Commission finds banks recommending own products was conflict of interest

Commission finds banks recommending own products was conflict of interest

The Banking Royal Commission has had a huge impact on the Australian finance sector, with developments happening faster than we can say ‘junk insurance’ (head here for the context).

We’ve taken time out to blog what’s been happening in the past month, so you’re up to speed on the investigation. 

What’s the Royal Commission about?

The Australian Government is investigating the Australian finance sector – including banks and financial services firms.

The commission was formed in late December, following increased pressure from the public, consumer groups, whistleblowers and some political groups (Labor, the Greens and a handful of National MPs).

The goal of the hearings is to find out if banks and other finance firms have engaged in illegal misconduct, and if sanctions should follow. 

There’s also the issue of compensating victims, and whether Australia has the mechanisms in place to do so.

Here’s what’s been uncovered so far.

What’s been revealed?

  • Evidence of bad behaviour by major banks and financial planners in Australia over the past decade.
  • This includes forged documents, alleged bribery, banks and firms repeatedly lending money to clients without checking their living expenses and selling insurances to individuals unable to afford it.
  • AMP admitted that they lied to regulators and its Chief Executive Craig Meller, stood down as a result of the fallout.
  • The Commonwealth Bank admitted they were charging clients who had died for financial advice.
  • National Australia Bank’s Andrew Hagger admitted that finance advisers from NAB forged signatures and allowed unauthorised withdrawals.

The banks involved

  • Commonwealth Bank, ANZ, Westpac and the National Australia Bank make up 4 of the 5 biggest Australian companies (in terms of market value).
  • As a result, they hold a significant amount of power in the finance system.
  • AMP, Aussie Home Loans, BT Financial, St George and some other smaller vehicle finance companies will be called on by the commission too.
  • In 2017, Commonwealth Bank made a cash profit of $9.8 billion (+4.6% from the year before). This makes them the largest company in Australia.
  • Westpac came next, with $8.1 billion in cash profit (+3%).
  • ANZ hit $6.4 billion (+12%) and NAB made $6.6 billion (+2.5%).
  • The 7 biggest institutions (which includes these 4 banks) own assets to the value of around $4.6 trillion.
  • To give you some context, this is approximately 2 and a half times Australia’s economy, which is valued at $1.8 trillion (per nominal GDP).

* Head here for the source.

Shoddy financial advice and the impact on customers

A while ago banks found out that selling financial advice and products to customers was extremely lucrative.

Their business model was known as ‘vertical integration’. It meant the banks advised people on products and strategies, which in turn recommended their own products to the client.

This profit-making feedback loop had some big problems. The main one? Conflicts of interest.

As a result, the commission looked at the quality of advice provided by two of the biggest financial advice licensees. The licensees were either controlled or owned by ANZ, Commonwealth Bank, Westpac, NAB and AMP.

Out of 75% of the case files reviewed, the advisers were found to have failed to provide advice in the client’s best interest.

The review found ‘inherent’ conflicts of interest stemming from banks giving financial advice to clients they were selling financial products to.

The impact on banking customers

As well as shoddy financial advice impacting banking customers, there has also been poor behaviour on the part of employees of the banks.

  • Approximately $250 million has been paid in remediation, as a result of around 540,000 bank consumers being affected by sub-par conduct relating to home loans. (Since 1 July 2010.)
  • Fraudulent documentation, administration or processing errors and responsible lending breaches were examples of this poor conduct.
  • Around 17,000 bank consumers have been remediated for around $90 million due to poor conduct relating to vehicle loans. (Since 1 July 2010.)
  • More than 34,000 bank consumers were remediated for more than $11 million for responsible lending breaches related to credit cards.
  • More than $128 million was paid to bank consumers due to poor conduct in relation to add-on insurances. (Head here for more on this issue.)

The take away

Although only in its early days, the fallout from the Royal Commission is undoubtedly far reaching.

To date, AMP Chairperson Catherine Brenner has stepped down as a result of evidence relating to staff misconduct. Brenner followed AMP CEO Craig Meller, who resigned earlier in April.

Treasurer Scott Morrison said on 1 May that he expects the board members and executives at Commonwealth Bank to resign, and we’re sure more top-ranking bank employees from the majors will follow.

The information coming out of the review is indeed troubling, but we are heartened by the fact it is clearing the way for a more transparent and fairer financial system.

If you are in the market for a loan and want support from finance professionals who have your best interests at heart, please contact us.

We research and tailor your loan to suit your unique circumstances and financial goals. And we trawl through hundreds of home loan products to find the right one.

In the meantime, if you want up to the minute live coverage on the Royal Commission, head to this Live Feed by the Guardian.

Financial Advice Disclaimer: This information is general in nature. Mortgage brokers do not provide financial advice. Clients seeking financial advice will be referred to a qualified financial planner.