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CBA chief agrees executive's scathing note an 'indictment' on bank – live CBA 'waiting on royal commission' before acting on broker incentives – live
(35 minutes later)
The royal commission is now examining CBA’s sale of three products: Creditcard Plus insurance, home loan protection insurance, and personal loan protection insurance.
Comyn, then head of CBA’s retail division, said he began to develop concerns about the value of the products to consumers from about 2014, the inquiry hears:
My concerns varied from the value of the product, the eligibility criteria which, as I think you know, becomes an issue later, whether we were meeting a genuine need, the claim payout ratio, a number of elements of the product and whether they provide appropriate value and benefits for customers.
Comyn said he feared there were poor sales practices involving the products. He said those concerns were in part driven by the setting of targetes. Comyn says he feared the products were being sold to people who didn’t need them or couldn’t afford them.
I was concerned broadly about sales practices and targets around the sale of products, were often a driver of that, yes.
He raised his concerns with the then chief executive of CBA at least once in 2015, and twice in 2016.
Nothing happened.
I raised the concerns. He had a differing view.
Comyn said he suggested suspending the sales of the products. Nothing happened. CBA continued to sell the insurance products.
Comyn’s concerns stemmed from the experience in the United Kingdom, where the sale of similar products forced the banks to eventually pay compensation to customers.
Orr asks:
What happened with those products in the UK, Mr Comyn?
Comyn:
They led to billions and billions of dollars of remediation to customers. As I understand it, some were in the order of 25 billion sterling.
Orr:
Because they were mis-sold?
Comyn:
Yes
We’re now moving on to trail commissions paid to mortgage brokers. We’re referring here to the fees paid by the customer in an ongoing fashion to mortgage brokers for, ahem, ongoing services.
The problem is, there is no real ongoing service.
Even Comyn admits that.
Commissioner Kenneth Hayne asks him:
Step one is to identify these ongoing services. Are there any ongoing services supplied by a mortgage broker, Mr Comyn?
Comyn:
I think they would be limited, Commissioner.
Hayne:
Well, limited or none?
Comyn:
Much closer to none.
Hayne:
I will take that as a “none”.
Comyn goes on to say that the abolition of trail commissions for mortgage brokers would require legislative change. He also agrees with a productivity commission recommendation that brokers be legally obliged to act in the best interests of their customers.
The inquiry hears that a previous inquiry, known as the Sedgwick review, recommended that banks delink payments to brokers from the size of loans. The Sedgwick review was commissioned by the banking industry itself. The findings were made last year.
Comyn said there was currently no plan to meet that recommendation.
Why is that, asks Orr. Comyn responds:
Well, we’re wondering what might be recommended from the commission.
Orr suppresses a laugh. She asks:
You’re waiting for us?
Comyn:
You seem to be probing in the – in the right areas, yes.
Orr:
You have this obligation to report to Asic about this, though, and you haven’t done so?
Comyn:
Not that I’m – I personally have not. Not that I’m aware of on behalf of the institution but I – I would have to follow up.
So, things are getting interesting. We now know that in April last year, CBA planned to be an industry leader on broker remuneration.So, things are getting interesting. We now know that in April last year, CBA planned to be an industry leader on broker remuneration.
Its plan was to move away from commission payments to brokers, thereby removing the perverse incentive for brokers to hand out unnecessarily large loans. It wanted to move to a flat fee model. Its plan was to move away from commission payments to brokers, thereby removing the perverse incentive for brokers to sell unnecessarily large loans. It wanted to move to a flat fee model.
Internal correspondence shows Comyn urged action on Ian Narev, the then chief executive:Internal correspondence shows Comyn urged action on Ian Narev, the then chief executive:
We believe this is an opportunity that will not be repeated and requires decisive action.We believe this is an opportunity that will not be repeated and requires decisive action.
CBA never changed from its commission model.CBA never changed from its commission model.
Orr asks:Orr asks:
What happened, Mr Comyn?What happened, Mr Comyn?
Comyn:Comyn:
Well, we decided that - and I’m sure - a number of the documents I think you have in my tender bundle, there is lots of work that’s going on, underway - that’s underway concurrently. We come to a view that nobody will follow. And we will suffer material degradation in volume. And we will not improve customer outcomes. And we start thinking about how to continue to engage in the discussion, and certainly some time later we then - there’s meetings with broker groups, we conduct our own research, we get involved in the SIF, productivity Commission starts looking at it. But you’re quite right, at that point in time when I hit send on the email, that was my intent. Well, we decided that – and I’m sure – a number of the documents I think you have in my tender bundle, there is lots of work that’s going on, under way – that’s under way concurrently. We come to a view that nobody will follow. And we will suffer material degradation in volume. And we will not improve customer outcomes. And we start thinking about how to continue to engage in the discussion, and certainly some time later we then – there’s meetings with broker groups, we conduct our own research, we get involved in the SIF, Productivity Commission starts looking at it. But you’re quite right, at that point in time when I hit send on the email, that was my intent.
