One of Sahay’s customers was accused of providing inconsistent documents to the bank and was threatened with being charged and possibly jailed. Distressed, the customer rang Aussie, believing there had been a mistake in her paperwork. Instead of telling her the truth, the mortgage broker now handling her case was more concerned about whether it would affect her trailing commission. In email correspondence, the broker told another broker, ‘I know it isn’t the best timing, with what has happened, but will this affect the commissions paid on the file?’
Orr quizzed Lynda Harris, an Aussie Home Loans general manager, on why the customer hadn’t been told Sahay was responsible for the fraud and was instead led to believe it was a bank error. ‘That was the process then,’ Harris said, adding that she disagreed with it now. Harris was then asked if it was still the case that customers weren’t contacted if their broker had engaged in fraud. ‘I can’t tell you one way or the other, I’m sorry,’ Harris said.
In 2015, Sahay had pleaded guilty in the Downing Centre Local Court to three charges of fraud after an ASIC investigation found that he created false bank statements for seventeen of his clients to obtain home loans totalling $7 million. For each loan he received $5500 in upfront commissions plus a trailing commission. He was sentenced to community service.5
Orr then referred to an internal audit of CBA’s mortgage-broking business in August 2017, which showed loose compliance systems and inadequate oversight of the loans being referred by mortgage brokers to the bank’s home-lending division. The audit found there were 13,000 active brokers submitting over 12,000 loan applications per month, but management didn’t have the mechanisms or tools to ‘proactively identify broker behaviours’ to ensure they were doing the right thing by their customers, including collecting the appropriate documents to verify whether the loans were affordable. The audit also discovered anomalies in loan documentation. As the commission made clear, such oversights and misconduct were rife across the entire mortgage-broking sector.
The royal commission then heard how, in 2017, as part of a plan to stave off a royal commission and rebuild community trust, the Australian Bankers’ Association had commissioned retired senior Australian public servant Stephen Sedgwick to conduct a review into product-sales commissions in retail banking, including mortgage broking. Sedgwick recommended banning commissions and moving to a fee-for-service system. His report said this form of remuneration was in customers’ best interests.6
In fact, as Sedgwick noted, CBA’s Ian Narev had filed a confidential submission in early 2017 to Sedgwick that suggested moving away from commissions towards a flat-fee payment. Narev highlighted the conflicts attached to commissions and noted that mortgage brokers were not covered by laws regulating financial advice, ‘even though buying a home and taking out a mortgage is one of the most important financial decisions an Australian consumer will make’.
Against that backdrop, CBA’s general manager of home buying Daniel Huggins was called to give testimony on mortgage broking and the CBA. Rowena Orr asked Huggins why CBA hadn’t changed the business model in light of Narev’s letter to Sedgwick. Huggins replied, ‘Well, I think as Mr Narev mentions in his note that these changes would need to be done on a uniform basis. Otherwise, what is a very important business to the Commonwealth Bank could be substantially damaged.’
Essentially what Huggins was saying was that the model for mortgage broking might be unethical, it might lead to adverse consequences for customers, but being the first to change its approach would negatively impact the bank. It was another case of profit before people.
Orr said it was ‘open to the commissioner to find that [fraudulent behaviour] arose not merely because of rogue conduct by individual brokers but because the systems, processes and culture at [CBA’s mortgage-broking business] Aussie Home Loans permitted such misconduct to occur . . . Aussie Home Loans’ risk management systems did not adequately prevent, detect or respond to the fraud; they did not create clear accountabilities for risk or prioritise ownership of risk, and they did not require reports to be made to law enforcement authorities, regulators or disciplinary bodies.’
*
Besides mortgage broking, some banks use introducer programs, where commissions, or a spotter’s fee, are paid in exchange for referrals from financial planners, accountants, property developers, solicitors and builders. The royal commission examined NAB’s introducer program, which accounted for $24 billion of loans the bank had written over a period of three years.
