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Westpac chief executive blames bank's 'culture' for ignoring Asic – live Westpac chief executive blames bank's 'culture' for ignoring Asic – live
(35 minutes later)
An economics course will eventually teach its students about the difference between a hypothetical “perfectly competitive” market with multiple players and price competition, and an “oligopolistic market” with a few large players and little price competition.
Australia’s banking system is an oligopoly, according to the Productivity Commission.
One of the classic strategic problems faced by firms in an oligopoly is the “first mover problem”. This refers to the logic they’ll employ to defend their behaviour.
For example, if oligopolistic firms are all ripping off customers with a particular product, none of them will want to be the first to stop doing so because they’ll lose market share and profits to their less scrupulous competitors.
We heard CBA’s chief executive, Matt Comyn, talk about the first mover problem yesterday.
And we’ve heard about it again today, this time from Brian Hartzer.
Check this exchange between Hartzer and Hodge:
Hodge: “The reason that Westpac didn’t want to simply move itself to give up flex commissions was because it didn’t want to be the first mover in the industry?”
Hartzer: “We didn’t think that making – being the first mover would actually achieve the elimination of flex commissions, because we didn’t think the others would change, if they weren’t required to.
Hodge: “But it would mean that you no longer would be paying flex commissions?
Hartzer: “Yes – and we felt that that would mean we were no longer effectively in the business.”
Hodge: “And it would mean that you would no longer be incentivising dealers to have a conflict of interest between themselves and the customer?”
Hartzer: “Yes.”
Hodge then asks Hartzer whether he still thinks it’s possible for a bank to operate a large-scale financial advice business “in a way that delivers compliant high quality advice?”
He says yes, but “the economics of doing that are getting very difficult”.
“Advice is inherently a challenging issue to monitor because you’re talking about a subjective conversation between two people at some point, investing inevitably has a level of subjectivity around it which can mean that with the best will in the world results don’t necessarily come out the way you expect them to,” he says.
“The standards of documentation and proof that we’re now as a general industry expected to meet are very, very high, and so the cost of training, hind-sighting, storing documents, auditing and the like is very, very high relative to the revenue associated with providing that advice.”
Hartzer admits he’s “disappointed” in the leadership of BT Financial.
Poor and inappropriate advice from financial advisors has been at the heart of many of the wealth advisory issues and Hartzer agrees that “in some respects” many of those problems were foreseeable.
Hodge asks, “do you have a problem, as the CEO, with the leadership of the senior leaders within BT over a number of years, given that all of these problems persisted within BT?
“I’m certainly disappointed,” he says. He says there has been “significant” remuneration consequences for the leaders at the wealth advisory company.
OK we’ve moved onto Westpac’s wealth advisory firm, BT Financal. The commission has heard issues around non-compliant advice and fees for no service across the major financial institutions.
Westpac has set aside $47m in funds for customers who received faulty advice as of September this year.
We’re hearing that Westpac has made a number of changes to improve their processes, but the risk profile is still currently outside of the bank’s “risk appetite”.
Yikes. Hodge gets cranky with Hartzer when he gives a “flippant” answer.Yikes. Hodge gets cranky with Hartzer when he gives a “flippant” answer.
He asks, if it’s not a cultural issue at Westpac, what are the possible explanations?He asks, if it’s not a cultural issue at Westpac, what are the possible explanations?
“The pursuit of a commission on the car is one. Another is [it] was a very sad story of a woman who was really desperate to get a car, and he may have been just really trying to get her a car. So that could have been part of it.”“The pursuit of a commission on the car is one. Another is [it] was a very sad story of a woman who was really desperate to get a car, and he may have been just really trying to get her a car. So that could have been part of it.”
Hodge asks which is more likely: a dealer doing something in order to make a profit and get the commission, or engaging in fraud out of the goodness of their heart?Hodge asks which is more likely: a dealer doing something in order to make a profit and get the commission, or engaging in fraud out of the goodness of their heart?
Hartzer responds: “I couldn’t say. I’m not a car dealer.”Hartzer responds: “I couldn’t say. I’m not a car dealer.”
Hodge doesn’t like that answer:Hodge doesn’t like that answer:
Does it seem to you that when Westpac is coming to design its systems and be involved with car dealers, which are its principal source of making auto finance, that it needs to actually think about things from the perspective of the car dealer?Does it seem to you that when Westpac is coming to design its systems and be involved with car dealers, which are its principal source of making auto finance, that it needs to actually think about things from the perspective of the car dealer?
Yes, Hartzer says.Yes, Hartzer says.
