Economics References Committee
26/04/2017
Consumer protection in the banking, insurance and financial sector
BIRD, Ms Joanna, Senior Executive Leader, Australian Securities and Investments Commission
DAY, Mr Warren, Senior Executive Leader, Australian Securities and Investments Commission
GREEN, Mr Chris, Group Senior Manager, Australian Securities and Investments Commission
KELL, Mr Peter, Deputy Chairman, Australian Securities and Investments Commission
Committee met at 09:32
CHAIR ( Senator Ketter ): I declare open this hearing of the Senate Economics References Committee for the inquiry into consumer protection in the banking, insurance and financial services sector. The Senate referred this inquiry to the committee on 29 November 2016 to report on or by the last sitting day of the autumn sittings in 2018. The committee has published 68 submissions, which are available on the committee's website. This is a public hearing and a Hansard transcript of the proceedings is being made, although the committee may determine or agree to a request to have evidence heard in camera.
I remind all witnesses that, in giving evidence to the committee, they are protected by parliamentary privilege. It is unlawful for anyone to threaten or disadvantage a witness on account of evidence given to a committee and such action may be treated by the Senate as a contempt. It is also a contempt to give false or misleading evidence to a committee. If a witness objects to answering a question, the witness should state the ground upon which the objection is taken and the committee will determine whether it will insist on an answer, having regard to the ground which is claimed. If the committee determines to insist on an answer, a witness may request that the answer be given in camera. Such a request may also be made at any other time.
I ask photographers and cameramen to follow the established media guidelines and the instructions of the committee's secretariat, and please ensure that Senators' and witnesses' laptops and personal papers are not filmed.
I now welcome officials from the Australian Securities and Investments Commission. I remind officials that the Senate has resolved that an officer of a department of the Commonwealth or of a state or territory shall not be asked to give opinions on matters of policy and shall be given reasonable opportunity to refer questions asked of the officer to superior officers or to a minister. This resolution prohibits only questions asking for opinions on matters of policy and does not preclude questions asking for explanations of policies or factual questions about when and how policies were adopted.
Thank you for appearing before the committee today. I invite you to make a brief opening statement, should you wish to do so.
Mr Kell : No, thank you.
CHAIR: Thank you very much. I will kick off questions just in relation to relatively recent media reports about the process of ASIC determining media releases. This relates to a media release dated May 2014 in connection with CBA's financial planning arms. There are references to CBA having misled ASIC over its compensation scheme and the methodology used to compensate clients was dropped from the final release. There were reports that an ASIC media staffer had asked that:
We are not stating openly that CBA misled us? Are we dialling down that rhetoric?
In terms of the final media release, did ASIC dial down the rhetoric?
Mr Kell : I would not agree with the proposition that we dialled down the rhetoric. Our aim in all media releases is to present an accurate summary of the outcomes that we have obtained, and there is inevitably communication within an agency about what exactly was achieved, what does this mean, what can we say and what can't we say. However, in terms of media releases, what we aim to say is a clear and accurate reflection of the outcome that we have achieved.
If I could make just a couple of additional points here. One is that any discussion around what is, ultimately, reflected in a media release comes after we have determined the outcome, and that is very important to understand and that is reflected in ASIC 's formal policy, our Information Sheet 152. The second is that some of the recent coverage refers to older releases and older actions, as you have indicated. If the committee so pleases, I would like to table for the benefit of this committee a statement we made about this issue to the parliamentary joint committee in March 2015 in our opening statements about the fact that we had updated and revised our policy in this area to make it clearer as to how media releases are developed and the limited set of circ*mstances in which we will check for accuracy in relation to negotiated outcomes.
The other point I would make here is that this is—as I am sure you will appreciate—not an insignificant issue. The experience of the Financial Conduct Authority, our counterpart regulator in the United Kingdom, is instructive. A media announcement that they made in 2014 saw around $2.4 billion wiped off the UK stock market as a result of a misunderstanding. What were alleged to be inaccuracies around the way the issue was presented, primarily, wiped off the value of insurers and led to significant disorder in the share market. So announcements that regulators can make, especially about large entities, can have those sorts of impacts, so we need to be careful.
I can assure you, as I said, the key issue here is that we reach an outcome. We then make sure we have an accurate statement of outcome.
CHAIR: There was another media report in relation to the EY review of Macquarie Bank's financial planning arm. In fact it is reported that Adrian Borchok called that review a sham. Was he correct?
Mr Kell : If you had a look at the public statements we did make around our Macquarie's equities action, we required a substantial review of that business by a different third-party expert, KPMG. We required a lot of remedial work as a result of that enforceable undertaking. It achieved significant compensation for affected customers. It required a lot of additional work to ensure there was appropriate staff training and so on.
To give you a bit of context, one of the concerns we had—this is now going back quite a few years—when we looked at that business and the problems that had been raised, was that they had had a series of reviews that had identified problems and potential risk areas and concerns, but they had not been properly acted on. That was not our only concern but that was certainly one of our concerns at that time. They had actually identified some problems but not properly acted on them, and that was one of the contributing factors to our decision to require an enforceable undertaking, a third-party review and the work that followed it. So was the work done prior to that sufficient to ensure that business reached the standards that we expected across the board? No, but I think that EY review needs to be seen in context. It was not a review commissioned by ASIC at the time; it was something that we were focused on.
CHAIR: The email correspondence refers to an initial preference to use the term 'superficial' in relation to describing the EY review. The word superficial was not in the final press release, as I understand it.
Mr Kell : Our release focused on the problems we had found with Macquarie and the work that they had to do to fix things up going forward. Again, I hope you would appreciate that, within a regulator, when you are looking at complex matters, where you have to decide which way to go, how to describe things, what sort of action to take, do you require this in the enforceable undertaking or that, that there will be debate within a regulator as to the best way to characterise things and the best way to go forward. I think that is common to most organisations and I think some of these emails reflect a healthy debate as to how best to tackle important and complex regulatory problems.
However, again, what was the outcome we achieved here? A very significant review of that business—frankly, a complete revamp of that business—plus quite a few advisers banned from the industry plus clients remediated plus monitoring put in place going forward. That was a good outcome. Frankly, we were pretty hard on them in our public messaging as well. If you read the media at the time, I do not think anyone could be in any doubt about that.
CHAIR: This document that has been tabled is your opening statement to the PJC?
Mr Kell : Yes, it was simply to provide some context that this issue had come up around two years ago and that was the time at which we clarified our policy and our Information Sheet 152 to set out the limited set of circ*mstances in which we would share a media release. I thought it might be useful for the committee to understand that this had come up before we had sought to provide some information. Our policy is now on our website and accessible, if people want to see where that goes. So we did recognise that our policy prior to that date was not as clear as it should have been.
CHAIR: Mr Butler from The Australian reports that the FOI dispute seeking the emails in relation to these media releases had dragged on for two years. Can you tell us why it took so long for ASIC to release those documents?