In its 31 January 2018 submission to the royal commission, NAB had admitted its introducer program had problems. It described ‘inappropriate conduct by a cohort of bankers and/or third parties, resulting in loans not being established in accordance with the group’s policies and responsible lending obligations’.
Rowena Orr put it more bluntly when she cross-examined NAB’s executive general manager of broker partnerships, Anthony Waldron. ‘Let’s be frank, Mr Waldron,’ she said, ‘there was fraudulent conduct engaged in by NAB bankers and by introducers. Do you agree with that? . . . We see no reference [in NAB’s submission] to any fraudulent conduct. In fact, the language is very qualified in the description of the conduct here . . . Now, what I want to put to you is that NAB knows and you know that there were unsuitable loans, there was false documentation, there was dishonest application of customers’ signatures on consent forms and there was the misstatement of some loans in loan documentation. All of those things occurred, did they not?’
Waldron replied, ‘Yes, we can now say that they have occurred.’
The brutal reality was that the misconduct included forgery, fraud and a bribery ring whereby staff across five branches took cash bribes to activate home loans based on fake documents. It involved branch managers, introducers and branch staff. Orr said it had taken a whistleblower’s disclosures to NAB to highlight the problem. According to the whistleblower’s email, read by Orr, ‘One customer recently said they told him that he could borrow $800,000 when his property was valued at $400,000. The money exchanges hands in white envelopes over the counter of the bank.’ The scam included supplying fake pay-slips, fake identification documents and fake Medicare cards to secure loans. The fake documentation was allegedly used by the bankers to obtain loans for customers who otherwise would not qualify for them but also to artificially inflate their sales figures so they might be promoted, Orr told the commission. ‘They charged $2800 for each customer for home loans mainly and also personal loans,’ she said.
Waldron’s excuse for NAB’s downplaying of the misconduct in its submission was that the bank was ‘still going through the process of reviewing files’. But Orr had too many documents about the bribery at her fingertips to be duped. Referring to emails and internal documents, she showed that the bank had known about the problem since at least November 2015 but had taken until February 2016 to report it to ASIC. (The law requires banks to tell ASIC about any significant breaches within ten days, so NAB was months overdue.) Other internal NAB documents presented at the commission listed further oversights in the bank’s home loan department, including a lack of proper checks and balances to identify emerging problems, such as fraud.
As the three days of hearings on the lending sector showed, the issues raised about NAB were equally relevant to the rest of the banking sector, including Westpac, ANZ and CBA. Target-based incentives, which drove a sales-at-any-cost mentality, were at the heart of what went wrong inside the banks. They created distortions and encouraged poor behaviour which the banks failed to detect in a timely manner; when they did, it took them too long to deal with the issues, to the detriment of customers. The banks had tolerated forgery, fraud, bribery, slow remediation and questionable compliance, and treated the regulators and the law with utter contempt.
NAB tried to suggest that it had changed its remuneration and incentive schemes to reduce such conflicts. But the royal commission looked behind the spin and found that NAB and other banks continued to award bonuses to staff for achie
ving targets for the sale of home loans.
It seemed that the banks were happy to continue to support a flawed business model until change was imposed on it. When Orr asked CBA CEO Matt Comyn whether he had any plans to stop commission payments to mortgage brokers, he replied, ‘Not – not that I can – no, there is not.’
When Orr asked him, ‘Why is that, Mr Comyn?’ he replied, ‘Well, we’re wondering what might be recommended from the commission.’
‘You’re waiting for us?’ asked Orr.
‘You seem to be probing in the . . . in the right areas, yes.’
Orr and everyone else at the hearing were staggered by Comyn’s response. Hayne raised his eyebrows. He must have thought to himself: what the hell is going on here?