So can I suggest the rather flippant answer which is you’re not a car dealer, rather ignores the position that you’re in, which is that you are dependent upon car dealers in order to make these loans for your profit?So can I suggest the rather flippant answer which is you’re not a car dealer, rather ignores the position that you’re in, which is that you are dependent upon car dealers in order to make these loans for your profit?
The back and forth goes on before Hartzer says:The back and forth goes on before Hartzer says:
We - sorry, we absolutely have an obligation to think about the controls that need to be in place for car dealers in this position, given that they are representing us in - in providing that finance, and we’ve made a number of improvements to those controls since that time to address that issue. We – sorry, we absolutely have an obligation to think about the controls that need to be in place for car dealers in this position, given that they are representing us in – in providing that finance, and we’ve made a number of improvements to those controls since that time to address that issue.
This loan in particular was manually approved by a Westpac credit officer, and Hodge wants to drill into whether this and the previous credit card limit increase offers suggest an “inadequate culture for respecting the responsible lending obligations”.This loan in particular was manually approved by a Westpac credit officer, and Hodge wants to drill into whether this and the previous credit card limit increase offers suggest an “inadequate culture for respecting the responsible lending obligations”.
Hartzer says an internal review did not identify any reward or remunerations issues, Westpac employees in these cases are not incentivised to approve loans.Hartzer says an internal review did not identify any reward or remunerations issues, Westpac employees in these cases are not incentivised to approve loans.
Hodge: So does it follow, therefore, that the – whatever the failing is is simply a failing to have adequately applied the responsible lending obligations?Hodge: So does it follow, therefore, that the – whatever the failing is is simply a failing to have adequately applied the responsible lending obligations?
Hartzer: Yes.Hartzer: Yes.
Hodge: And does that suggest, then, the possibility that the problem, at least at the time, was an inadequate culture for respecting the responsible lending obligations?Hodge: And does that suggest, then, the possibility that the problem, at least at the time, was an inadequate culture for respecting the responsible lending obligations?
Hartzer: I don’t think that follows.Hartzer: I don’t think that follows.
Hodge: So what, then, is the possible explanation for why there was this failure to follow the responsible lending obligations?Hodge: So what, then, is the possible explanation for why there was this failure to follow the responsible lending obligations?
Hartzer: So for our employees, the credit officer’s clearly made a mistake here.Hartzer: So for our employees, the credit officer’s clearly made a mistake here.
Hodge: From your perspective, it’s just some mistake that was made?Hodge: From your perspective, it’s just some mistake that was made?
Hartzer: That’s what it looks like to me.Hartzer: That’s what it looks like to me.
Hodge: I see. And have you considered whether there might be cultural factors that contributed to the conduct?Hodge: I see. And have you considered whether there might be cultural factors that contributed to the conduct?
Hartzer: We’ve considered it, but it’s not obvious that that’s an issue here.Hartzer: We’ve considered it, but it’s not obvious that that’s an issue here.
Hodge: When you consider the two case studies from round 1, the credit card limit increase offers and the car loan, both of which involve Westpac taking a particular approach to the responsible lending obligations, does that suggest anything to you about the culture within Westpac in relation to responsible lending?Hodge: When you consider the two case studies from round 1, the credit card limit increase offers and the car loan, both of which involve Westpac taking a particular approach to the responsible lending obligations, does that suggest anything to you about the culture within Westpac in relation to responsible lending?
Hartzer: No, I think they’re different issues. Each of them.Hartzer: No, I think they’re different issues. Each of them.
OK, we’re moving on to Westpac and car loans. The commission previously heard about a Bank of Melbourne car loan granted to a woman in 2012. The commission heard Nalini Thiruvangadam earned $350 per fortnight and and $600 from Centrelink benefitsOK, we’re moving on to Westpac and car loans. The commission previously heard about a Bank of Melbourne car loan granted to a woman in 2012. The commission heard Nalini Thiruvangadam earned $350 per fortnight and and $600 from Centrelink benefits
She was signed up to fortnightly car loan payments of $259.She was signed up to fortnightly car loan payments of $259.
Westpac gives out billions in car loans every year but the overwhelming majority of car loans on issue by Westpac ware initiated by dealers who can set higher interest rates on car loans to get larger commission.Westpac gives out billions in car loans every year but the overwhelming majority of car loans on issue by Westpac ware initiated by dealers who can set higher interest rates on car loans to get larger commission.
