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Version 6 Version 7
Bank branches becoming 'uneconomic', ANZ boss tells commission – live Revealed: how ANZ executives can earn 300% bonuses – live
(35 minutes later)
ANZ shareholders kept in dark
There’s a long discussion about the reasons why, for the 2018 financial year, there were four instances of a current or former ANZ senior executive suffering a cut in their variable remuneration for reasons relating to risk, conduct or compliance.
It turns out ANZ shareholders have been kept in the dark about the details.
Elliott was one of the executives who had his pay cut. The other three executives had their variable pay slashed due to issues with risk management.
Elliot says the pay was cut for the three executives in recognition of the fact that ANZ had not met the standards it had set itself for risk management, some of which has actually been publicly discussed at the Royal Commission.
Elliott: “So, for example, the failure to remediate issues on time would be a good example. That was taken into account. As a result of that, those executives received ... less than their target remuneration ... they received, I believe, 60 per cent of their target in particular.”
But the exact figures are subject to a non-publication order - so we don’t know what they are.
Elliott says they are in ANZ’s remuneration report, but Orr says that’s not the case.
Orr: “We’re told that they’re not and that was the basis of the application for a non-publication direction, Mr Elliott. I do want to take that up with you. Do you say that someone reading the remuneration report in your annual report can see that each of those three individuals had their variable remuneration reduced - not just reduced but reduced because of risk, compliance or conduct reasons?”
Elliott: “No, they cannot.”
Orr: “And why not?”
Elliott: “Well, that’s a good question. I can say it’s not market practice. I’m not sure that’s a terrific answer but it hasn’t been.”
Not bad for a year’s work
The royal commission hears about ANZ’s system of executive remuneration.
Its system involves a fixed remuneration component that’s paid in cash and a variable remuneration component.
The variable component is designed to provide 200% of the fixed remuneration component for on-target performance (for senior executives).
That means if a senior executive does what ANZ expects of them in the performance of their role, they will generally be entitled to receive their target variable remuneration, which is twice their fixed remuneration.
And if the senior executive performs above target, they are entitled to up to 300% of their fixed remuneration.
So, if the fixed remuneration for a particular senior executive is $1 million, their target variable remuneration is an extra $2 million, but if they perform above target, they might get up to $3 million in variable remuneration.
Elliott expresses frustration with the “two strikes rule.”
He concedes individual shareholders have very little say in how a large publicly-listed company is run, despite theoretically being part owners of the company.
He says a consequence of them having so few avenues to express their views on a company’s performance is, when they are asked to vote on executive remuneration, via the two-strikes rule, they often take the opportunity to express opinions on all matter of issues.
Elliott: “My views are probably not terribly educated. I do have views. I am concerned that shareholders today, irrespective of their size, have very few avenues for expressing their perspectives to a company. The remuneration report is one of the few avenues given to them. And understandably, I think we’ve seen shareholders use that to have a voice on other issues.”
Orr: “Concerned?
Elliott: “Well, I’m not sure it’s being used for the purpose it was meant. I think the purpose was to talk about remuneration. People use it understandably to express views on all sorts of things to do with the company because they have no other real significant ways or any powerful ways - I mean, the good thing about the two strikes rule, it inevitably has power to it. If you second strike, there is an outcome, as opposed to opposition to general issues that are voted on at an AGM.
“So I am concerned that it is used for incorrect purposes, if you will. But I think it is shareholders expressing the need to be heard as well.”
Orr wants to know significant the expectations of shareholders are in setting remuneration structures for executives.Orr wants to know significant the expectations of shareholders are in setting remuneration structures for executives.
Elliott says they have a “very significant” voice, given their ability to vote on particular issues around remuneration means.Elliott says they have a “very significant” voice, given their ability to vote on particular issues around remuneration means.
He argues they have the most significant voice.He argues they have the most significant voice.