Comyn later says he would “prefer” to move to the flat fee model. But he feels unable to embrace it because no one would follow, without regulatory intervention. Comyn later says he would “prefer” to move to the flat-fee model. But he feels unable to embrace it because no one would follow, without regulatory intervention.
The crux of the current evidence is that CBA knew its remuneration model for brokers, in which they were incentivised with commissions to sell bigger loans, was leading to poor consumer outcomes.The crux of the current evidence is that CBA knew its remuneration model for brokers, in which they were incentivised with commissions to sell bigger loans, was leading to poor consumer outcomes.
And yet, CBA was too scared of changing to a demonstrably effective model - the Netherlands flat fee model - because the other banks were unlikely to follow suit. An email chain between Comyn and his predecessor, Ian Narev, shows these concerns. Comyn wrote to Narev: And yet, CBA was too scared of changing to a demonstrably effective model – the Netherlands flat fee model – because the other banks were unlikely to follow suit. An email chain between Comyn and his predecessor, Ian Narev, shows these concerns. Comyn wrote to Narev:
What we’ve made clear is that it’s very hard for us to move unilaterally so we would need legislation.What we’ve made clear is that it’s very hard for us to move unilaterally so we would need legislation.
Comyn had been hopeful that a pending Asic report would recommend a flat fee structure. He tells the royal commission:Comyn had been hopeful that a pending Asic report would recommend a flat fee structure. He tells the royal commission:
I thought it would be very difficult to change the - the commission structure unless there was at least regulatory guidance, which I - which I would have thought the industry would then follow. But absent that, I thought it would be very challenging. I thought it would be very difficult to change the – the commission structure unless there was at least regulatory guidance, which I – which I would have thought the industry would then follow. But absent that, I thought it would be very challenging.
We then hear that the idea of de-linking loan sizes from commissions came extremely close to being implemented at CBA. Internal correspondence shows that Comyn was about to announce a flat fee model last year. He advised Narev of an impending announcement in the following week. We then hear that the idea of delinking loan sizes from commissions came extremely close to being implemented at CBA. Internal correspondence shows that Comyn was about to announce a flat fee model last year. He advised Narev of an impending announcement in the following week.
We are proposing to delink the value of a loan from the broker commission and replace with a flat fee, conditional on satisfactory customer outcomes. Interestingly, broker commissions have risen 45 per cent since 2009 as a result of increased house prices. We are also proposing to introduce a transition payment to existing high quality brokers that will provide downside protection in case other lenders do not follow. We are proposing to announce next week, effective in February 2018. We are proposing to delink the value of a loan from the broker commission and replace with a flat fee, conditional on satisfactory customer outcomes. Interestingly, broker commissions have risen 45% since 2009 as a result of increased house prices. We are also proposing to introduce a transition payment to existing high quality brokers that will provide downside protection in case other lenders do not follow. We are proposing to announce next week, effective in February 2018.
He said he did not believe the changes would destroy the broking industry, if the industry followed CBA. But he said there was considerable uncertainty about whether others would follow.He said he did not believe the changes would destroy the broking industry, if the industry followed CBA. But he said there was considerable uncertainty about whether others would follow.
The change would have reduced broker revenue on an average loan from $6,600 to $2,300, the inquiry heard.The change would have reduced broker revenue on an average loan from $6,600 to $2,300, the inquiry heard.
So that flat fee model would have allowed brokers to be “agnostic” to the size of the loan and leverage. It would by extension help to remove an incentive for brokers to sign customers up for loans they didn’t need or couldn’t afford. So that flat-fee model would have allowed brokers to be “agnostic” to the size of the loan and leverage. It would by extension help to remove an incentive for brokers to sign customers up for loans they didn’t need or couldn’t afford.
But CBA did not, in fact, go to the Netherlands’ flat fee model. Instead, they moved from their existing commission structure to a different fee model, in which the lender, rather than the consumer, paid a fee to the broker.But CBA did not, in fact, go to the Netherlands’ flat fee model. Instead, they moved from their existing commission structure to a different fee model, in which the lender, rather than the consumer, paid a fee to the broker.