Westpac – and Hartzer now – have acknowledged that the loan was unsuitable and that it breached its obligations under the National Consumer Credit Protection Act.Westpac – and Hartzer now – have acknowledged that the loan was unsuitable and that it breached its obligations under the National Consumer Credit Protection Act.
So, we’re told that Hartzer, in his statement to the commission, said the primary cause of the failure to heed Asic’s changes to unsolicited credit increase offers was “the way in which Westpac’s broader systems and culture addressed regulatory issues”.So, we’re told that Hartzer, in his statement to the commission, said the primary cause of the failure to heed Asic’s changes to unsolicited credit increase offers was “the way in which Westpac’s broader systems and culture addressed regulatory issues”.
He agrees with Hodge that “the culture” – particularly further down the chain – included a lack of appreciation for the significance of respecting the view of the regulator.He agrees with Hodge that “the culture” – particularly further down the chain – included a lack of appreciation for the significance of respecting the view of the regulator.
He says that’s changed since, but we’re also told that no one from the bank suffered any negative consequences as a result of the credit card increase issue because “there wasn’t a specific error by an individual”.He says that’s changed since, but we’re also told that no one from the bank suffered any negative consequences as a result of the credit card increase issue because “there wasn’t a specific error by an individual”.
Hodge: And then when you’re explaining that this is why it wouldn’t be appropriate to take action against any managers or executives, that rather suggests that you’re saying it wouldn’t be fair to punish specific individuals involved in the decision-making and interaction with the regulator because they were acting within their authority in accordance with the culture of Westpac?Hodge: And then when you’re explaining that this is why it wouldn’t be appropriate to take action against any managers or executives, that rather suggests that you’re saying it wouldn’t be fair to punish specific individuals involved in the decision-making and interaction with the regulator because they were acting within their authority in accordance with the culture of Westpac?
Hartzer: In effect, yes.Hartzer: In effect, yes.
Hodge: And does that seem problematic to you, if you want to change the culture of the bank, don’t you need to apply remuneration consequences to employees who act in a way that you don’t want them to act?Hodge: And does that seem problematic to you, if you want to change the culture of the bank, don’t you need to apply remuneration consequences to employees who act in a way that you don’t want them to act?
Hartzer: Yes. Although I think we also have a – an obligation on ourselves as a company to make expectations very clear upfront, and I think that’s part of the issue here.Hartzer: Yes. Although I think we also have a – an obligation on ourselves as a company to make expectations very clear upfront, and I think that’s part of the issue here.
Hodge: Is your point it wasn’t clear at the time to employees that there was an expectation that they would respect the view of the regulator and, therefore, it’s unfair to apply remuneration consequences to?Hodge: Is your point it wasn’t clear at the time to employees that there was an expectation that they would respect the view of the regulator and, therefore, it’s unfair to apply remuneration consequences to?
Hartzer: I wouldn’t say it in such a sweeping way.Hartzer: I wouldn’t say it in such a sweeping way.
One of the most striking things about the banking royal commission has been the timeframe we’re talking about.One of the most striking things about the banking royal commission has been the timeframe we’re talking about.
Remember how commissioner Kenneth Hayne asked the banks to cough up to every act of misconduct and poor behaviour they’d engaged in over the past 10 years?Remember how commissioner Kenneth Hayne asked the banks to cough up to every act of misconduct and poor behaviour they’d engaged in over the past 10 years?
That took us back to 2010.That took us back to 2010.
Remember the global financial crisis?Remember the global financial crisis?
That broke out in 2007-2008. That was when the arteries of the global financial system seized up and very nearly collapsed. We were all extremely lucky to avoid another global depression.That broke out in 2007-2008. That was when the arteries of the global financial system seized up and very nearly collapsed. We were all extremely lucky to avoid another global depression.
Yet here we are this year, hearing evidence about how – a handful of years after the GFC – the banks were ripping off customers, prioritising profits over people, and dismissing regulatorsYet here we are this year, hearing evidence about how – a handful of years after the GFC – the banks were ripping off customers, prioritising profits over people, and dismissing regulators
If the GFC wasn’t enough to get them to behave properly, to appreciate how lucky we all are, what is?If the GFC wasn’t enough to get them to behave properly, to appreciate how lucky we all are, what is?
Hartzer is telling the commission about improvements at Westpac in engaging with the regulator, including a new agenda item in risk meetings.Hartzer is telling the commission about improvements at Westpac in engaging with the regulator, including a new agenda item in risk meetings.