Mr Kell : The original FOI application was received in early 2015. It covered a lot of documents, as you have seen. The FOI Act allows an agency to impose a relatively modest charge for the work that we do to review and retrieve documents, to review them for relevance, to consult with third parties, to consider submissions from third parties and so on. We assessed the charge for processing the request from The Australian as a little over $4,000, which reflected the scope and the time involved in processing it. That was in April 2015. The Australian contested the charge by going to the Information Commissioner, as is their right.
Mr Day : Sorry, can I interject? Just so you can make sense of the chronology, it was only a couple of months after the initial request was made.
Mr Kell : Soon after the request was made this took place. The Australian contested it. In May 2015, in fact, they asked the Information Commissioner to review ASIC's decision to impose charges, which we were allowed to do. We were not contesting the handing over of information but the charging of the fee. That was in May 2015. In February 2017 the Information Commissioner reached a decision: the decision to waive the charges. Soon after that, in April—not long ago—we provided The Australian with the documents. At all times ASIC complied with the timing requirements of the FOI.
CHAIR: Let's move on to your submission. One of the things you note is in relation to the benefits that could flow from ASIC having competition included in its mandate. We note that Choice is also in favour of this. Could you just briefly explain to us why this is so important?
Mr Kell : What we have sought at this stage is not competition powers in the same way the ACCC has competition powers. We have not sought the ability to formally assess and perhaps reject mergers or those sorts of things. Rather, as the markets regulator in financial services, one of the clear objectives we should have is facilitating and improving competition and the impact on competition, which should be formally recognised as one of the issues we should take into account in our decision making. Remember, we make a lot of decisions about whether to grant companies relief or to require disclosure in a particular form or to modify the law in a way that impacts across an entire industry. We think it would be of significant benefit to have that formally recognised as part and parcel of how we should administer the regime and that we should take into account, if you like, the market-wide implications of decisions we make. We do that already in many ways, but we would like to have that formally recognised to be able to communicate that back to our regulated constituency. At times there are claims made like, 'You ought to be helping me rather than improving outcomes in the market as a whole.' We think having that competition mandate would be an important step. Indeed, that is what happened in the UK. The Financial Conduct Authority was given a competition mandate. Subsequently, they have been given a full set of competition powers, but that is not wat we think is necessary in the Australian context.
Senator XENOPHON: That could clash with the ACCC, would it not?
Mr Kell : That is exactly right, so we have not sought that here. That is our reason for doing so. We are finding, I think, increasingly the expectation is that ASIC should be a regulator that is helping to fix market-wide problems and is being proactive. A lot of that, at the end of the day, will impact on the way competition is working or, in many cases, is not working in the market. So having that as a more prominent part of our decision making and the factors we take into account would be valuable.
CHAIR: In relation to this particular aspect of your mandate, could you tell us how this relates to product intervention powers? You mention that the two are importantly related.
Mr Kell : Product intervention power, as you may know, like the competition mandate, was another one of the recommendations coming out of the inquiry David Murray chaired, the financial system inquiry. Product intervention power, in ASIC's view, is potentially a very important power. It is in some ways a reflection on what has been a limitation in the consumer protection regime in financial services in that it has had that over-reliance on disclosure. Product intervention power helps to, if you like, broaden the toolkit and give us greater ability to address problems. There has been a bit of a focus on saying product intervention power is just about ASIC banning products. We think it ought to be a more flexible power than that and operate more broadly. It would allow us, in some instances, to deal with problems in an individual firm that might be selling a product that is going to pose unreasonable risks. Importantly, it would also allow us at times to take an industry-wide approach that fixes competition.
Let me give you an example. We have recently been doing some work on flex commissions. I do not know whether you have come across that term before; it refers to the way loans are provided to people buying cars. The way those loans are being distributed is that the car dealer is paid a higher commission if they manage to get the customer to pay a higher interest rate on their loan. I hope I do not have to explain why that is a problem, the sorts of distortionary outcomes it creates and the fact that it is most likely to impact on those who are vulnerable and the least financially knowledgeable.
Senator XENOPHON: You do not have to explain that—that can be explained! But how does it arise that they say 'Have we got a deal for you! You can pay 12 per cent rather than 10 per cent'? How do they actually wangle it?
Mr Kell : This is exactly where a product intervention power might be useful. We have stepped in and done something about that, but it has taken us a lot longer and it has been a lot more convoluted than would have been the case with a product intervention power. Where someone is saying 'Here's how I'm going to offer a loan, and you're going to get a higher commission if you charge a higher fee' if you are competing with that you are not going to sell as many loans through that channel if you do not offer a similar sort of structure. So what happens is that you get a really unfortunate practice embedding itself across an industry whereby it is hard for an individual to break out unless they basically want to stop selling.
Senator XENOPHON: But how do they do it? Do they say 'We're going to give you free servicing if you agree to this loan'?
Mr Kell : To the consumer?
Senator XENOPHON: Yes. How do they con the consumer?
Mr Kell : This is a classic problem with add-on products. If you are, say, a 19-year-old buying your first car, a flashy, red good-looking car—
Senator XENOPHON: I have a white car with 210,000 kilometres on it!
Mr Kell : —it is hypothetical!—typically, your overwhelming focus will be on that car. Your discussion will be around 'What is this car going to do for me?' When it comes to 'Do you need a loan for it?' often the question is 'How much can you afford to pay?' rather than 'Here's the interest rate, and here are some insurances because you do not want this beautiful new car that you are about to buy get damaged.' The focus for those add-on products tends to be overwhelmingly on the underlying product. In many cases, consumers do not understand what they are getting with the add-ons. This is a problem that occurred across the industry. Something like a product intervention power will allow us to fix what is effectively a competition failure across the market. I am happy to talk about flex commissions more generally.
Senator XENOPHON: Does that mean ASIC can say that if you are going to offer any loans you need to say which loan, to your knowledge, is the best and cheapest available on the market? Can your powers extent that?
Mr Kell : It would depend on how the product intervention power is ultimately drawn up—and obviously that is under consultation at the moment. From ASIC's perspective—as we have now done in this case, though it took a long time—we would like to be able to say that you can pay a commission to the dealer for a car loan but you cannot pay a flex commission. In other words, you cannot pay a commission that goes up as the interest rate goes up. So, in effect, you can rule out the most pernicious aspect of that distribution model.
CHAIR: That is an example of how that product intervention—
Mr Kell : A market-wide fixing of competition failure.
CHAIR: I understand that Treasury is working through this issue at the moment. Can you tell us about the design and distribution obligations that Treasury is looking at?
Mr Kell : Sitting alongside the product intervention power, if you like, would be a new obligation on the part of both the product manufacturer and the distributor to ensure that the products are appropriately designed and appropriately distributed. The products should in some senses be required to be appropriate or suitable for the people who end up with the products. There should be a process for ensuring that they get to the right people—who might not have an appropriate understanding of the risk or financial situation that makes that product the right one for them—and firms should have in place systems and accountability arrangements that enable them to do that clearly. Going back just a little bit: one of the problems we have typically encountered over many years in this sector is that if something goes wrong you often have the product manufacturer pointing the figure at the distributor, such as a financial adviser, saying 'It wasn't us, it was the way it was sold' and then you have the adviser, pointing the finger back at the product manufacturer, saying 'It wasn't us, we just sold the product; it was the way it was designed.' There has been an unwillingness to take responsibility, and a lack of accountability, around ultimately ensuring that the customer gets the right outcome. And that has not been helped by the lack of clarity in the law. So design and distribution obligation is in many ways a way of addressing that problem that we have had where there is a lack of clarity around who is accountable and finger-pointing saying 'It was their fault, not my fault.' I think the message now is that that is no longer acceptable.
