Australian financial institutions have been under the microscope over the past year, facing the scrutiny of a royal commission and the Australian Securities and Investments Commission (“ASIC”), the corporate regulator. We will publish a series of posts on the sector, summarising open findings under the royal commission and other ongoing proceedings, enforceable undertakings, remediation activities and settled cases.
Westpac Banking Corporation (“Westpac”) is the subject of our first post.
Royal Commission
The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (the “Royal Commission”) was established on December 14, 2017, by the Governor-General of the Commonwealth of Australia. The Commissioner will submit an interim report by September 30, 2018 and will provide a final report by February 1, 2019.
Westpac has been involved in multiple cases in the Royal Commission thus far:
- Round 1 – Consumer lending
- In her closing address, Senior Counsel Assisting stated that it was open to the Commissioner to make multiple findings of misconduct by Westpac in relation to a single car loan made in 2012 (identified in a specific case study).
- In its submission regarding the car loan case study, Westpac accepted that some but not all of its actions had fallen short of the relevant standards or had otherwise breached certain statutory obligations.
- In the same address, Senior Counsel Assisting also stated that it was open to the Commissioner to make multiple findings of misconduct by Westpac, and that Westpac engaged in conduct that fell below community standards and expectations, in relation to its practices regarding credit card limit increases from September 2012 to December 2014. Senior Counsel Assisting also said it was open to the Commissioner to find that there were a number of causes of misconduct or conduct falling below community standards and expectations on this issue, which are attributable to the culture and governance practices at Westpac.
- In its submission regarding the credit card increases case study, Westpac rejected all allegations of misconduct, most of the allegations of conduct falling below community standards and expectations, and most of the allegations regarding its culture and governance practices.
- In her closing address, Senior Counsel Assisting stated that it was open to the Commissioner to make multiple findings of misconduct by Westpac in relation to a single car loan made in 2012 (identified in a specific case study).
- Round 2 – Financial Advice
- In her closing address, Senior Counsel Assisting stated that it was open to the Commissioner to make multiple findings of misconduct by two Westpac financial advisers in connection with the advice they gave whilst employed at Westpac, and to make multiple findings of misconduct by Westpac and conduct falling below community standards and expectations in the period when those financial advisers provided advice (between 2011 and 2015). Senior Counsel Assisting said it was also open to the Commissioner to find that Westpac’s alleged misconduct can be attributed, at least in part, to Westpac’s remuneration practices, and to the inadequacy of Westpac’s consequence management system.
- In its submission, Westpac accepted multiple instances of misconduct by the two Westpac financial advisers. However, Westpac rejected the allegations that it should be found to have engaged in misconduct, though Westpac accepted that there were failings in its consequence management system.
- Westpac accepted that its conduct in regards to poor advice received to an individual couple by one of the two Westpac financial planners fell below community standards and expectations. However, Westpac rejected allegations that its conduct in regards to the other Westpac financial planner fell below community standards and expectations.
- In her closing address, Senior Counsel Assisting stated that it was open to the Commissioner to make multiple findings of misconduct by two Westpac financial advisers in connection with the advice they gave whilst employed at Westpac, and to make multiple findings of misconduct by Westpac and conduct falling below community standards and expectations in the period when those financial advisers provided advice (between 2011 and 2015). Senior Counsel Assisting said it was also open to the Commissioner to find that Westpac’s alleged misconduct can be attributed, at least in part, to Westpac’s remuneration practices, and to the inadequacy of Westpac’s consequence management system.
- Round 3 – Loans to small and medium-sized enterprises
- In his closing address, Counsel Assisting stated that it was open to the Commissioner to find that Westpac had, in relation to the “power and communication” topic, engaged in misconduct and conduct falling below community standards and expectations in 2017.
- In its submission regarding the “power and communication topic”, Westpac accepted that its Bank of Melbourne (“BOM”) subsidiary did not act fairly and reasonably in requiring the small business that was the focus of the case study to provide a term deposit, but Westpac did not accept that it acted unethically in doing so. Westpac rejected other allegations of misconduct. However, Westpac accepted that BOM engaged in conduct that fell short of community standards and expectations.
- In his closing address, Counsel Assisting stated that it was open to the Commissioner to find that Westpac had, in relation to the “power and communication” topic, engaged in misconduct and conduct falling below community standards and expectations in 2017.