Elliott: “I can’t put a number or percentage on it but it is a very, very significant voice. Perhaps the strongest of all. I am struggling to think of a stakeholder group that has anywhere near the influence on remuneration structures ... as to the actual absolute amounts for some like myself as a chief executive.”Elliott: “I can’t put a number or percentage on it but it is a very, very significant voice. Perhaps the strongest of all. I am struggling to think of a stakeholder group that has anywhere near the influence on remuneration structures ... as to the actual absolute amounts for some like myself as a chief executive.”
Orr talks about the remuneration regime for ANZ’s senior executives.Orr talks about the remuneration regime for ANZ’s senior executives.
She wants to know if there has been an “incorrect calibration” - to use Elliott’s euphemism - of senior executive pay.She wants to know if there has been an “incorrect calibration” - to use Elliott’s euphemism - of senior executive pay.
Elliott says there has.Elliott says there has.
Orr: “In your submissions in response to the interim report you’ve said that, or ANZ said that, as a generalisation over a number of years, and due to various events, the financial services industry has developed a culture that has become overly focused on revenue and sales?Orr: “In your submissions in response to the interim report you’ve said that, or ANZ said that, as a generalisation over a number of years, and due to various events, the financial services industry has developed a culture that has become overly focused on revenue and sales?
Elliott: “Yes.Elliott: “Yes.
Orr: “And this was a point I took up with you earlier today. And also in those submissions, that in cases where ANZ had engaged in problematic conduct, there was often a focus on achieving certain short-term financial objectives, including financial objectives at the expense of the longer term matters?Orr: “And this was a point I took up with you earlier today. And also in those submissions, that in cases where ANZ had engaged in problematic conduct, there was often a focus on achieving certain short-term financial objectives, including financial objectives at the expense of the longer term matters?
Elliott: “Yes.Elliott: “Yes.
Orr: “And ANZ acknowledges that its remuneration and incentive structures have at times not adequately discouraged and may even have encouraged poor conduct. Is that right?Orr: “And ANZ acknowledges that its remuneration and incentive structures have at times not adequately discouraged and may even have encouraged poor conduct. Is that right?
Elliott: “Yes.Elliott: “Yes.
Orr moves on to remuneration, and how it can encourage misconduct.Orr moves on to remuneration, and how it can encourage misconduct.
Orr: “Could each of those steps have been taken much earlier than following the Commission’s inquiry into these matters in the fourth round of hearings?Orr: “Could each of those steps have been taken much earlier than following the Commission’s inquiry into these matters in the fourth round of hearings?
Elliott: “Of course.Elliott: “Of course.
Orr: “And why weren’t they, Mr Elliott?Orr: “And why weren’t they, Mr Elliott?
Elliot: “Because they didn’t receive sufficient attention.”Elliot: “Because they didn’t receive sufficient attention.”
Orr: “Now, since that round of hearings, ANZ has taken several steps directed to assisting Aboriginal and Torres Strait Islander customers living in regional and remote locations?Orr: “Now, since that round of hearings, ANZ has taken several steps directed to assisting Aboriginal and Torres Strait Islander customers living in regional and remote locations?
Elliott: “Yes.Elliott: “Yes.
Orr: “You’ve now committed to working with indigenous leaders to rework your security questions for customers who need to verify their identity over the phone?Orr: “You’ve now committed to working with indigenous leaders to rework your security questions for customers who need to verify their identity over the phone?
Elliott: “I believe so, yes.Elliott: “I believe so, yes.
Orr: “And you’ve decided to offer a telephone service staffed by employees with special training in assisting Aboriginal and Torres Strait Islander customers?Orr: “And you’ve decided to offer a telephone service staffed by employees with special training in assisting Aboriginal and Torres Strait Islander customers?
Elliott: “Yes.”Elliott: “Yes.”
Orr: “You’ve also now decided to cease providing informal overdraft facilities on transaction accounts that you detect are in receipt of certain Centrelink benefits? And the effect will be that from the end of this month, certain Centrelink recipients, as identified by your systems, will be unable to unintentionally overdraw their transaction accounts except in very limited circumstances?Orr: “You’ve also now decided to cease providing informal overdraft facilities on transaction accounts that you detect are in receipt of certain Centrelink benefits? And the effect will be that from the end of this month, certain Centrelink recipients, as identified by your systems, will be unable to unintentionally overdraw their transaction accounts except in very limited circumstances?