CHAIR: We want better outcomes for the consumer, at the end of the day.
Mr Kell : We want better outcomes for the consumer. I do not think it is unreasonable to expect the key players on the supply side to take some responsibility for ensuring that their products are appropriate and that they end up in the right hands. That, after all, was one of the key drivers of the disaster that was the global financial crisis. We want to make sure that that is not how this sector operates going forward.
CHAIR: You mentioned in your submission that your product intervention powers could go further than what was originally proposed. Can you tell us about the importance of that if it did go further than what was originally proposed.
Mr Kell : I suppose one of the key areas that we think is important to capture under the product intervention powers from ASIC's perspective—and, as I said, this is out for consultation at the moment—is that the way in which the people who sell or advise on products are remunerated is fundamental. If you look at many of the problems that have arisen in the financial service sector, they have arisen because of conflicts of interest or a misalignment in remuneration between the adviser or salesperson on the one hand and the consumer on the other hand. So we are keen to have the product intervention power enable us to look at not only the particular way the product has been designed but also the associated way people are remunerated for selling it. You can imagine that there may be instances where the product itself is not necessarily a problem as long as it is sold to the right people. But if people are being paid very high commissions or other sorts of benefits for selling it then the temptation will be to sell it to the wrong people. That, for us, is the key area where we would like to see an extension to what has been proposed.
There are some other areas as well. There is the issue about ensuring that all products are captured so that it covers the ASIC Act as well. For example, funeral insurance may not be captured in the way that it is currently being conceived. That has been a problematic product in the past and we would like to make sure it is universal across the product and the sector.
Mr Day : We also—and we set this out in our submission—want to see it longer than 18 months. At the moment, the proposal is 18 months, with no ability to be extended. We want to see that be a little longer because the arbitrary 18 months may not be sufficient. We would say there may be circ*mstances where we need more flexibility and we may need it to be longer.
CHAIR: Can I turn to enforcement priorities more generally. Can you explain to us briefly the work of the enforcement review that is underway.
Mr Kell : Yes. That is a really important review. We are really pleased that that is actively out there and consulting at the moment. It is a review that is taking place under Treasury. The government announced it last year. In fact, they have accelerated the review. As you are probably aware having been on this committee for a while, we have been asking for some key reforms to our powers for some time. It is looking broadly at ASIC's enforcement powers and the penalties that we have. That includes issues such as a stronger regime for breach reporting. We are on the record, including before this committee, as highlighting some significant limitations with the breach reporting regime at the moment. The penalties are not strong enough, the test is too unclear and so on. That is up for consultation at the moment. We would like a directions power that will more easily enable us to seek compensation where consumers have lost money due to advice that is in breach of the law.
Another potential power that has been talked about that we could seek through the courts would be a disgorgement power. For example, if a firm makes $5 million out of misleading conduct, they may well be required to pay back a multiple of that to provide a significant disincentive. You get that in competition law, especially around cartels. It is not in this regime at this point in time. And then there are the penalties themselves. There are some areas where the penalties that we can seek have simply not even kept up with inflation, let alone what might reasonably be regarded as community standards. So those are some of the broad based elements.
Without going into a lot of detail—we could spend a lot of time talking about this—we would also like to raise some reforms that are specific to the life insurance sector. Under the financial services consumer protection provisions in the Corporations Act, they currently enjoy an exemption for claims handling. We would like to see that exemption removed. So there are some specific areas as well. It is a very important review.
CHAIR: Table 1 of your submission, on page 68, details the key priorities, though I do not see the disgorgement power referred to specifically in the table.
Mr Kell : It is probably there by implication if it is not specific; it should be there. I can happily assure you that the disgorgement power is one that we are keen to see in place. I had better double check on that.
CHAIR: What benefits would consumers see if these changes were introduced?
Mr Kell : I think we would see several benefits. One is that there would be stronger incentives for firms to do the right thing by consumers. There would be clearer incentives, so I think you would see better conduct in the market over time. Going to the point that I made earlier, I think you would also see the benefit, if something did go wrong, of having greater clarity around who is responsible and how they could be held accountable. I think there would be a better ability for the regulator to take action and, in some cases, seek compensation. If some of the issues around the powers we have mentioned in our submission around banning individuals and tougher licensing came into effect, we would also I think be able to help ensure that you have higher standards in terms of the population of financial services providers, including being able to address issues with more senior executives in firms. So I think overall you would have a combination of factors that would contribute to greater incentives to behave better, greater accountability and better outcomes.
Mr Day : Chair, in relation to your question about disgorgement, in the paragraphs following that table there is a reference to the Senate inquiry into white collar crime. In paragraph 408, we reference the fact that we made a submission to that inquiry saying that disgorgement is something we see as important. I note also that paragraph 410 of the Senate committee's report included support for disgorgement.
CHAIR: Thank you. I would now like to turn to commissions. In particular, I want to focus on your report 516 on mortgage brokers, which has raised some very concerning points. First of all, can you describe the market structure and the services that are provided in the mortgage broking area?
Mr Kell : The mortgage broking sector is quite an important sector, as we have said, in the overall credit and home lending sector. You have mortgage brokers, who recommend and arrange loans and tend to be the interface with the consumer. You have aggregators—in effect, networks of brokers—who provide the interface with the lenders. And you have the lenders themselves, both banks and non-banks, in the sector. So that is the first part. To flesh it out: it is worth noting that our report also looked at how home loans are distributed directly through lending staff. A bit over half of the home loans in Australia are distributed through brokers; the others are distributed directly through lenders. Finally, just to complicate things a little further, we have also commented on referrers, who are other parties—they could be real estate agents, lawyers, accountants—who may create leads or pass on consumer details to lenders. They may also be paid commissions. They could be real estate agents, lawyers and accountants; frankly, they could literally be hairdressers—it is a range of players, and we have seen some issues there. But the key players are the mortgage brokers, aggregators and lenders.
CHAIR: In terms of the data that you were looking at to do your analysis of the industry, you spent a fair bit of time in your submission saying that you were not able to find all the data that you needed. Could you explain.
Mr Kell : It was certainly a challenge to obtain all of the data in a way that was straightforward. Lenders, as we have said, could not necessarily in some simple way track whether a particular loan was arranged by broker A or broker B. They did not have systems that allowed them to readily track the amount of remuneration paid to individual brokers. They did not necessarily have systems that allowed them to track the amount of soft-dollar benefits. So one of the recommendations we have made is that this information should be provided through a new public reporting regime of consumer outcomes that will, for a start, require lenders to set up systems to allow them to track this but also provide some transparency for the market. Chris, do you want to add anything on that point?