Hodge wants to know who at Westpac knew about the Asic letter to the ABA. Hartzer can’t say why senior executives within the business weren’t aware of the letter and admits he hasn’t looked into why nobody at a more senior level in the bank stepped in.Hodge wants to know who at Westpac knew about the Asic letter to the ABA. Hartzer can’t say why senior executives within the business weren’t aware of the letter and admits he hasn’t looked into why nobody at a more senior level in the bank stepped in.
Hodge: And if you haven’t looked into that, does that suggest that you haven’t necessarily fully investigated and understood what the problem was within Westpac at the time?Hodge: And if you haven’t looked into that, does that suggest that you haven’t necessarily fully investigated and understood what the problem was within Westpac at the time?
Hartzer: I don’t think so. I think that the steps that we’ve taken to strengthen the attention and the resourcing and the focus on regulatory matters would address that issue in any event.Hartzer: I don’t think so. I think that the steps that we’ve taken to strengthen the attention and the resourcing and the focus on regulatory matters would address that issue in any event.
Hartzer is telling the commission that Westpac has improved the way it responds to regulators but Hodge challenges him on his view of the unsolicited credit card increase issue.
Hodge: I get the sense that the point that you’re trying to make is you don’t necessarily even now accept that Asic’s view was right?
Hartzer: Right in terms of what?
Hodge: In terms of the application of the responsible lending obligations to credit limit increase offers?
Hartzer: Well, it [is] kind of moot because credit limit increase offers have ceased altogether.
Hodge: Yes. So I think by saying that you’re saying you don’t need to accept it any more because whether it’s right or wrong any more because it just doesn’t matter?
Hartzer: I haven’t spent a lot of time thinking about it because we stopped doing it.
This is from Brian Hartzer, Westpac's CEO: "I think there was clearly a deficiency in understanding the seriousness with which regulatory disagreements needed to be dealt with"Translation: Westpac didn't take regulators seriouslyHow to hide behind jargon 101 #auspol
So, in September 2012, Asic wrote to the Australian Bankers Association setting out its views about responsible lending requirements for credit limit increases. Asic decided that a “base minimum level of inquiry” was asking individual customers whether they are employed and what their income is.But Westpac didn’t make any changes because of, Hartzer said, a difference of opinion about its obligations. Westpac didn’t tell Asic that it didn’t agree with it on its obligations, and continued its practice of offering unsolicited credit increases. While Westpac’s risk team thought the bank should fall into line with Asic’s requirements, in part because it would provide a better customer experience, that position changed after discussions with the bank’s product team.
Hodge:
Do you think it is a problem that risk had internally formed a view that it should change and alter its position to accord with what Asic wanted, but then after a discussion with product it changed that position?
Hartzer:
Strictly, to the answer to your question, no, because I don’t think that’s – so I do think there is absolutely an issue in the way we handled this with Asic and today we would handle it very differently. So I’m not meaning to argue that point. But I’m just struggling with the suggestion that there was an overruling in this ... you can have different points of view within risk ... It concerns me that we didn’t engage with the regulator when that point of view was pointed out, and that, to me, is where we clearly went wrong in this case.”
Hodge is going to start by looking at Westpac’s approach to credit card limit increases – the practice of sending unsolicited credit card limit increase offers to selected Westpac customers.
The commission has previously heard the bank did not comply with the corporate regulator’s position that banks directly ask customers about their employment status and income when offering them credit card limit increases.
We’re back from lunch. Brian Hartzer, Westpac’s chief executive, is in the stand. Senior counsel assisting the commission, Michael Hodge QC will take the reigns in this round of questioning.
Hartzer has been the managing director and CEO of Westpac since February 2015.
Let me tell you a quick story while we wait for the hearing to resume.
In 2016, the Turnbull government was fighting very hard to reintroduce a bill to parliament to force all superannuation funds to appoint an independent chair and fill a third of their board seats with independent directors.
The policy was pushed by the Financial Services Sector, a body that intensely dislikes the idea that industry super funds have strong union representation on their boards. It argues the boards should be opened up.
In late November of 2016, a forum was held in a theatre in Parliament House, and it was attended by representatives from the super industry, particularly industry super funds. Many of them had travelled from overseas for the occasion. Serious people. The type of people that invest billions of dollars in major infrastructure projects globally. They know how to handle money.
Anyway, Liberal MP Kelly O’Dwyer delivered a speech to the audience that had to seen to be believed.
I wish I’d kept a recording of it. It was a textbook example of misreading an audience.
She told the audience that superannuation funds – and by that she meant industry funds – were not governed to the same standard as major banks and life insurance companies.
It drew laughter from the audience.
“Are you serious?” one audience member said. “She’s got to be joking,” said another.
