In its closing address, the royal commission called on parties involved in the hearings to provide answers to further questions surrounding conduct, remuneration and conflicts of interest.
Rounding up the concerns arising from several case studies that were looked at over the course of the first round of hearings at the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, counsel assisting Rowena Orr outlined that the Commissioner Hayne was now open to make findings on a range of topics involving the banks.
Going over evidence put forward, Ms Orr outlined that CBA, for example, still pays volume-based commissions to brokers, despite stating that this can “lead to a conflict between the customer’s interests and the broker’s interests since the broker can maximise their income by getting the largest loan possible approved extending over the longest period of time”.
She also highlighted that customers receive credit contract schedules that records any commissions paid to brokers/head groups as “not ascertainable” but evidence put forward during the hearings demonstrated that the “amount of upfront commission, the rate of trailing commission, and any amount paid under the connect referral program are each known and are each able to be disclosed by CBA to the customer at the time the loan is entered into, but CBA makes no such disclosures”.
These findings, as well as several others relating to specific case studies, led Ms Orr to state that it was open to the commissioner to make findings that the Commonwealth Bank had engaged in misconduct in regards to four areas. It stated that these could be:
- CBA's remuneration arrangements with brokers and head groups, as well as its failure to disclose commissions to customers, breach the [obligation]…. to “act fairly and reasonably towards the customer in a consistent and ethical manner”.
- CBA's remuneration arrangements with brokers and head groups breach its statutory obligations… to have in place adequate arrangements to ensure that customers of CBA whose home loans are submitted by a mortgage broker are “not disadvantaged by any conflict of interest that may arise wholly or partly in relation to CBAs credit activities or in its provision of financial services”;
- CBA's failure to adequately monitor the activities of its head groups breaches its statutory obligations… to “do all things necessary to ensure that the financial services covered by its financial services licence and the credit activities authorised by its credit licence are engaged in efficiently, honestly and fairly”; and
- CBA's failure to disclose to customers the commissions paid to head groups in respect of their loan breaches its statutory obligations… to “do all things necessary to ensure that the financial services covered by its financial services licence and the credit activities authorised by its credit licence are engaged in efficiently, honestly and fairly”.
Further, Ms Orr said that it was open to Commissioners Hayne to make findings that CBA “engaged in conduct that fell below community standards and expectations”.
She said: “Despite taking the position that volume-based commissions paid to brokers are potentially associated with poor customer outcomes, CBA has failed to remove such commissions or take steps to remove the conflict of interest created by these commissions, a conflict between the broker’s interest in maximising upfront and trail commissions earned from the loans they submit and the customer’s interest in obtaining a loan that meets their needs.”
Further, the senior counsel assisting stated that the bank last year revoked the accreditation of 710 brokers on the basis of inactivity (highlighting that the bank originally intended to revoke the accreditation of approximately 3000 further brokers, but did not proceed with this plan) and noted that the bank had conceded during the hearings that, in hindsight, it would have been better if CBA had not disaccredited them purely based on volume, but instead required inactive brokers to undergo more training in order to ensure the quality of their work.
She said: “By revoking the accreditation of hundreds of mortgage brokers on the basis of inactivity with immediate effect, and without first providing brokers with an opportunity to satisfy CBA of the quality of their activities, CBA paid insufficient regard to the interests of brokers in being able to recommend a full suite of potentially suitable loan products to a customer.”
Ms Orr has now called on all parties that had leave to appear to provide written submissions to a range of follow up questions that have arisen from CBA case studies.
The questions included:
- does the use of upfront and trailing commissions for remuneration of head groups and the brokers who submit loans through head groups lead to poor customer outcomes?
- should upfront and trailing commissions be replaced with an upfront flat fee payment?
- is the first mover issue identified in CBA's evidence a genuine commercial impediment to change in respect of the structure of broker remuneration? If so, what can and should be done to overcome that impediment?
- will the program of reforms in the mortgage broking industry, announced by the Combined Industry Forum in 2017, ameliorate the conflicts of interest or any other issues that have been referred to in this case study?
Do remuneration structures create unacceptable risks?
The counsel also went over several cases historic cases referring to misconduct relating to Aussie Home Loans and some of its brokers.
Ms Orr said: “On the evidence, it is open to the Commissioner to find that the misconduct arose not merely because of rogue conduct by individual brokers but because the systems, processes and culture at Aussie Home Loans permitted such misconduct to occur.
“We note the following matters in particular: the remuneration of Aussie Home Loans brokers was tied directly to the number and size of home loans introduced by the broker. Therefore, the more loans the broker introduced and the higher their value, the greater the commissions that would be paid.
"This resulted in a culture within Aussie Home Loans that prioritised selling of home loans over the proper assessment of the customer’s requirements and objectives for the purpose of identifying and recommending a loan product that was not unsuitable for the customer.”
Ms Orr asked those with leave to appear to provide written submissions to the following questions relating to the Aussie case studies:
- do remuneration structures that reward mortgage brokers for volume of sales of loans create an unacceptable risk that mortgage brokers will prioritise the sales of loan products over their responsible lending obligations; their obligation to recommend loans to customers in a manner that is efficient, fair and honest; their obligation to have adequate arrangements in place to ensure that customers are not disadvantaged by conflicts of interest; and their obligation to ensure that the conduct of the brokers is not misleading, deceptive, or unconscionable?
- do credit licensees, whose representatives engage in mortgage broking activities, have adequate systems and processes to prevent fraud, to detect fraud, to respond to fraud, and to identify and address any detriment to current and former customers occasioned by the fraudulent conduct of its representatives?
Who does a broker act for?
Commissioner Hayne said it would also be of assistance if parties could seek to answer the question of who a broker acts for.
“It’s a deceptively simple set of questions to ask: who does a mortgage broker act for? You can put it in three ways, I think, and the issue has at least three elements to it. Who does the broker act for? That might be seen as an inquiry about fact or fact and law. Two, who does the customer think the broker is acting for? And third, who does the lender think the broker is acting for? And do you give separate answers at separate steps along the way? If you do, what are the markers that tell you, “I’ve gone from a step where this set of answers is appropriate into the next stage where that set of answers is appropriate".
“So who does a broker act for, who does the customer think the broker acts for, who does the lender think the broker acts for, are there varying or varied answers at various steps? If there are, what are they?”
The second round of public hearings will commence on 16 April and will focus on the financial planning and wealth management industry.
The commissioner, the Honourable Kenneth Madison Hayne AC QC, is authorised to submit an interim report no later than 30 September 2018, and will provide a final report by 1 February 2019.
[Related: CBA outlines Aussie ‘misconduct’]