Mr Green : For example, we found that there is a system of numbering for authorised representatives, but that was not able to be tracked through from the lender's material. That is an example of some of the things that did not connect.
CHAIR: You mentioned that there was trouble getting information from the lenders on the credit licence or credit representative number at the banks.
Mr Kell : I should emphasise that the lenders involved in this review were cooperative. We asked for a lot of information, and they provided us with a lot of information. The difficulties around information did not arise from an unwillingness to provide the data, but it was apparent that the systems that some of the lenders had in place were not as robust and did not give them as clear a picture as they themselves would wish. I think it was a bit of a wake-up call, frankly, for some of the lenders.
CHAIR: Was that a breach of regulatory requirement?
Mr Kell : Not necessarily, in some straightforward sense. Ultimately, our requirements here go to—our focus is on responsible lending, so that is when we will home in on that. It will, in some instances, make it more difficult for them to understand whether they are providing credit in a responsible way. It puts them at risk, if you like, of potentially stepping over the line in a way that is undesirable.
CHAIR: It is a bit concerning. Consumers normally think of the finance sector as being data rich. There is lots of data everywhere, except when we want to know what is going on.
Mr Day : As Mr Kell says, because the entities are responsive, they have data, but there is a question of: is it put in an aggregate format or is it aligned in a way that is useful for the types of questions we might be asking? We are seeing that, across a number of the industries that we regulate, there is lots of information. They have differing systems, different metrics and different numbers in the way that they calculate that, but the alignment to give them the insights that we might want them to have—so, in a broker situation, it may be that you and I might say we want a particular bank to know it has a broker that has written way more business, way more loans, in a particular category than anyone else in the network of brokers for that bank. That would be something you would be interested to know.
It may be, though, that that is not something they are focused on. In one way, they may be focused on that because they are trying to work out who they are paying commissions to but, in another way, they may not be calculating that information. We might want to know that, as the regulator, because we would say, 'Why are they suddenly writing so much businesses that it stands out in the crowd?' There is lots of data—yes, they are data rich—but have they got that data in a place and in a way that can be used both maturely by them and across the industry? The phase that we are moving through in ASIC is to try and work out how to put that data in a way where we can see the industry but also, potentially, the public can see the industry.
CHAIR: That lack of data, or the structure of the data, has made it hard to track remuneration in the industry. That is the problem.
Mr Kell : I agree with that. It meant that it probably cost a few of the lenders a lot more time and effort than we or they had anticipated in producing the data that we needed to properly analyse the industry. That is one of the reasons why having a public reporting regime—and this, as Warren Day has said, has some parallels with other sectors, like life insurance—is a good discipline to ensure that this data will be collected going forward.
I should say we did end up being able to obtain, as we have said, a very large amount of data for this report which has allowed us to undertake the analysis that we ultimately did. It was more challenging for quite a few of the lenders than we had anticipated.
CHAIR: My time is running out, Mr Kell, but I have a couple of further questions in this area. Can you summarise the current regulatory requirements in this area in the regulation of credit.
Mr Kell : The key focus for ASIC is to ensure that credit is provided to consumers in a way that is responsible, so the responsible lending regime is our major focus. All participants have to be licensed or representatives of licensees, but the key requirement on all of those participants is that they have to provide loans in a responsible manner. That applies both to the lenders and to the brokers, and that means they have got to undertake an adequate assessment of income, expenditure and the suitability of the loans to make sure that it is the right loan going to the right people, and ultimately that they can afford it. On top of that, you also have prohibitions on misleading and deceptive conduct, and you have to be a member of an ombudsman scheme. That is a brief snapshot. Chris, did you want to add anything?
Mr Green : No, that is the crux of it.
CHAIR: What is the requirement in relation to the disclosure of commissions?
Mr Kell : Commissions have to be disclosed.
Mr Green : The industry is relatively complicated, as Deputy Chairman Kell was saying. There are different layers in the industry: there are aggregators, there are broker businesses, and there are individual brokers. To answer that question fully, we should take it on notice and give you a comprehensive answer.
CHAIR: Is there a disclosure at each point in the home loan process?
Mr Green : Consumers should get disclosure of commissions that can be ascertained, yes.
Mr Kell : Your question, obviously, also points to the fact that commissions are permitted under this regime, unlike under the FOFA regime, going forth.
CHAIR: The structure of the industry is somewhat complex, and I think it is important for consumers to know whether remuneration is occurring.
Mr Kell : Indeed.
CHAIR: In summary—and I have further questions, but we will see how we go with Senators Hume and Xenophon—do you believe that consumer protections are lacking in the mortgage broking sector?
Mr Kell : I think the responsible lending regime is a very important and hard regime with a very important set of requirements. We have not been seeking changes to that regime in relation to mainstream credit. However, as we have indicated in this report, we think there are areas of current industry practice that could and should be reviewed, in particular around some of the types of conflicted remuneration involving bonuses and soft dollar commissions that are paid. It is also the case that we would say that some of the other powers that we were talking about earlier would help to ensure that you get the right sorts of outcomes in this sector. Responsible lending is a very important legislative regime and it is one that we think does its job overall, but it is important to supplement it with some of those other powers that we were talking about earlier in relation to product intervention and so on.
CHAIR: Who is going to take forward these proposals for reform?
Mr Kell : ASIC's report has been released by the government through Treasury for consultation. That consultation period runs up until the end of June. It is a very significant report; there is a lot in there. We put out six propositions, or proposals, in the report that we think can improve consumer outcomes. That is currently out there in the market for discussion and debate, and it ranges from changing some of the remuneration structures to clearer ownership disclosure and the public reporting we talked about earlier. We think those are the propositions that ought to be tested, and there are a lot of different players in this sector. We think it is quite reasonable to see what sorts of views the Treasury gets back on that.
CHAIR: Do you think the industry itself—for example, the ABA—will be asked to do some work in this area?
Mr Kell : They have recently released a report commissioned by Stephen Sedgwick which looks at some of these issues. I think Stephen Sedgwick's report points to some of the proposals that ASIC's review has set out. One of the key issues, though, to remember is that you have got a lot of different players here. You have got large banks. You have got smaller banks. You have got non-banks. You have got the aggregators. You have got the mortgage brokers. One of the interesting challenges is going to be that, for those reforms or improvements to industry standards that require all of those groups to come together, there will be some interesting questions as to how that might be done and whether that requires, for example, some sort of work by the regulator or what not, because they do not always align on each and every issue, as you will probably hear.
CHAIR: If you have the ABA representing the major four banks, there is the potential for focus to be on the advancement of those four banks rather than the other parts of the sector.
Mr Kell : Certainly, our report found that, for some of the issues we have highlighted, such as volume payments and what not, the largest banks do have an important piece of work to do to reform their practices. We would expect leadership from certain of the key players in this area, and I think the fact that they commissioned that Sedgwick review means that we will, hopefully, see some progress.
CHAIR: Thank you very much.
Senator HUME: I thank ASIC for their very comprehensive submission to this inquiry—135 pages. You will be pleased to know I ploughed my way through every single one of them.