Elliott: “That’s my understanding, yes.Elliott: “That’s my understanding, yes.
Orr: “And why have you taken that step?Orr: “And why have you taken that step?
Elliott: “Well, I think it was a recognition that our services had the potential to cause unintended harm to customers who, perhaps, were not as familiar as they could be in terms of how to responsibly use those products. And so while there was no ill intent as far as I can determine, we felt it better to put these safety mitigants in place, if you will, to try to ameliorate that risk.Elliott: “Well, I think it was a recognition that our services had the potential to cause unintended harm to customers who, perhaps, were not as familiar as they could be in terms of how to responsibly use those products. And so while there was no ill intent as far as I can determine, we felt it better to put these safety mitigants in place, if you will, to try to ameliorate that risk.
Orr: “And also since that round of hearings you’ve committed to cease charging dishonour fees on pensioner advantage accounts?Orr: “And also since that round of hearings you’ve committed to cease charging dishonour fees on pensioner advantage accounts?
Elliot: “Yes.”Elliot: “Yes.”
Elliott had told colleagues of his, before the fourth round of hearings, to tell him how many ANZ outlets service communities of people that predominantly rely on Centrelink payments.Elliott had told colleagues of his, before the fourth round of hearings, to tell him how many ANZ outlets service communities of people that predominantly rely on Centrelink payments.
About 40 outlets meet that definition.About 40 outlets meet that definition.
Elliot wanted to be on standby for any remediation issues that could arise from the royal commission’s investigation into those communities.Elliot wanted to be on standby for any remediation issues that could arise from the royal commission’s investigation into those communities.
Elliott takes Orr through the steps again about the economics of ANZ’s branch network.
Orr then asks Elliott why ANZ was so concerned about being prepared for the fourth round of hearings, which were held in late June and early July.
That round of hearings focused on issues affecting Australians who live in remote and regional communities, farming finance, and interactions between Aboriginal and Torres Strait Islander people and financial services entities.
The royal commission has heard shocking evidence of financial advisers employed by Australia’s major banks deliberately targeting Indigenous communities with poor levels of financial literacy.
The fourth round of hearings showed major failings by banks with regards to meeting basic banking needs of indigenous customers.
Elliott says ANZ knew it was going to be the subject of two cases studies during that round, one involving Landmark, the other involving the poor experiences of indigenous customers (where it took ANZ four months to open the correct basic bank account for one customer).
Elliott: “Both issues were likely to be difficult because we knew we had failings in both areas. We knew that both areas were highly and understandably emotional for customers and the community.”
We’re back after lunch.
Senior counsel assisting the royal commission Rowena Orr QC is asking ANZ’s chief executive Shayne Elliott about his bank’s decision to close scores of bank branches around Australia.
AMP’s acting chief executive, Mike Wilkins, wrapped up his evidence to the royal commission this morning.
It didn’t fill AMP’s shareholders with confidence. AMP’s share price has lost 3.7% today (as of 1pm AEST).
Wilkins stubbornly defended AMP’s “vertical integration” model this morning - the business model that has so obviously corrupted Australia’s financial industry in recent decades. Despite all the criticism from the royal commission, and the corporate regulator, about vertical integration, Wilkins reckons it is serving AMP well. It was a bizarre attitude.
Shayne Elliot, ANZ’s chief executive, took the witness box after Wilkins.
It takes ANZ over four years to identify an incident that’s later determined to be a significant breach.
It also takes ANZ 213 days after becoming aware of a breach to report the breach to ASIC. There is a legal obligation under section 912D of the Corporations Act to report significant breaches within 10 days of becoming aware of the breach.
He talked about the steps ANZ was taking internally to better remediate customers.
He also defended ANZ’s decision to shut down scores of bank branches this year, saying they had become uneconomic.