Orr asks:Orr asks:
So why didn’t you go to the Netherlands’ model rather than to the lender pays the fee model?So why didn’t you go to the Netherlands’ model rather than to the lender pays the fee model?
Comyn says:Comyn says:
Because our - as you will see, we were struggling or grappling with how to implement, and I’m sure we will return to it, we felt there was a genuine first mover disadvantage. We didn’t think it would be replicated, absent regulatory intervention. Therefore, we didn’t think we would improve customer outcomes because, effectively, no one else would change their model. We would just originate fewer loans through that channel. Because our – as you will see, we were struggling or grappling with how to implement, and I’m sure we will return to it, we felt there was a genuine first mover disadvantage. We didn’t think it would be replicated, absent regulatory intervention. Therefore, we didn’t think we would improve customer outcomes because, effectively, no one else would change their model. We would just originate fewer loans through that channel.
Comyn is effectively saying the bank would have lost business if it went to the consumer flat-fee model. No other bank would have followed it, and therefore it wouldn’t have had a huge impact on customer outcomes.Comyn is effectively saying the bank would have lost business if it went to the consumer flat-fee model. No other bank would have followed it, and therefore it wouldn’t have had a huge impact on customer outcomes.
We’re back. And we’re back into evidence about CBA’s approach to mortgage brokering. The royal commission hears CBA considered shifting to a model where customers pay a fat flee for mortgage advice, following a positive experience in the Netherlands.We’re back. And we’re back into evidence about CBA’s approach to mortgage brokering. The royal commission hears CBA considered shifting to a model where customers pay a fat flee for mortgage advice, following a positive experience in the Netherlands.
It would be a significant change from the commission model used by CBA. It would also disrupt brokers significantly, but Comyn believes it worked well in the Netherlands.It would be a significant change from the commission model used by CBA. It would also disrupt brokers significantly, but Comyn believes it worked well in the Netherlands.
Comyn said:Comyn said:
So in the context of our situation, it would prevent – let’s say the fee being set that a customer would pay a broker – let’s call it $2,000 but a financial institution such as ourself couldn’t charge $2,000 because we were prepared to subsidise, because of our size, that would create an unfair advantage. So it required some regulation to ensure there was no beneficial or undue advantage gained.So in the context of our situation, it would prevent – let’s say the fee being set that a customer would pay a broker – let’s call it $2,000 but a financial institution such as ourself couldn’t charge $2,000 because we were prepared to subsidise, because of our size, that would create an unfair advantage. So it required some regulation to ensure there was no beneficial or undue advantage gained.
Comyn said he believed it would improve customer outcomes. It would also reduce the broker’s share of the home loan market.Comyn said he believed it would improve customer outcomes. It would also reduce the broker’s share of the home loan market.
The royal commission has broken for lunch.The royal commission has broken for lunch.
There were no huge revelations from this morning’s evidence. As anticipated, the commission was not attempting to reveal new instances of misconduct or extract a grovelling apology from the CBA’s chief executive, Matt Comyn. Instead, it was aimed at trying to understand the causes of banking misconduct. This is what we heard:There were no huge revelations from this morning’s evidence. As anticipated, the commission was not attempting to reveal new instances of misconduct or extract a grovelling apology from the CBA’s chief executive, Matt Comyn. Instead, it was aimed at trying to understand the causes of banking misconduct. This is what we heard:
Comyn believes the bank’s most concerning failing was that it did not properly understand the different relationships between various parts of its business and customers. That meant it did not properly understand its duty to customers.Comyn believes the bank’s most concerning failing was that it did not properly understand the different relationships between various parts of its business and customers. That meant it did not properly understand its duty to customers.
Comyn believes CBA’s culture will be one of the hardest aspects of the business to change, because it is difficult to measure.Comyn believes CBA’s culture will be one of the hardest aspects of the business to change, because it is difficult to measure.
CBA’s head of compliance in its retail division, Larissa Shafir, wrote a scathing note to Comyn following an inquiry by Apra, the regulator, into the bank’s conduct. Shafir said the report was accurate and vindicated the concerns previously expressed by her team. She said changes were needed to ensure that compliance was not seen merely as a “rubber stamp” exercise. Comyn agreed to the royal commission the note was an “indictment” on CBA.CBA’s head of compliance in its retail division, Larissa Shafir, wrote a scathing note to Comyn following an inquiry by Apra, the regulator, into the bank’s conduct. Shafir said the report was accurate and vindicated the concerns previously expressed by her team. She said changes were needed to ensure that compliance was not seen merely as a “rubber stamp” exercise. Comyn agreed to the royal commission the note was an “indictment” on CBA.