Mr Kell : Sorry.
Senator HUME: No, it was very thorough, and that is exactly what you would expect, because when I first looked at the terms of reference for this inquiry I have to say that my eyebrows shot off my head. They are very broad—as broad as the Nullarbor. In light of the fact that we have had so many reviews and inquiries into this sector—from the Murray inquiry to the Carnell report and the Ramsay review; this committee has had dozens of inquiries into the financial services sector; we have the Australian Consumer Law review; there is so much going on—when you first heard about this particular inquiry, what was ASIC's response? What did you think that this particular inquiry was going to achieve or could achieve that all of those other reviews and inquiries could not?
Mr Kell : I would say that, obviously, ASIC seeks to cooperate and provide as much useful information as we can to any inquiry. I suppose we did see that there was an opportunity for this inquiry to, if you like, do a bit of a stocktake of some of the other reforms that are underway that we think are very important, like the review of ASIC's enforcement powers that we have just talked about—we are very keen to see that move forward—like the review of some of the issues in the life insurance sector, which have recently been the subject of legislation, including remuneration and outcomes there; like the review of the EDR system, which is a very important system for consumers. I would hope that one of the things that this inquiry might be able to do is point to where some very important reforms are going on and maybe form an assessment about how those are going and encourage those to go forward.
Senator HUME: You think that this inquiry is going to be able to achieve a reiteration of existing activities.
Mr Kell : I would not like to seek to prescribe to the committee exactly what they ultimately cover, but I think as part of it there is an opportunity to emphasise the desirability of some of those current reform processes going forward in a timely and robust manner. As I said earlier, if we get some significant reforms to things like breach reporting and we can encourage those things to move through, that would be terrific.
Senator HUME: Do you think that the current reforms that are being undertaken as a result of those reviews will be adequate? Do you think that there is going to be a lot more work to be done?
Mr Kell : I think there is a lot of work across those reviews. I have not even mentioned the payday lending review, which is something that is dear to our heart. We think that is a very important package of reforms. It is a large and complex sector—there are no two ways about it. There will be issues that kick up as the market evolves. For example, we are seeing some emerging issues around debt management firms. I think there will be some interesting questions about how those firms are regulated over time. You are right, Senator, there is a lot of work currently underway across a range of different areas, and we think it is going to be very important for that work to be advanced.
Senator HUME: I thank ASIC very much for taking the time to write a 135-page report for an inquiry that is essentially reiterating inquiries and reviews that are already going on. I think you have done a terrific job there. You were talking about enforcement capability and the additional powers that ASIC are seeking. You have given us in your submission a quite comprehensive review of your current enforcement action. In light of the fact that I know that you have commenced litigation against three of the big four banks for alleged manipulation of the bank bill swap rate and you have commenced proceedings against BT Westpac for breaches of the FoFA laws, could you give the committee, for the benefit of the transcript, a potted version of your current enforcement action? Is there such a thing as a potted version of your current enforcement action?
Mr Kell : Yes. I am happy to give a quick report on that for the purposes of Hansard. It would also be good to have the opportunity to present a response on the most recent figures.
Senator HUME: I do realise, Mr Kell, that you do do this at estimates, so we are covering the same ground and we will probably cover the same ground in a couple of weeks time. My apologies.
Mr Kell : I might ask Jo Bird in a minute to comment on our work in the financial advice space to give you a sense, but last financial year we banned 136 individuals from providing financial services or credit; we completed 22 criminal proceedings; we obtained around $1.3 million in civil penalties, 22 enforceable undertakings, well over $210 million in compensation and remediation, and 109 infringement notices worth over $2 million; and we completed 175 investigations. That is a very brief snapshot. If you want to get a sense of just the financial advice space, Jo Bird will tell you what we have been doing.
Ms Bird : In the financial advice space in the last 12 months we have had six enforceable undertakings; we have banned 41 individuals from providing financial advice; we have had four infringement notices; we have taken seven criminal actions; we have had four what we call 'other outcomes', where people have significantly changed things as a result of our work; we have imposed one set of additional licence conditions; we have cancelled 12 financial services licences for advisers; we have had two voluntarily cancel in light of our action; we have commenced or finished four civil penalty regimes; very importantly, we have had our first civil penalty action for breach of the new best interest duty, which came out recently—that was against a licensee called National Sterling—and we have suspended four licences. On top of that we have done significant remediation. In our fee-for-no-service remediations, we have got up to just over $60 million, and we anticipate getting over $200 million returned to consumers out of that project. We will have about $30 million in the backward-looking quality-of-advice work that we have done with the large institutions.
Mr Kell : That is just on financial advice, as distinct from payday lending, home lending and so on. What I would like to do is provide a little bit more detailed table to the committee for the purpose of the report.
Senator HUME: That would be terrific. If you could provide that on notice, we would really appreciate that. I know that we have mentioned this before in estimates a few times, but I am interested to know how ASIC is using the funds that were allocated to it—approximately $120 million or so in April last year. How is it proactively using that in terms of proactive regulation of the financial market sector?
Mr Kell : Out of the $121 million, roughly half of that is for financial services regulatory work and roughly half is for significant work to upgrade our data and IT capabilities, which will ultimately flow through to enabling us to do better regulatory work. Of the half that is for the regulatory work, it is focused in a few areas of the financial advice sector, where we will be undertaking some significant projects, including a review of the accountants that have now come into the regime, a shadow shop of self-managed superfund advice, and a review of self-managed superfund advice and ongoing review of the life insurance sector in particular. That is in the financial advice space. In the credit space, we will be doing a review of the direct insurance channel. We have undertaken a review of the advised insurance channel, and we will be undertaking a review of the direct insurance channel. We will be undertaking some additional work on targeting loan fraud in the credit space and a range of—
Mr Green : That was a project in relation to credit cards.
Mr Kell : We will soon be commencing a work on credit cards and the way that consumers end up paying more than they should in that area. There is work as well going on in relation to looking at breach reporting: how firms have engaged in breach reporting and whether they have been up to scratch on that issue. Across credit, life insurance and financial advice—including, in relation to the biggest entities, the big banks—there are some significant projects underway. Again, I am happy to provide a more detailed snapshot on notice if you would like.
Senator HUME: That would be terrific. It does sound like ASIC is undertaking an awful lot of work in this area of consumer protection with those additional funds. That is very comforting. I have a more general question about the role of financial literacy with regard to consumer protections. I know that this has been an area of focus for ASIC in the last few years. Could you give us an update on your MoneySmart website and its accessibility and usage?
Mr Kell : I am happy to do that. I have already done some media this morning about financial literacy and our MoneySmart website. It is receiving well over 6 million unique visitors on average. Just as important as the outright number is the fact that, when we survey the people that go there, around nine out of 10 people take some sort of action in response to visiting the website. It might even be as simple as checking whether they have got multiple superannuation accounts, looking at their insurance policy or doing a budget. That, to us, is a very positive measure. We continue to have a focus there, and we are expanding our presence on social media as well. I would encourage you, if you have not already, to download some of our apps, such as TrackMySPEND and our how to purchase a car—
Senator HUME: No, I do not want to know!
