
These recommendations are viewed by the Committee as supplementing ASIC’s innovation hub and regulatory sandbox. The Committee noted changes in the UK to reduce capital requirements (already significantly lower than in Australia) and to introduce the two-phase process which allows new entrants to obtain a restricted licence for a year, giving time to raise capital, hire staff and invest in technology.
- Major banks should be required to engage an independent party to review their risk management frameworks to improve how the banks identify and respond to misconduct. These reviews should be completed by July 2017 and reported to ASIC, with recommendations implemented by 31 December 2017.
The Committee expressed concerns that ‘[t]he processes that the major banks have in place to protect consumers seem to be reactive, rather than proactive’ (para 7.5) and that ‘demonstrable links exist between poor risk culture and the potential for poor consumer outcomes’ (para 7.12). The Committee therefore indicated that the review should focus on:
‘· the development of a proactive framework to identify and manage risks to consumers;
·the creation of an ‘early alert’ system, similar to those used in other industries, to ensure that relevant executives are informed of emerging problems;
·the merits of a ‘product recall’ tool that can be triggered in response to a range of fixed criteria, to supplement ASIC’s proposed product intervention and banning power; and
·the appropriateness of existing training on, and frameworks to support, whistle-blowers and whistle-blower protections.’ (para 7.13)
- ASIC should collect data about the internal dispute resolution (IDR) schemes of AFS licensees to:
a)identify institutions that may not be complying with IDR scheme requirements and take action where appropriate; and
b)determine whether changes are required to ASIC’s existing IDR scheme requirements.
ASIC should respond to all alleged breaches of IDR scheme requirements and notify complainants of any action taken, and if action was not taken, why that was appropriate.
Again, the second part of this recommendation appears to be an unnecessarily restrictive fetter on how ASIC should deal with these matters. No doubt there are complaints that are warranted and ASIC would and should address them appropriately. However, this recommendation appears to start from the premise and all complaints have merit and that vexatious or frivolous complaints never occur.
- ASIC issue an annual report on financial advice (starting at the end of 2017) with details about:
a)the overall quality of the financial advice industry;
b)misconduct by licensees and their representatives (including names of licensees and individual representatives); and
c)consequences for representatives and their licensees guilty of misconduct.
This recommendation is said to be in the context of almost half of all Australian adults having unmet financial advice needs (para 9.3), but it is hard to see how this type of naming and shaming will result in more Australians having the confidence to seek financial advice. This recommendation gives rise to a significant risk that representatives and licensees will be defamed by unproved allegations, unless the report simply amounts to a report of ASIC’s successful prosecutions.
- When a licensee becomes aware that an adviser has breached their legal obligations, the licensee should be required to contact the adviser’s clients to advise them of the breach.
The Committee expressed concern that it is not industry practice that ‘When a financial advisor is found guilty of misconduct, … the clients of that advisor should be notified as soon as possible.’ (para 9.23) Strangely, the Committee based this conclusion on testimony that did not relate to whether breaches are notified to clients but rather whether clients are notified that their adviser has been banned.
Presumably the obligation recommended by the Committee should be limited to significant breaches, rather than minor or technical breaches that do not have any impact for clients. Despite the Committee’s conclusion, in our experience licensees do typically notify clients of breaches that have an impact on them.