Four Incredible Revelations - Banking Royal Commission
Onlookers have been left stunned by some of the revelations uncovered during the first round of public hearings for the bank royal commission, which wrapped on Friday after two weeks of intense dissection.
The examination of programs and systems in place from the big four and their subsidiaries has thrown up numerous uncomfortable discoveries, but here are four worth knowing about.
Lying on a mortgage application isn’t very hard
ANZ’s head of home loans and retail William Ranken admitted that a customer can provide incorrect information about their living expenses on a mortgage application without fear of the bank cross-checking.
Furthermore, Commissioner Kenneth Hayne suggested mortgage brokers were not incentivised to interrogate customers in search of more reliable information.
Through questioning by counsel assisting the commission Rowena Orr QC, it was found that even if a customer’s stated living expenses, submitted via a mortgage broker, directly oppose living expenses shown in bank statements held by the lender, no follow-up will occur.
“The complexity, the cost and the time of implementing that for every single application would be significant,” Mr Ranken said.
In response, Ms Orr asked: “So, as I understand your answer, it’s too hard to do that. It’s too hard to do anything about an inconsistency, so it’s ignored?”
“It’s not that it’s too hard, it’s actually that it – it is hard – but it’s not that it’s too hard. It’s too hard, but there are better ways to get a better level of comfort around a customer’s expenses,” Mr Rankin said.
The lax approach of banks in verifying mortgage applications has been a concern of the broader economy, with UBS analysts last year estimating $500 billion of Australian mortgages are “liar loans”.
Some mortgage-boosting programs led to bribery and fraud
Employees at some NAB branches in greater western Sydney accepted bribes to facilitate loans they knew to be based on fake documents, the commission heard.
Through the bank’s “introducer” program, non-bank employees who brought prospective home loan customers to NAB brokers received between $100 million and $150 million in overall payments between 2013 and 2016.
The program generated $24 billion in home loans for the bank during that period.
“Let’s be frank, there was fraudulent conduct by NAB bankers and introducers,” Ms Orr put to NAB’s executive general manager for broker partnerships, Anthony Waldron.
“There were unsuitable loans, there was false documentation, there was dishonest application of signatures … all of those things occurred … you knew those things occurred. You had dismissed multiple NAB employees because these things had occurred,” Ms Orr added.
The program worked by offering “introducers” between 0.4 per cent and 0.6 per cent on each home loan they helped arrange.
Widespread selling of dud insurance
Insurance products were sold on a range of loans from several banks to customers ineligible to make a claim because they did not meet certain criteria.
CBA files showed about 64,000 credit card customers may have held insurance they could not claim against.
“We certainly failed … to take reasonable steps. There were some disclosures but I don’t believe the disclosures were adequate,” Commonwealth Bank’s general manager of retail products, Clive van Horen, said.
Mr van Horen also said telephone scripts used to sell credit card insurance instructed staff to push callers to purchase the insurance up to three times before moving on.
Over 42 per cent of CBA’s personal loan and 10 per cent of home loan customers were sold protection insurance.
In 2015 a “knockout” question was introduced to telephone scripts designed to eliminate ineligible customers, but the question only applied to home loans, leaving personal loans open. The knockout question was added to the digital channel in 2017.
When asked by Commissioner Hayne what he should make of CBA’s evidence, Mr van Horen responded: “It’s clear there was a number of errors on our part,” Mr van Horen said. “There was definitely no malintent. Was there poor judgment on our part? Yes.”
Westpac was also grilled on its add-on insurance sales, with the bank said to have also sold insurance packages to customers unable to make a claim.
Car loans are a consumer minefield
Customers have been deliberately kept in the dark on how their car repayment rates are calculated, and how dealers are paid, the commission heard.
Westpac’s general manager of specialist finance, Philip Godkin, explained how flex commissions work – a system aimed at hiking loan interest rates for cash bonuses.
The bank sets a base rate of interest for the loan, the dealer then sets a higher interest rate to be applied to the customer. The dealer and the bank then each receive a percentage of the difference between the bank’s base rate and the final rate set.
“Do customers ever know that that’s the way the commission structure works?” counsel assisting Albert Dinelli asked Mr Godkin.
“No,” Mr Godkin replied. “No customer knows about that structure, I don’t think.”
Up until August 2016 there was no maximum rate set by Westpac.
ASIC has banned flex commissions from November 2018, but Mr Godkin said it would be impossible abandon the structure before then without “unilaterally stepping away from the market altogether”.
But ANZ’s head of small business bank, Guy Mendelson, said ANZ ended the flex commission structure in December 2017, shifting to a published customer rate, from which the dealers can discount, plus a fixed amount paid to the dealer.
“The customer did not understand the arrangement,” Mr Mendelson said. “They were presented a rate but they didn’t understand how that rate was being constructed and who was keeping what, because the inference would be that that was what the bank was charging, and keeping.”
Fraud was also exposed in the car lending sector, with ANZ’s former car finance business, Esanda (sold to Macquarie in 2015), overseeing 92 cases of “guarantor swap” fraud.
The practice involves switching the details of the applicant with the details of their guarantor to get the loan approved.
The second round of the bank royal commission will begin on April 16.