Mr Kell : That is what my teenage daughter says! The other key part of our financial literacy work is the work in schools. We have reached around half of the schools across Australia in terms of having an engagement with financial literacy. I think that we have trained more than 20,000 schoolteachers as part of the financial literacy program. Critically, I think that we have, through cooperative work with state governments and state education departments, been successful in having financial literacy incorporated as part of the core curriculum. That is the real test here. That is not going to magically ensure that everyone is completely financially literate overnight, but it is helping to build a long-term basis for improving financial literacy. We have two areas: our engagement with consumers directly—older consumers, consumers in regional areas and whatnot—through MoneySmart and we have the schools program. Both of those are significant. I would not pretend that somehow everyone will be financially literate instantly, but I think it is something that has been supported by this committee and others as a long-term way of improving consumer outcomes.
Senator HUME: I personally think that education is the largest puzzle piece in consumer protection. I think that the MoneySmart website is fantastic. I have used it myself. Having worked in the industry for 20 years, I actually have referred to the MoneySmart website occasionally myself. I think that that is a terrific feather in ASIC's cap. Can I ask you some questions about the Murray review and particularly the reforms that have come out of that? Most specifically, the recommendations around industry funding for ASIC and how that might operate to improve consumer protections. I know that it is a bit of a long road.
Mr Kell : Ultimately, that is the aim—to have a sustainable funding base that, in its own way, contributes to better market outcomes. The way that that occurs through the industry funding model, which is obviously now advancing, is that it allows a more direct signal to be sent to the various parts of the financial services sector as to how much they are costing to regulate. Ultimately, a large part of that will derive from, 'Are they creating more problems for consumers, investors and end users or less problems? If they are creating more problems, they are going to, over time, generate greater costs to regulate. They will be paying more under an industry funding model. There is not, as you are suggesting, some direct link, but there is that clear signal that, over time, if your sector is not up to scratch, the standards are not there and you are getting poor consumer outcomes, then the regulator is going to need to pay more attention and devote more resources to that end, and that is going to cost you more money. You would hope, over time, that you will see an incentive created for those sectors to potentially do things like lifting their own standards through codes as well as supporting necessary regulation.
Mr Day : You are also going to see, going back potentially to Senator Ketter's question about data, is that through that industry funding model, because of the way the pricing model works in terms of the way the fees are set for industry funding, we are going to be collecting data about the amount of products and services that are sold by certainly financial services licensees and credit licensees, although we collect that for credit licensees now. You will see data collected from a whole range of the other areas that we regulate as well. Because of that, we will be able to have better insights into what is going on in the industries that we regulate. That will give us better opportunities then to say, 'Where are the interventions we need to make?' or, 'Where are the changes happening that we didn't actually know about?' You will see better regulatory outcomes come just by virtue of that model as well. It will not only be about the price signals and a solid funding base but also be about the capture of data about these things as well—that we will be able to see in real time as we are invoicing people for the regulation.
Senator HUME: That is terrific. Can I ask about ASIC's power to deal with wrongdoing in the financial sector compared to the power, say, of a royal commission.
Mr Kell : Ah, right. I expect you would understand this: a royal commission has very extensive powers—and I am not an expert, I should emphasise—to gather information and to require witnesses to appear. My understanding is it is not the prosecutorial body, if you like; that is the body that ultimately can take court action or some other enforcement action. That is typically done by enforcement agencies—the relevant one, depending on the royal commission. I suppose that is the key distinction. You may or may not believe this, but it is not something we have given a lot of thought to, to be honest.
Senator HUME: Fair enough. That is fine. Governance in the financial sector falls under the purview of ASIC, as it does generally. While a lot of the work that you are doing is under compliance as opposed to governance, there is a connection between governance and compliance.
Mr Kell : Certainly.
Senator HUME: Can you expand on any work that you have done in the governance space that has a flow-on effect to consumer protections in financial services, or any particular areas of governance that you are looking at.
Mr Kell : The key word there, and it is one that has been discussed a fair bit of late, is 'culture'. Governance is inextricably linked to culture. As ASIC has said on numerous occasions, the tone starts at the top when it comes to culture as to how you approach of consumers, how you deal with wrongdoing, how you deal with whistleblowers and so on. We have set out very clearly through meetings with the boards of the key financial institutions in this country that we expect as boards to set very clear direction on improving the culture within those firms and to seek to identify where that is not delivering for consumers. We do have some explicit work around that at the moment. We do not regulate culture, but we do look for cultural indicators as potential risk factors when we are undertaking surveillance. How does the communication around dealing with consumers take place within a firm? What sort of attitude is taken to consumer complaints? Those are the sorts of things, and that is all part of governance.
Just to give you a direct example—the mortgage broker report. One of the findings there within a lot of the firms that we looked at was that the governance and oversight of the remuneration in that sector was generally poor; that typically there was not enough focus on compliance issues or some of the consumer metrics. A lot of it is driven, ultimately, by direct financial performance. In that report, we have signalled that one of the outcomes we would like to see is better governance to ensure that you do not generate the sorts of risks that lead to consumer outcomes.
Ms Bird : Connected to that is one of the areas where we think we do have more limited powers than we should have. We actually do not have the powers that you would expect in relation to the governance of our licensees. For example, we can ban people from providing financial services such as advice but we cannot ban people from being involved in the management of a financial advice business. That does really limit our ability to control what happens in the management level of those sorts of institutions, and that is one of the reasons why we specifically asked for that power.
Senator HUME: Are there any glaring inconsistencies in governance in financial services sectors? I suppose specifically I am talking about the difference between superannuation funds and banks. Are there pressing governance issues?
Mr Kell : From ASIC's perspective, we would say that governance and the right culture ought to be front and centre for all entities—for all of the key players in our financial sector—whatever part of it they are in. I do not think we would say we have done that sort of analysis. But, as to differentiating our views on governance, we do find problems in different sectors at different times.
Senator HUME: I want to ask one last question about a particular type of product that I am not entirely sure falls under ASIC's remit. You might be able to help me with this. Equity release products are property transactions as opposed to financial transactions, aren't they?
Mr Kell : Are these things like reverse mortgages?
Senator HUME: Well, they are not reverse mortgages. They are like reverse mortgages.
Mr Kell : Sorry.
Mr Green : They are an equivalent sort of product. They aim for the same kind of result as a reverse mortgage, but they are not a reverse mortgage. Usually, on the investment side, they are—I am not a managed investments lawyer—normally a managed investment scheme. We asked for relief from some of those provisions to make those equity release products work, and we used that opportunity to place restrictions on those products to match reverse mortgages so the effect for the consumer is the same. As you know, reverse mortgages have a number of specific protections that are built into them above and beyond the normal protections for credit products. We do use our powers in relation to schemes to match those protections for those equity release products.