Chapter 17
Round 2: Financial advice
Theft, lies, and fees for no service
THERE WAS A GROWING sense of excitement at the opening on 16 April 2018 of the second round of hearings, which would deal with malfeasance in financial planning. Financial planning is a substantial industry. The top five financial institutions – CBA, Westpac, ANZ, NAB and AMP – control about 50 per cent by revenue, estimated at $4.6 billion, and there are around 25,000 financial advisers acting as a distribution channel for financial products to more than 2.3 million Australians, many of them retirees. It’s an area, as we have seen, that has had more than its fair share of scandals, and putting the sector on trial was always going to be a showstopper.
The royal commission had decided to focus on a little-publicised scandal: fees for no service – or ‘money for nothing’ – whereby customers paid their hard-earned cash for financial advice but received nothing in return. The big four banks and AMP, as noted, had raked in at least $1 billion in fees for services they hadn’t provided. A nice little earner, if you can get away with it.
The gouging had been uncovered as a direct result of the Future of Financial Advice (FoFA) legislation demanding financial advisers write to customers every two years and let them know what they’d done for them during that period, including listing their fees, services and returns – if the customer was happy, the contract would continue, if not the customer could end the contract. The details had been set out by ASIC in an October 2016 report that looked into practices at AMP, ANZ, CBA, NAB, Westpac and the Macquarie Group. It revealed at that time that 200,000 customers had been systemically robbed of an estimated $178 million for financial advice they had never received.1
In typical ASIC style, the report underplayed the significance of the issue, suggesting the problems had arisen due to poor systems and that the institutions were doing all they could to repay the customers they had gouged. The report said, ‘After determining that there were systemic fee-for-service failures, the licensees designed and implemented processes to identify the customers affected. Most of the licensees . . . have engaged external consultancy firms . . . to identify and compensate affected customers, or to provide some level of assurance in relation to those activities. In general, the banking and financial services institutions and their external advisers have used . . . high-level processes to identify potentially affected customers.’
But after delving into what had occurred at AMP and CBA, the royal commission painted a much more alarming picture, and again demonstrated how ineffective and weak ASIC had been. As early as 2006, AMP financial advisers had been caught inappropriately switching customers into AMP superannuation funds to earn fat commissions and generate profits for the company, then under the leadership of Chief Executive Andrew Mohl. ASIC had found problems in almost half of the files it reviewed, and AMP had entered into an enforceable undertaking with ASIC, which included a commitment from AMP to remediate up to 7000 customers and fix the mess. The assumption was AMP had cleaned up its act and kept its nose clean. That was until the royal commission showed otherwise.
*
It was like something out of a Monty Python sketch when Anthony ‘Jack’ Regan, AMP’s head of advice, stepped into the witness box to be grilled by Michael Hodge QC. Under intense questioning, Regan admitted that the insurance giant had made misleading statements to ASIC on at least twenty occasions. The exchanges bordered on the farcical as Hodge tried to work out which part of the company’s toxic culture Regan was apologising for.
‘When you say, Mr Regan, “On behalf of AMP I apologise unreservedly – for the regulatory breaches which are discussed below”,’ asked Hodge, ‘what are you apologising for?’
Regan replied, ‘I will have to take that on notice.’
‘That’s not really how it works. Is the answer you just don’t know?’ Hodge countered.
‘Yes, I’m uncertain,’ said Regan.
‘I’m uncertain,’ was Regan’s constant refrain while he was in the witness box. Ironically, he’d been hired as head of advice in 2017 to improve AMP’s governance. Before that he had run AMP’s New Zealand financial services department.
Later in the questioning Hodge said to Regan, ‘I want to take you through the false and misleading statements that AMP made to ASIC.’ Everyone leaned forward to hear more.
Hodge asked Regan to confirm that the initial breach notice given to ASIC by AMP on 27 May 2015 had stated that none of the customers affected by the breach had paid for periodic reviews of their financial position.
‘Yes,’ Regan replied.
‘And that was untrue, wasn’t it?’ asked Hodge.
‘Yes, I believe it was,’ Regan replied.
Hodge then revealed that back in 2009 AMP had filed a breach report with ASIC that it was charging clients a fee for no service as a result of inadequate monitoring controls. It had agreed to fix the system.