But with that we have broken for lunch.
The hearing will resume at 2pm.
Elliott insists that ANZ thinks seriously about its branch closures, taking things on a case-by-case basis.
He agrees there have been some cases where ANZ’s decision to close a branch has led to the final branch in a regional community shutting down.
Orr wants to know if people still go into branches to discuss significant things like home loans.
Elliott says they do, but for ANZ’s home loan book less than a third of home loans are originated through a branch – 55% come through brokers, another roughly 15% come through ANZ’s mobile banking network.
“So the branch network is not a terribly efficient or .. well-used avenue for home loans,” he says.
He said ANZ has two types of customers who come into its branches – consumer retail customers and small business customers.
“The last report that I saw from our network was that retail traffic, the number of people coming in and the number of things they do when they are there, is falling. I can’t remember the exact numbers but from recollection it’s close to, perhaps, 10% per annum.
“Small business usage remains reasonably solid, so it’s not shrinking.”
Orr changes the topic to ANZ’s branch network.
This year ANZ has closed 35 branches.
Its remaining network comprises 55 branches in inner regional areas, 44 in outer regional areas, six in remote Australia, and four in very remote Australia.
Orr wants to know why ANZ has closed so many branches this year.
Elliott: “Well, consumer behaviour is changing very quickly. And not that it has changed just this year but over the last few years we’re seeing a number of fundamental changes.
He notes the Reserve Bank governor recently noted that the usage of cash has almost become a niche payment solution.
Elliott: “What do people do in branches? Much of it is related to cash, either deposits or withdrawals. So what we’re seeing is a significant fundamental in traffic in our shops, if you will. That fundamental has approached 20-30% over a couple of years, and shows no sign of slowing.
“So, essentially, we are confronted with a dilemma where we have shops and a distribution network with less and less people in it, and, therefore, at some point they become uneconomic.”
Interesting.
As part of ANZ’s attempt to ensure Neave remains independent they’ve put him on a fixed three-year term which won’t be renewed.
He’s only being paid a base salary, which is fixed. There won’t be any variable remuneration.
What, no bonus!? But how could you expect him to do the job he’s been employed to do if he doesn’t get a bonus? He’ll be impossible to motivate.
There has been a long discussion about ANZ’s “customer fairness adviser”.
In December 2016, ANZ appointed Colin Neave as ANZ’s customer fairness adviser with particular focus on remediation. Neave is a former commonwealth ombudsman.
Neave’s role is to advise on customer remediation.
Elliott says Neave has contributed greatly to internal discussions about what to do with customers who use ANZ products that end up causing them harm.
Consider the use of credit cards for gambling.
Elliott says many people use credit cards perfectly responsible, and ANZ respects peoples’ individual choices and rights, but it also believes it has a responsibility to customers who can get into trouble.
He says with regard to the use of credit cards for gaming, ANZ has changed a number of things: (1) how ANZ deals with people who have got themselves into difficulty and how it can put “speed bumps” along the way that make it more difficult for people to use those products irresponsibly.
Orr: “What sort of speed bumps are you thinking of, Mr Elliott?”
Elliott: “So, for example, to suggest - and it is difficult because we are talking about individual rights here - while you may be able to use our products at a gaming venue, we don’t want to see people use the maximum credit limits.
“We want to always have people have some ability and flex left in their cash flow for normal expenses. So we will put essentially a sub-limit in on a card.
“If I’ve got a $5,000 limit in general - I am making this up here but hypothetically, maybe I can only use $4,000. Once I hit $4,000 I could not use that product for gaming purposes beyond there. Things like that.”
Orr: “So is that something that you are considering as a way forward?
Elliott: “We are actually doing that. Yes.
Orr: “And have you commenced implementing that?
Elliott: “We are - we have to amend the terms and conditions of our products to allow us to do that with our customers.”
And again on AMP, the sharp fall in the shares follows a release to the stock market confirming the figures revealed by Wilkins yesterday that the cost of fixing the company’s rep will be a hefty $778m.
Here is that statement to the ASX.