The royal commission spent much of the morning addressing the role bonuses played in misconduct. Comyn said he had the power to address staff bonuses himself. He said he had considered removing bonuses, but decided against it. He said such a move would have significant impacts on parts of the business, particularly in home lending. Comyn says bonuses are important to motivate and incentivise staff to perform well, though he conceded his thinking had shifted somewhat since seeing more examples of bad customer outcomes.The royal commission spent much of the morning addressing the role bonuses played in misconduct. Comyn said he had the power to address staff bonuses himself. He said he had considered removing bonuses, but decided against it. He said such a move would have significant impacts on parts of the business, particularly in home lending. Comyn says bonuses are important to motivate and incentivise staff to perform well, though he conceded his thinking had shifted somewhat since seeing more examples of bad customer outcomes.
CBA removed bonuses for its teller staff last year, and it had no impact on their performance.CBA removed bonuses for its teller staff last year, and it had no impact on their performance.
The former CBA chief executive Ian Narev had hinted to Comyn that the bank may not need bonuses anymore. Comyn said they were necessary to “uncover the unserved financial needs of our customers and ensure we always provide good customer outcomes”.The former CBA chief executive Ian Narev had hinted to Comyn that the bank may not need bonuses anymore. Comyn said they were necessary to “uncover the unserved financial needs of our customers and ensure we always provide good customer outcomes”.
The hearing will resume at 2pm.The hearing will resume at 2pm.
We’ve moved into an examination of mortgage brokers. It’s a significant part of CBA’s business. The bank also owns mortgage aggregators.We’ve moved into an examination of mortgage brokers. It’s a significant part of CBA’s business. The bank also owns mortgage aggregators.
We hear CBA conducted a five-year study on the effect of commissions on the flow of home loans through brokers. The higher the commission, the more home loans flowed, the commission hears.We hear CBA conducted a five-year study on the effect of commissions on the flow of home loans through brokers. The higher the commission, the more home loans flowed, the commission hears.
A bit more on that email chain. Narev, the former CBA chief executive, told Comyn in 2016 that the bank needed to develop its core philosophy on remuneration. They needed to work out what they “actually believe” is the link between bonuses and behaviour, Narev said.A bit more on that email chain. Narev, the former CBA chief executive, told Comyn in 2016 that the bank needed to develop its core philosophy on remuneration. They needed to work out what they “actually believe” is the link between bonuses and behaviour, Narev said.
Narev was hinting at the idea that bonuses may not be needed at all.Narev was hinting at the idea that bonuses may not be needed at all.
In his response to Narev, Comyn offered a few quick thoughts. He said staff needed to be proactive in selling CBA products to customers.In his response to Narev, Comyn offered a few quick thoughts. He said staff needed to be proactive in selling CBA products to customers.
We want our staff to be motivated to uncover the unserved financial needs of our customers and ensure we always provide good customer outcomes.We want our staff to be motivated to uncover the unserved financial needs of our customers and ensure we always provide good customer outcomes.
He continued:He continued:
Customers lack the financial literacy to understand their needs and the products that best served their needs.Customers lack the financial literacy to understand their needs and the products that best served their needs.
Asked about the letter, Comyn says he has certainly seen more examples of bad outcomes for customers and hints that he may be shifting in his thinking on bonuses.Asked about the letter, Comyn says he has certainly seen more examples of bad outcomes for customers and hints that he may be shifting in his thinking on bonuses.
We’re now talking about an email chain between Comyn and Ian Narev, his predecessor, in 2016. Comyn was informing him of changes to remuneration in the Netherlands, where a cap was introduced on variable pay for bank staff, and in the United Kingdom, where the regulator had warned and punished banks for incentivising staff on product sales performance.
Evidence suggested the changes resulted in better customer outcomes in both countries, the inquiry heard.
Comyn explained to Narev that Australia was different, because the banks here were not responsible for the global financial crisis, and so hadn’t been subject to the same sort of regulatory scrutiny. He also said there was “no evidence of widespread mis-selling in Australia” and that Australian banks were more customer-focused.
But he also told Narev CBA’s incentive schemes needed to avoid four risks. The first was “bad customer outcomes”, which included customers receiving loans “they don’t need”. CBA also needed to avoid “broken promises, perceived inaction, and customer needs going unmet”.
We’re now examining a decision by CBA in 2017 to remove financial incentives for its tellers. Comyn agrees that he had hoped the decision would improve customer outcomes. Has it affected the performance of tellers?
I have not observed a deterioration in their performance to date.