But in 2011 the issue had resurfaced again when an AMP manager told her boss, Michael Guggenheimer, the managing director of financial planning, that ASIC should be alerted to fees-for-no-service breaches. Guggenheimer thought otherwise, saying, ‘I’d like to challenge the notion of this being a breach, it’s not an AFSL [Australian Financial Services Licence] requirement, it’s a business rule.’
Hodge asked Regan: ‘No breach notice was ever given to ASIC in 2011 in relation to this?’
Regan replied, ‘That’s correct.’
It wasn’t until 2015 that AMP launched an internal investigation, after ANZ had publicly announced it had been charging customers fees for no service. Hodge said, ‘What we seem to be seeing is that a conscious decision is made to protect the profitability of AMP at the expense of complying with AMP’s licence. Do you agree?’
Regan replied, ‘Yes.’
Hodge returned to the 2015 breach report, in which AMP had told ASIC that the fees-for-no-service issue had been caused by an administrative error. Hodge said, ‘The processes didn’t fail, did they, Mr Regan? There was a deliberate decision made by AMP to retain fees on some of these clients?’
Regan replied, ‘As I recall, I think it’s both.’
Hodge said, ‘By my count this was the fourteenth false or misleading statement by AMP to ASIC. You’re losing count?’
Hodge counted another six lies before moving on to his next target, AMP chair Catherine Brenner. She had commissioned law firm Clayton Utz to investigate the issues, writing in an email to the law firm, ‘This investigation will be entirely independent of the business and is commissioned exclusively by the board through me and the CEO.’ Yet, as demonstrated in emails between AMP and Clayton Utz produced at the royal commission, the board, including Brenner, had made a series of changes to the report before the final version was presented to ASIC. All up, Hodge, who had by now earned himself the nickname ‘the baby-faced assassin’, outlined twenty-five different draft versions of the Clayton Utz report that had been workshopped with AMP before the final report was submitted to ASIC. In one version Brenner wanted to ensure the Clayton Utz document included a statement that CEO Craig Meller had no knowledge of the fees-for-no-service scandal.
The Clayton Utz report was presented by Brenner and legal counsel Brian Salter in a meeting in O
ctober 2017 with ASIC’s then chairman, Greg Medcraft, and deputy chair, Peter Kell. Hodge asked Regan, ‘Do you feel any discomfort at having met with ASIC and said to them, “This is an independent report”, in light of what you’ve now seen?’
Regan replied, ‘There is a level of discomfort, yes.’
‘And that’s because, from your perspective, looking at it, the report appears far less than independent of the company. Do you agree?’ asked Hodge.
‘That’s correct,’ Regan replied.
Just before Regan left the witness box, Hodge got him to admit what had been clear to many for some time. ‘It’s clear that we preference the interest of shareholders . . . at the expense of clients,’ Regan said.
As Regan walked out, head bowed, a momentary silence engulfed the courtroom. By the end of the day, $600 million had been wiped from the value of AMP’s stock, and the heads of AMP boss Craig Meller and Catherine Brenner were on the block. Meller resigned a week later, and soon Brenner’s position became untenable. Nothing could save her from the wrath of investors as class-action law firms circled. On 30 April, two weeks after Regan had given evidence, Brenner fell on her sword after an emergency board meeting failed to back her.
When the commission handed down its preliminary findings at the end of the two-week hearing into financial planning, saying it was open to finding AMP had committed criminal offences in four of the twenty instances in which it misled ASIC over the fees-for-no-service scandal, there was panic. Clayton Utz rushed to protect its battered reputation, denying it had done anything wrong and releasing a statement saying that it hadn’t misled ASIC and that the investigation had been ‘undertaken according to the terms of reference set by AMP’. AMP’s legal counsel, Brian Salter, also denied any wrongdoing, saying he was just doing his job. Like Meller and Brenner, he lost his position.
Banking Bad Page 20
