Financial services industry’s customer remediation bill $10bn and counting

The nation’s financial services industry has blown through $10bn in customer remediation provisions and program costs.

ASIC chairman James Shipton Picture: Gary Ramage

The nation’s financial services industry has blown through $10bn in customer remediation provisions and program costs, although payments to customers have proceeded at a snail’s pace, according to the corporate watchdog.

Appearing before the joint committee on corporations and ­financial services on Tuesday, ASIC deputy chair Karen Chester said the provisions related to three financial products — consumer credit insurance, add-on insurance in car yards, and fees for no service.

Despite the huge sums involved, Ms Chester said customers had so far only received $660m in payments, equal to about 7 per cent of the funds set aside.

ASIC also gave evidence in the afternoon to the same committee’s inquiry into regulation of auditing. Commissioner John Price declined to endorse ex-ASIC chair Greg Medcraft’s 2017 assessment that the quality of corporate audits was “appalling” and getting worse.

“But let there be no ambiguity. I think audit quality needs to improve,” Mr Price said.

In ASIC’s risk-based audit surveillance program for the 2018 ­financial year, which targeted files with certain risk characteristics, the regulator found in 24 per cent of cases there was no guarantee the financial report as a whole was free from “material misstatement”. The figure was 20 per cent for the largest six audit firms.

Asked if he supported Mr Medcraft’s objective to reduce the overall figure to 10 per cent, Mr Price said he did not have a fixed percentage in mind. Instead, he wanted consistent improvement.

He also said he was cautious about taking the 24 per cent figure as an industry-wide indicator of poor auditing, given the surveillance program was risk-based.

ASIC, he said, would publish a more robust dataset on audit quality before the end of the year.

The slow pace of customer refunds prompted a spirited discussion between ASIC and members of the committee about the adequacy of the financial services industry’s systems and processes and the lack of resources devoted to them over the years.

More recently, the major banks have invested heavily in manpower to speed up repayment processes, with a combined total of about 4000 people at the big four now engaged in locating files, conducting audits and tracking down customers.

ANZ chief executive Shayne Elliott told the house economics committee last Friday the pace of remediation was “modest” because it required manual intervention. While the bank was confident it would pick up the tempo, the program would not be completed in the next 12 months. There was no benefit in ANZ delaying the process because further program costs and interest payable to customers would only add to the final bill.

“There is no benefit in delay, there is now benefit in speed,” Mr Elliott said.

ASIC chairman James Shipton said the situation was unsatisfactory: “It’s been years in many cases (before customers get their refunds). We want real people getting real money in their pockets.”

He said ASIC was looking at the attentiveness of boards and management to outdated legacy systems that created bottlenecks that impeded identification of non-financial risks, prompt breach reporting, and efficient rectification of customer issues.

“It is without a doubt one of the barriers to good governance,” Mr Shipton said.

A report by the watchdog’s close and continuous monitoring program, in which senior ASIC ­officers are embedded in the ­nation’s major financial institutions and report back on cultural and governance challenges, would be released early next year.

ASIC was also waiting for legislation to arm it with a directions power to speed up the administration of programs.

Mr Shipton said ASIC’s updated guidance on responsible lending obligations would be released before the end of the year.

“This is all about providing clarity to lenders and borrowers alike, and building on existing guidance to narrow points of uncertainty, clarify small business lending and restate the basic obligations and purpose of the law,” the ASIC chairman said.

He said lenders were required to assess if loans were “not unsuitable” by conducting reasonable inquiries and verification.

ASIC again copped criticism over its decision to appeal against the Westpac responsible lending decision, with committee members saying it created uncertainty. Committee chairman James Paterson said the current framework was confusing for consumers.

Mr Shipton said the interpretation of the law was nuanced: “We will from time to time test the adherence to that law.”

Commissioner Sean Hughes said the Westpac judgment had created uncertainty: “We think an appellate judgment would be helpful. The purpose is to clarify the law, not to punish Westpac.”