Senator HUME: I think this product development is quite an exciting area, and I know Bendigo Bank, in particular, are quite heavily involved in this space. My concern is that, because they seem to be a hybrid-style product, they seem to be slightly outside the net of everybody's purview. I do not have any further questions on that particular issue. I just think it is something that is worth—
Mr Kell : It is a good issue, because, given the ageing of the population and that more people are going to want to be able to use that equity in some form, you can see more of these products developing. I am not sure that we would be able to paint you a nice neat picture at the moment because, as you say, it is an evolving area. It is an area that I think this committee, and others, should keep an eye on. You want people to be able to access that sort of product but you want them to be able to do so in a way that they have appropriate protections. We will keep an eye on it and we will keep you up to date as to what we see in that area.
Senator XENOPHON: I am going to be rapid firing, so long as you understand that it is a function of time, not temperament.
Mr Kell : Sure.
Senator XENOPHON: I want to go to the matters raised by Senator Ketter, the chair, in relation to media releases and whether they have been watered down, altered or however you want to describe it. The situation now is that the parties involved are provided 24 hours notice before publication. Correct?
Ms Bird : If it is a negotiated outcome.
Mr Kell : If it is a negotiated outcome once the outcome has been obtained, yes.
Senator XENOPHON: And, if it is not negotiated, no notice?
Mr Kell : No.
Senator XENOPHON: Sometimes you give notice?
Mr Kell : No, if it is court based outcomes or banning actions or so on.
Senator XENOPHON: Does ASIC keep notes of those discussions about negotiated outcomes as to what wording goes into the release or not?
Mr Kell : Typically, it is around, for example: have we characterised the entity in exactly the right technical way—those sorts of things-or have we got the numbers right?
Senator XENOPHON: But it is more than that; it is also the language used, isn't it?
Ms E Kelly : That is with the past releases, but the focus now is on making sure the accuracy is there. So, yes, there will be a track record of those sorts of things, if there is a change made.
Senator XENOPHON: You will be relieved to know that I am not planning to ask you for details on all of those. I just wanted to understand how the system works. Can I go to the FSI, or the Murray inquiry—the more flexible regulatory toolkit, as it has been referred to. When did Murray report? Has it been about 18 months or two years now?
Mr Kell : It was at the end of—
Senator XENOPHON: 2015?
Mr Kell : I should know that.
Senator XENOPHON: 2014?
Mr Kell : I should take that on notice, just to double-check.
Senator XENOPHON: How about this: it has been quite a while.
Mr Kell : It has been a while. It is a big report. There is a lot of follow-up underway.
Senator XENOPHON: In terms of the more flexible regulatory toolkit, do you believe you need those more flexible powers, that toolkit, sooner rather than later?
Mr Kell : It probably would not surprise you to hear that we, the regulator, are keen for those tools to be part of our toolkit—
Senator XENOPHON: So the answer is yes.
Mr Kell : as soon as practical. That is right.
Senator XENOPHON: You could have just said yes.
Mr Kell : We are pleased with the process.
Senator XENOPHON: Are you concerned that it has taken so long, that no legislative amendments have been introduced to date in relation to that more flexible toolkit?
Mr Kell : I should be clear on that. There are couple of amendments that have been introduced—
Senator XENOPHON: Yes, but not to the full extent of the Murray report—
Mr Kell : Not in relation to the product intervention power at this stage, but a consultation paper is out. We are pleased about that.
Senator XENOPHON: Can I go to you, Ms Bird. You said, I think in answer to a question from Senator Hume, that at the moment you can ban people from being the providers of certain financial services but you cannot stop them from being managers. Is that right?
Ms Bird : Yes.
Senator XENOPHON: So you have some—I should use parliamentary language—shonk who has been banned by ASIC, but they can still be working in that office if they get somebody else with a licence. Doesn't that concern you?
Ms Bird : Yes. That is why we have made submissions asking for the power to ban people from being involved in the management of financial services businesses.
Senator XENOPHON: It is pretty axiomatic and makes sense. Have you been advised by government as to whether there is any legislation forthcoming in respect of that?
Ms Bird : It is one of the recommendations that the government has accepted, and my understanding is it is being looked at as part of the enforcement review.
Mr Kell : It is part of the enforcement package.
Senator XENOPHON: Can I go to the whole issue of managed investment schemes. This goes to the issue of last resort compensation. Sadly, I am still spending a lot of time talking to victims of MISs. The inquiry that was undertaken by this committee, I think, back in 2015 looked at that issue. There was one witness who I remember very clearly who was an agricultural economist or an agribusiness expert who said, essentially, that these schemes were always going to end in tears because they were unsustainable. They were so heavily leveraged.
It was the federal parliament that introduced legislation to have these schemes up and running. I do not want to go into a blame game, but they had the imprimatur of the parliament. They would not have existed without a legislative scheme approved by parliament. There is moral hazard with all those sorts of issues, where there is evidence that these schemes were almost inevitably going to end in tears. The very basis of the schemes was somewhat shaky, and whenever there were any pressure points such as drought, interest rates or whatever they were going to fall over, as they did, with many thousands of people being devastated financially. In fact, I was on the phone to one person this morning, trying to sort out his issues with a liquidator. Does ASIC have a view about whether it would be appropriate, in those circ*mstances, for taxpayers to have some role in providing a last resort compensation scheme?
Mr Kell : They are all very good points you make. We do not have a concluded view on whether those sorts of matters should be incorporated in a last resort compensation scheme. We are currently looking at that in the context of Ian Ramsay's review, which is explicitly looking at this issue.
Senator XENOPHON: Yes, I have spoken to Professor Ramsay.
Mr Kell : So our focus on the last resort scheme has been on the financial advice sector and poor outcomes there.
Mr Day : They are not necessarily connected concepts in terms of the poor nature of the managed investment scheme and, then, someone's ability to access a compensation scheme. As Mr Kell said, it depends on whether or not there was bad advice given—those types of things. That is what the compensation scheme is for. It is not just because the MIS fell over; that is not what is being contemplated about a compensation scheme.
Senator XENOPHON: Perhaps I have not made myself clear. I am saying that there was clearly bad advice, but the very basis of the managed investment schemes—according to evidence that was given to this committee in the previous parliament—was so unstable that they were going to fall over. I do not have the name of the witness in front of me, but this witness said that these schemes were so highly leveraged, so speculative and so risky that it was inevitable that they would collapse, as they did, leaving tens of thousands of people around the country devastated financially. Does ASIC have a proactive—I hate that word—role in considering these issues and whether there should be special consideration given for a last resort scheme that may be, in part, funded by government to deal with a mess that many consider was a creature of the parliament in the first place? Or is that a matter for Ramsay?
Mr Kell : I think it primarily is a matter for Ramsay. We support the last resort compensation scheme, I should be clear, but to date our focus has been on the last resort compensation scheme in relation to negligent advice or advice in breach of the law. Would, could or should it be expanded to cover the sorts of issues you are talking about? That is something we are considering in the context of Ian Ramsay's current review, and then you have the stuff looking forward—the product intervention powers, the ban on commissions—that will hopefully prevent this in the future.
Senator XENOPHON: I am worried about the here and now.
Mr Kell : I understand.