Peter Collins, who was a former leader of the NSW Liberal party and who had subsequently worked in the industry fund sector, told Guardian Australia that her comments were laughable.
He then said this:
If super funds had been responsible for systemic failures in financial advice, failure to pass on interest rate cuts, excessive executive remuneration and other forms of profit gouging by banks, there would have been a royal commission into super funds in a flash.
It is abhorrent and unacceptable in the minds of most Australians that the standards for super funds should be the same as those tolerated for the banks.
That was in 2016.
This really is extraordinary.
So CBA’s board received a highly critical report from the prudential regulator, the Australian Prudential Regulation Authority (Apra), which identified egregious shortcomings at the bank, and which pointed to serious problems with CBA’s board.
The board was overhauled, and the bank got a new CEO. The new board then asked the former chairman David Turner to return 40% of his fees and he ... refused. He didn’t feel like it.
And that’s that?
What’s more, CBA did not disclose any of this in their final-year report, so shareholders were left uninformed.
Orr asked Livingstone: “Do you think it was important for you to publish that the board had made that request of the former former chair?”
Livingstone replied: “Well, I suppose I didn’t consider at the time including it, and maybe I should have.”
Orr continued: “Well, could I ask you to consider now whether that’s a message that you think should be sent publicly, that you made a decision as a board to request the former chair to return 40% of his fees?”
Livingstone replied: “In – in retrospect, yes, perhaps we should have made that public.”
This is from the chairwoman of the board of Australia’s biggest bank.
Let me editorialise for a moment.
Before the royal commission began, we had to endure a drawn-out public argument from the Financial Services Council – pushed inside parliament by Liberal MP Kelly O’Dwyer – about the desperate need to get more non-union representatives on the boards of Australia’s industry superannuation funds.
But then the royal commission discovered that the most egregious behaviour by super funds in Australia has been occurring inside “retail” super funds – the funds run by Australia’s major banks – not the industry funds who represent workers and who have a mixture of worker and union representatives and independent board members on their boards.
Perhaps it’s time we consider changing the board formation of our major banks so they look more like the boards of industry super funds.
And with that CBA chair Catherine Livingstone is done with her evidence. We’ll break for lunch in a moment before the Westpac chief executive, Brian Hartzer, takes the stand at 2pm AEST.
First though, here’s a quick wrap-up of what we’ve learned this morning:
The former CBA chair David Turner was asked to give back 40% of his pay from the final year on the board after a string of scandals and a damning Apra report.
He said no, because he didn’t recognise in the Apra report the CBA board that he knew.
Since the 2011 financial year, the CBA has never reduced an executive’s short-term remuneration as a result of a risk-related issue that had not yet been made public.
The head of CBA’s wealth division had their executive bonus reduced by only 5% as a result of the Comminsure scandal.
In the same year, the former CEO Ian Narev received 108% of his short-term target bonus, or $2.862m.
At the beginning of the day, Livingstone told the commission she had put her “reputation on the line” by taking the CBA job.
Catherine Livingstone is being asked why Matt Comyn – who was head of the bank’s retail banking service at the time of both the mis-selling of consumer credit insurance and its anti-money laundering failings – was appointed chief executive.
What kind of message does that send, Rowena Orr asks.
The biggest reason he was given the job, the chair says, “is the way he stepped up at the time the Austrac proceedings were lodged”.
In fact, for me, the most telling thing was after the proceedings had been lodged, and I met individually with each group executive, and variously they came in either not having informed themselves or blaming other people. Mr Comyn came in and the first thing he did was apologise. Apologised to me, apologised to the board for what had happened, and his failings in that.
That sounds nice, but Orr reminds Livingstone that it isn’t an answer to her question.
She wants to know what kind of message it sent internally and to the community.
Livingstone says “the easy answer” would have been to appoint an external person.
But, perhaps distressingly, she tells the commission that “to find an external person globally at that level who has not been involved in some regulatory event is almost impossible”.
And I don’t mean that as a joke. So the message that it actually sent inside the organisation is one that these issues are unacceptable and we’re determined to fix them. That was the message it sent.
And what about the external message?
Well, the – the external message, in my view, was the same, in terms of what – the feedback I have had, that here is someone who is committed to dealing with the issues that have arisen. And I think, I would hope, that you’ve seen that in his evidence over the last two days.
Orr is hammering Livingstone over the CBA’s remuneration report, which she says does not make obvious how executive bonuses are adjusted for matters like poor risk management.
“I accept that that is not obvious and that is something that we should consider for next year’s report,” Livingstone says.