- Round 5 – Superannuation
- In his closing submission, Counsel Assisting stated that it was open to the Commissioner to make a finding that Westpac-controlled entities (i.e. BT Funds Management Limited) engaged in misconduct in relation to incorrect charges levied in respect of some customers of certain Investor Directed Portfolio Services (“IDPS”) products, IDPS-like products and superannuation products from 2014 to 2016.
- In its submission, Westpac accepted the allegation.
- In his closing submission, Counsel Assisting stated that it was open to the Commissioner to make a finding that Westpac-controlled entities (i.e. BT Funds Management Limited) engaged in misconduct in relation to incorrect charges levied in respect of some customers of certain Investor Directed Portfolio Services (“IDPS”) products, IDPS-like products and superannuation products from 2014 to 2016.
Other issues
Westpac has been under scrutiny for other practices in the past year:
Overcharging mortgage customers
On December 17, 2017, ASIC announced that Westpac would provide 13,000 interest-only mortgage customers with refunds totaling over A$11 million. This remediation follows an error in Westpac’s systems which meant that these interest-only home loans were not automatically switched to principal and interest repayments at the end of the contracted interest-only period. This long-standing error had impacted some Westpac customers dating back to 1993 through August 2016.
Inappropriate credit card increases
On February 7, 2018, ASIC announced that Westpac had provided A$11.3 million in remediation to around 3,400 credit card customers after ASIC raised concerns about its credit card limit increase practices. In 2016 Westpac had previously agreed to improve its lending practices in this area and pay A$1 million over four years to support financial counselling and literacy following a 2014 ASIC review which had identified the concerns.
BBSW conviction
On May 24, 2018, the Australian Federal Court found that Westpac engaged in unconscionable conduct under a provision of the Australian Securities and Investments Commission Act 2001 by its involvement in setting the bank bill swap reference rate (“BBSW”) on four occasions between 2010 and 2012. The penalty hearing has been scheduled for November 8, 2018.
Poor financial advice
On Friday June 15, 2018, the ASIC commenced proceedings against Westpac in relation to alleged poor financial advice provided by one of its former financial planners from 2001 to November 2014. To our knowledge, Westpac has not released a statement in response to these proceedings. However, Westpac has a remediation program underway in respect of the financial planner’s conduct and had already paid approximately A$12 million in compensation to affected clients leading up to the commencement of ASIC’s proceedings.
More broadly, on August 8, 2018, ASIC announced that Westpac has either paid/offered compensation or provisioned around A$31 million in total for remediation for failing to provide financial advice to customers while charging them ongoing advice fees. This was following an ASIC review into financial institutions’ advice practices, under which Westpac agreed to review the period from July 1, 2008, to December 31, 2015.
Breaching responsible lending obligations
On September 4, 2018, ASIC announced that Westpac had admitted to breaching its responsible lending obligations when providing home loans and had agreed to submit to a A$35 million civil penalty to resolve Australian Federal Court proceedings. Westpac admitted to contravening responsible lending provisions of the National Credit Act between December 2011 and March 2015.
As a result of deficiencies, Westpac should not have automatically approved approximately 10,500 loans. If approved by the Federal Court, this will represent the largest civil penalty awarded under the National Credit Act. Westpac noted that it had changed its systems in 2015 and the relevant loans are performing as expect and in line with the broader loan book.
Glass Lewis commentary
In relation to the Royal Commission, we note that the Royal Commission is ongoing and that many of the open findings regarding Westpac are in dispute. However, shareholders may wish to assess the materiality of the open findings that Westpac has accepted.
The overcharging mortgage customers and inappropriate credit card increases are problematic, suggesting an insufficient attentiveness to look after customers’ needs. Additionally, these practices in effect artificially inflated revenue in the reporting periods in which the infractions took place.
The BBSW verdict is problematic and speaks to the historic acceptable risk tolerance at Westpac’s trading desks.
The ASIC proceedings relating to alleged poor financial advice are also concerning, though they appear to be an isolated incident.
The fees-for-no-service scandal is particularly problematic because of the practice itself and, like some of the issues identified above, resulted in Westpac artificially inflating revenue in the reporting periods in which the practices occurred.
In relation to Westpac’s settlement with ASIC regarding its responsible lending obligations, it is worth noting that Westpac did not admit that any of its loans were unsuitable for consumers at the time of their origination, and that there is no remediation activity required or underway as part of the settlement.
Investors will want to take a step back from the details and assess the potential implications of the totality of these practices when considering how to vote at Westpac’s AGM in December 2018.
Daniel J. Smith is General Manager, CGI Glass Lewis.