Senator XENOPHON: I am worried about people around the country whose lives have been ruined by these MISs. If I wanted to engage on behalf of these many constituents I am still trying to help, would it be useful to have a meeting with ASIC to discuss this further with you, or are you saying you do not want to know about it at this stage?
Mr Kell : I think a very important point to make is that it is not ASIC's call.
Senator XENOPHON: But ASIC can give advice on this.
Mr Kell : And, obviously, as you would understand, for some of the schemes at least, we have had quite a lot of meetings with—
Senator XENOPHON: I am running out of time—
Mr Day : With respect, Senator, that would not assist people who invested in these schemes a number of years ago. I want to be clear, I am in no way insensitive to the damage this is causing financially and personally to investors in these schemes. But those people who invested in those schemes, quite a few years ago now, entered into contractual arrangements about the need to pay for what was meant to be their initial investment. They did not pay that at the time and, as you alluded to, liquidators are now claiming the need for repayment from these investors under the terms of those contracts, which some may see as draconian and harsh. But for those people, now, I cannot see how a last resort compensation scheme would assist them in those contractual arrangements.
Senator XENOPHON: It would, but I do not want to go into the discussion about the liquidators.
Mr Kell : Senator, as you commented earlier, you have a live review with a good panel headed by Ian Ramsay, which is considering the overlapping issues both of a last resort compensation scheme and past complaints.
Senator XENOPHON: Perhaps I have not elucidated it appropriately. Does ASIC have a role—and if it is not ASIC, which regulator would have a role—to comment, consider and reflect on the stability of a scheme approved by the parliament in the first place? This is not a trick question. I am just trying to understand who would have a role—is it APRA, is it the ACCC, is it ASIC?
Mr Day : The way I will try to address the question is to say there are schemes being registered now. You are still allowed to register a new managed investment scheme now. We register them regularly now. Much like if you decide to buy a share in a company, if you invest in a scheme you have to make a determination as to whether or not that is a scheme you see as financially viable as a worthy investment into the future. That gets down to questions of advice, generally speaking—what advice you have been given. We know, certainly in relation to a number of the timber schemes, people were, effectively, shown the prospectus—the document that gave them an outline about what was happening—and they saw a tax deduction. They sought no other information from any other source; they filled in the application form; they had an interest in the scheme, knowing that they would get a tax deduction. They did not really look into it—again, I am not being insensitive about this—and they did not consider that they would have to pay in the future, if something should potentially happen, for those investments that they had indicated they would make even if the scheme fell over.
Senator XENOPHON: But the fact that so many people have been burnt by this—
Mr Day : It asks real questions, which have been asked to date, about the provisions around managed investment schemes, the levels of disclosure that need to be made and the advice around them.
CHAIR: In the last couple of minutes that we have available to us there are so many areas we could go into, but I am going to continue my line of inquiry about the mortgage broker sector. I want to give you a bit more of an opportunity to highlight some of the very good work that ASIC has done in this area. Mr Kell, for anybody listening to today's proceedings, customers out there engaging with the mortgage broking sector, do you have any words of advice?
Mr Kell : I would suggest that you should look carefully at the disclosure you have been provided around commission payments or any links to the lenders to ensure you understand where there are conflicts of interest. I would also say that, whether you are going to a broker or directly to a lender, you should carefully consider what you are going to be able to afford not just now, while interest rates are at very low levels, but later, potentially, in a period when interest rates have gone up by several points. You should ask either the broker or the lender to explain to you very clearly what those additional costs or additional financial burdens might be if you are paying out that loan under a higher interest rate regime. That is what you have to do. You do not want to just be assuming that the interest rate today is going to stay there forever. That would be my key advice.
CHAIR: You have touched on the role of aggregators in this sector. Aggregators provide quite a lot of data and they use algorithms in their advice and recommendations to brokers. What is your level of assurance that these algorithms are not influenced by benefits to the broker or the aggregator?
Mr Kell : I might have to take the algorithm point on notice. But one of the issues we have raised in our report is that aggregators also get commission payments and other volume related benefits from lenders, part of which they pass onto the broker and part of which they keep for themselves, so they have a very important issue around managing conflicts of interest. Just to complicate things, 'aggregator' is also a phrase that is used at times for comparison websites, so I am not quite sure whether you are referring to the comparison websites or the broker networks.
CHAIR: The comparison websites.
Mr Kell : We are interested in that issue in the home loan sector and, for that matter, in several other sectors. Our concerns include things like: are the commissions they are paid clearly disclosed? Is the fact that they may only have a smallish sample of the market on the website clear to the customer when the recommended loan comes up? Is it clear to the customer that if they are just going to a comparative website they are not getting some of the additional information that they may get if they went to a broker or lender?
The key thing with comparative websites is being clear about the conflicts but also clear about how much of the market you shop in.
CHAIR: In terms of the negotiations between brokers and lenders, I guess on behalf of consumers ultimately, did you find any statistical difference in interest rates offered by the brokers as opposed to going through the direct channel?
Mr Kell : No. That was an interesting result. We were interested to see where that landed, because there is sometimes a perception that you might necessarily get a better rate through a broker. We found that there was not a significant difference between the rate that you got going directly versus the rate that you got going through a broker.
CHAIR: Is that a cause for concern, where you have got additional intermediaries but consumers do not seem to be benefiting?
Mr Kell : I am not sure it is a cause for concern. It is one of those areas where a transparent reporting regime will help to highlight what it is exactly that you are getting from one channel versus the other. If it is your perception that you will necessarily get a better deal, well that is not what our evidence has suggested. There may be other benefits—brokers might be able to help you manage the whole application process—but we did not find significant difference in the rate.
CHAIR: Which is the main determinant of the financial outlay.
Mr Kell : That is right. We found other differences, as you may have seen. Typically a broker is more likely to recommend interest only loans. We found that typically customers going through brokers have higher loan valuation ratios and that customers going through brokers end up borrowing more and they are spending more of their wage on their mortgage. There are some differences, they are important differences and they are differences that are worth consideration in terms of whether there are issues there that would benefit from some improvements in the way the market works.
CHAIR: In terms of the commission structures, there are sales campaigns that we are aware of that are based on volume and other types, and you mention in item 407(b), that 'most arrangements are complex'. How can we be sure that good consumer outcomes are occurring when you have got this level of complexity?
Mr Kell : I think that is one of the key questions. Ultimately we are testing from a responsible lending perspective whether the lender or the broker, or whatever channel is used, have properly assessed the income expenditure and suitability of the loan. But these things can be complicated by volume related remuneration and conflicted remuneration, and that is why we have said that the sector as a whole, both the broker channel and the direct channel, should move away from bonus payments and bonus commissions, and they should move away from soft dollar benefits. Within that, some of the campaign based approaches that you have spoken about, we think the conflicts associated with those types of remuneration just run too great a risk of encouraging the wrong sorts of outcomes, loans that are not suitable for the borrower.
CHAIR: I have a number of other questions, Mr Kell, but I will get those put on notice, if you do not mind.
Mr Kell : Sure.
CHAIR: Thank you very much to you and your team for appearing before us today. We appreciated it very much.
Mr Kell : Thank you for the opportunity.
