Senate debates

Thursday, 15 November 2018


Economics References Committee; Report

3:53 pm

Photo of Chris KetterChris Ketter (Queensland, Australian Labor Party) Share this | | Hansard source

I present the report of the Economics References Committee on the banking, insurance and financial services sector, together with the Hansard record of proceedings and documents presented to the committee. I move:

That the Senate take note of the report.

Firstly, I want to thank the secretariat for their sustained hard work on this inquiry, which was run over almost two years since it was referred to us on 29 November 2016. I also want to thank the witnesses who appeared at our three public hearings and the 147 individuals and entities who made submissions. I want to make a special mention here of the consumer group, Choice, which put out a public call for submissions to inform their position. They received an overwhelming 1,300 responses, a clear demonstration of the level of public concern over consumer protections in the financial services sector.

It's important to look at the context of this inquiry which commenced at the time of the absence—and it was a prelude to it in many ways—the banking royal commission. Labor first started calling for the royal commission in April 2016. We listened—and I acknowledge Senator Williams's efforts in this regard—when ordinary Australians told us that they were being ripped off by the banks. We took notice of the evidence coming through the parliamentary committee inquiries, like the three-year inquiry into the impairment of customer loans which, despite reporting in March 2016, this government is yet to respond to. Notably, this report gives voice to concerns similar to those in the royal commission's interim report, including topics such as: financial counselling and legal services; the effectiveness of the enforcement regime; financial advice; conflicted remuneration arrangements and grandfathered commissions; mortgage brokers; fraudulent home loan applications and irresponsible lending; issues with valuations and foreclosure; insurance; engagement with Aboriginal and Torres Strait Islander groups; credit cards; and gambling limits and credit.

I want to look at two of these issues in a bit more depth. The first issue that I want to cover is remuneration practices within our banks. I want to firstly thank the Finance Sector Union for appearing before the committee and for their tremendous effort in bringing Mr Kilian Colin out from the United States to speak to his experience at Wells Fargo. We heard disturbing evidence of the culture at Wells Fargo and the pressure on frontline staff to sell products at the expense of consumer outcomes. Mr Colin was instrumental in exposing some of those practices at Wells Fargo. He told us:

The unreasonable sales goals at Wells Fargo took a huge toll on workers like myself. Like many retail banks here in Australia, the branch where I worked was structured in such a way that we had to meet a sales quota every day. If I did not meet my sales goals, I could be written up for discipline and risk being fired.

This kind of pressure means that bank employees must always prioritise selling product rather than just focusing on serving customers or what best matches their needs. I had a quota of approximately 10 to 20 sales products a day. That means between two and three new accounts and between two and three new credit cards, loans and daily referrals to insurance and mortgage products. While working as a personal banker I was being trained and working hard to be promoted to a business banker. My supervisor encouraged me to take on both roles in order to get promoted. This resulted in having two sets of sales goals that I had to meet, not only to show my manager that I was qualified for this promotion but also to earn my commission and continue to earn a living wage.

At the time, the National Secretary of the FSU, Mrs Julia Angrisano, added the following Australian context to this issue:

Our members believe that improving the standing of their industry requires a change in the culture of target-driven performance management and cost control introduced and perpetrated by management. We have today heard from a former Wells Fargo worker who spoke of a system that encouraged and turned a blind eye to mis-selling of products that resulted in two million bank accounts reportedly being opened either fraudulently or without the customer's consent. A culture like this exists in Australia's banking and financial services sector. It manifests in the remuneration models and structure that are fixated on revenue and financial measures rather than on developing and promoting a professional approach to the provision of financial services and products based on customer needs rather than rewarding product pushing or denying legitimate claims.

On this same issue, the royal commission interim report said that:

The culture and conduct of the banks was driven by, and was reflected in, their remuneration practices and policies.

The conduct that is at the heart of the Commission's work is inextricably connected with remuneration practices, with deficiencies in governance and risk management and with the culture of the entities concerned.

…   …   …

At least until very recently, the central tenet of the remuneration policies of not only the four largest banks but other banks as well (apart from the mutuals) has been to reward what the organisation treats as important: sales and profit. If there were exceptions to this approach, they were immaterial.

The conduct identified and criticised in this report was driven by the pursuit of profit – the entity's revenue and profit and the individual actor's profit. Employees of banks learned to treat sales, or revenue and profit, as the measure of their success.

…   …   …

… almost every piece of conduct identified and criticised in this report can be connected directly to the relevant actor gaining some monetary benefit from engaging in the conduct.

Those are extracts from the interim report of the royal commissioner. The similarities between our evidence and these interim findings of the royal commission are striking.

The second issue I wish to touch on is mortgage brokers, and I thank ASIC for their Report 516: review of mortgage broker remuneration, which didn't get much public attention. I believe that, as we're all quite capable of calling out ASIC on its shortcomings, we should also acknowledge when it does things well, and this is one of those examples. ASIC highlighted in a very detailed and methodical way some of the concerns about remuneration in the mortgage-broking industry and the behaviours it was driving. The then deputy chair of ASIC, Mr Peter Kell, stated during one of the hearings:

… we think there are areas of current industry practice that could and should be reviewed, in particular around some of the types of conflicted remuneration involving bonuses and soft dollar commissions that are paid. It is also the case that we would say that some of the other powers that we were talking about earlier would help to ensure that you get the right sorts of outcomes in this sector. Responsible lending is a very important legislative regime and it is one that we think does its job overall, but it is important to supplement it with some of those other powers that we were talking about earlier in relation to product intervention …

Lo and behold, when you turn to the royal commission and look at the time they spent on mortgage-broking, you find the royal commissioner asking questions such as:

Is it desirable to prescribe that some or all of those who are not employees of banks, but deal with bank customers, must act in the interests, or the best interests, of the client? In particular, what duty, if any, should a mortgage broker owe to the prospective borrower? Is value based commission, paid to the broker by the lender, consonant with that duty? Should a mortgage aggregator owe any duty to the borrower? Again, are the remuneration arrangements for aggregators consonant with that duty?

Again, important work started by our inquiry is now being very appropriately dealt with by the royal commission.

Whilst elements of our work have now been overtaken, we have made three very clear and sensible recommendations to the government:

Recommendation 1

5.34 The committee recommends that the Commonwealth Government give the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry an extension of time to report—

It has become very clear that only 27 witnesses have been able to appear before the banking royal commission out of over 10,000 submissions; that no hearings have been held in South Australia, Western Australia or Tasmania; and that the commissioner should be given more time to appropriately understand these issues—

Recommendation 2

5.38 The committee recommends that the Commonwealth Government provide a response to the Parliamentary Joint Committee on Corporations and Financial Services' inquiry into the impairment of customer loans—

The government has had over 2½ years to respond to this largely bipartisan report and recommendations, and the evidence of that inquiry prompted this inquiry in the notable absence at that time of a royal commission—

Recommendation 3

5.40 The committee recommends that the Commonwealth Government consider increased funding for community legal and financial counselling services dealing with victims of financial misconduct.

The sheer volume of concerns raised in this committee as well the extraordinary number of submissions show that there is a need for increased access to financial counselling and legal services out there.

In conclusion, I note that it was more important for the government to consult with its big business mates than with the little guys ripped off by the banks, but this inquiry contributed to the volume of evidence that demanded a royal commission be called. I seek leave to continue my remarks. (Time expired)

Leave granted; debate adjourned.