Westpac’s cash earnings for the first half of 2019 will be reduced by an estimated $260 million as the bank continues to work on its customer remediation programs for issues with advice service fees and IO loan switch-overs.
While Westpac has not yet determined its allowance for refunds to customers, the bank has now announced that its cash earnings for 1H2019 will be reduced by $260 million due to “provisions arising from further work” on its customer remediation programs.
This will include costs associated with implementing the remediation program, along with interest on fees to be refunded.
The sum builds on similar cash earnings impacts announced for the full year 2017 and full year 2018, when the earnings were hit by a $118 million and $281 million customer remediation provisions, respectively.
IO loans and business loan refunds
Of the $260 million impact, the vast majority (about 90 per cent) relates to issues identified in previous financial years.
Approximately half of the provisions relate to consumer and business banking, while the remainder relates to its financial advice business (and the ongoing advice service fees debacle as heard of during the banking royal commission).
In banking, the remediation work includes refunds for certain consumer and business customers that had interest-only loans that did not automatically switch over to principal and interest loans when required, and refunds for business customers who were provided with business loans where they should have been provided with loans covered by the NCCP.
In relation to wealth advice, the remediation items will look at customer refunds associated with certain ongoing advice service fees charged by Westpac’s salaried financial planners.
While Westpac had already announced provisions for this, it noted that the additional provisions “reflect an increase in the estimated proportion of instances where records of financial advice were insufficient for the purposes of the remediation”.
As a result, the provision for this item has increased, bringing the estimated proportion of fees that will be refunded to around 28 per cent.
In an update on its work on refunding customers that paid ongoing service fees to authorised representatives where no services were provided, Westpac said it was “focused on identifying and making refunds to customers as soon as possible and will commence remediation in the second half of 2019 for customers of advisers still operating under BT Financial Group’s (BTFG) licences”.
Last week, Westpac said it would exit face-to-face financial advice in BT Financial Group or through authorised representatives, instead selling personal financial advice assets to Viridian Advisory.
However, the bank has said that it will continue to work on this and on determining the extent of the services provided by authorised representatives who are no longer operating under BTFG’s licences, including those who have left the industry.
“This remediation program is more challenging, including because many of the authorised representatives’ files have been difficult to access,” the bank said in a statement.
Speaking of the impact to cash earnings, Westpac CEO Brian Hartzer commented: “A key priority is to deal with outstanding remediation issues and refund customers as quickly as possible.
“As part of our ‘get it right, put it right’ initiative, we are determined to fix these issues and stop these errors occurring again.
“We will continue to review our products and services to ensure they deliver the right outcomes for customers and, if necessary, make further provisions,” he said.