Comyn explains that removing bonuses would cause significant problems, particularly in the home lending space. He said a similar approach caused dramatic changes in the UK. He said this had caused more mortgages to originate with brokers:
If you look into the UK you will see all of the major banks there are shutting branches because, in effect, what is happening is more and more of their customers are dealing with intermediaries, which is putting more financial pressure on their branch network, they close their branches, it helps the intermediaries more and you get into a precipitative cycle down.
Matt Comyn concedes he has the ultimate power to make a decision about bonuses, or as he calls them, “short-term variable remuneration”. He said he had considered it, but so far decided against it.
Comyn says remuneration is always under consideration. He says he understands the link between short-term variable remuneration and poor customer outcomes.
Orr:
But you decided not to respond to those links by removing variable remuneration?
Comyn:
We’ve made a number of changes to variable remuneration ... I would certainly be committed to, if they are not completely successful, then it may – and it probably will be – necessary to take further steps.
Orr has taken Comyn to examples where bonuses have motivated CBA staff to do the wrong thing. One was the Dollarmites scandal, which involved branch staff depositing small amounts of money – either the bank’s or their own – to create or top up children’s accounts to meet their own personal targets.
Comyn agrees bonuses can lead to “perverse outcomes”.
Comyn accepts that bonuses create the risk that banking staff will put their own interest ahead of the customers. He says:
There have been examples of that, yes.
Orr asks:
Do you accept that is an inherent risk of short-term variable remuneration?
Comyn:
I do.
Orr helpfully lists other ways CBA could motivate its staff, sans bonuses. These, Orr says, include positive feedback, encouraging them to take pride in their work and be satisfied with helping customers, giving them additional responsibilities, promotion, and a higher base pay.
Orr:
But do you maintain that it is necessary to have another form of motivator which is short-term variable remuneration?
Comyn:
I would suggest that all of the elements that you raised are appropriate, and things that we, of course, do.
But, as always, Orr has laid a trap of sorts.
She produces an email from Comyn to the head of the bank’s remuneration committee, David Higgins. The email says the most “fundamental” care of CBA staff is job security and career and personal development. The email read:
At its most fundamental, our people care about job security, personal growth, a positive environment, and career advancement. CBA has a strong service culture and our people are intrinsically motivated by feeling that they are helping customers and playing their part in a winning team.
Comyn agrees these are motivators, but says bonuses are too.
We’re now getting into another cause of so much of banking misconduct: bonuses. We’ve seen example after example in the royal commission of banking staff putting their own financial gain ahead of the interests of the customer.
Comyn doesn’t like the word “bonus”. He describes it as “short-term variable remuneration”. Orr asks why:
Because I think it sends the wrong message, that it’s something in addition to or part of just coming to work. We tend to think about both the combination of fixed remuneration and short-term variable reward as total remuneration, and there are some principles about why we think short-term variable remuneration is appropriate.
He goes on to say he believes “short-term variable remuneration” is important to motivate and incentivise his staff to boost performance. Orr asks why he can’t just pay them more:
Orr:
Why does not paying an adequate and appropriate level of fixed remuneration adequately motivate and incentivise your staff?
Comyn:
Well, I accept that for the vast majority of people it may be hard to understand why a fixed component wouldn’t – would not be sufficient.
He gives an example of a lender who does 30% less work without bonuses.
I do accept that it’s an open discussion and I do not sit here today saying there are no further opportunities to improve remuneration. It’s still an open issue in my mind.
Comyn says one of the problems within his organisation has been a reluctance to hear criticism. He says there has been a “fragility” among the bank’s executives.
I think at one point maybe in my witness statement I make the point that there was too much focus on not just collaboration but also – actually it’s in the prudential inquiry interview – too much of a sense of relationship at all costs. And so we need to bring much more sharpness and a willingness to listen, and in the past I think there’s been too much fragility of – on the part of individuals to – to hear criticism.
We hear another “troubling” response to the Apra report by a senior CBA executive, the general manager for compliance in the bank’s retail division, Larissa Shafir. She warned that changes were needed to ensure that CBA’s “decisions are made on the basis of an understanding of compliance risk, and that compliance is not viewed as a blocker or a rubber stamp function”. Orr summarises Shafir’s note to Comyn:
Ms Shafir referred to the lack of authority of the compliance function which she said was rooted in senior management’s lack of appreciation of the regulatory environment, and the legitimate expectations of good conduct the community place on an organisation of CBA’s size, scale and history.
Orr asks Comyn whether this is an “indictment” on CBA. Orr:
Mr Comyn, Ms Shafir’s comments are an indictment of the culture within CBA in relation to treatment of compliance risk, and operational risk, more generally. Do you agree?”
Comyn:
Yes, I do.