Banks face ASIC suit, $1bn bill over ‘fee for no service’

ASIC is about to make good on its promise of legal action in the near future over the fee-for-no-advice scandal.

ASIC is about to make good on its promise of legal action in the near future over the fee-for-no-advice scandal, which has become so ubiquitous that it’s acquired its own acronym, FFNS.

It’s understood that Scott Morrison’s tough cop on the beat will launch proceedings before the end of this month, ahead of royal commissioner Ken Hayne’s much-anticipated interim report.

When ASIC deputy chairman Peter Kell had the privilege of appearing before the royal commission for a second time last month, he revealed that the damage caused by FFNS would tip over the $1 billion mark.

Kell also warned ominously that there was “a very high likelihood of proceedings commencing in the near future”.

From what we already know, when ASIC does pull the legal trigger, it will be the first of many FFNS cases.

On August 17, the royal commission heard from Kell that the probe has centred on 31 licensees, spawned 27 investigations and collected about 2.5 million documents. The big four banks and AMP are still working on likely compensation figures, particularly for related licensees where the work is less advanced.

While ASIC has considered sending criminal briefs to the commonwealth Director of Public Prosecutions over the last five years, Kell told the royal commission that enforcement action so far had been limited to bannings and enforceable undertakings.

One of the challenges that ASIC faces is the expiry of the six-year limitation period for civil action. Kell said he was unable to give a comprehensive answer on the issue, but it was something that the watchdog has “firmly in mind”.

The other matter that’s exciting speculation is the length of Hayne’s interim report.

The scope of the report is limited to policy-related issues arising from the first four hearings — consumer lending, financial advice, loans to small and medium-sized businesses and financial services and regional and remote communities.

Again, the word on the street is there’s likely to be a seven-volume report which will give new meaning to the word “comprehensive”. Once the document is submitted to the Governor-General, it will be tabled in parliament and released to the public. Submissions will then be accepted.

Westpac’s legal woes

Westpac’s payment of $35 million to settle breaches of responsible lending laws between 2011 and 2015 shows the extent of the fire and fury that’s descended on the banks since the start of the year.

At that time, the bank was wondering why it was in ASIC’s crosshairs, facing both barrels, when an enforceable undertaking would have taken care of the mischief. It is now facing the largest civil penalty awarded under the National Credit Act, presenting new ASIC chair James Shipton with another welcome scalp.

In Westpac’s favour, there was no allegation in ASIC’s press release that the bank’s executives deliberately flouted the law, or that customers suffered financial loss. However, the bank accepted that about 10,500 loans should have been referred to a credit officer for manual assessment.

Half of the loans have since been paid off and the remainder have performed as well, if not better, than the rest of the home loan portfolio. So, why the fuss? There are a number of reasons.

First, Westpac was an outlier bank when ASIC published its review of interest-only loans in 2015 as part of a broader examination by the Council of Financial Regulators of home-lending standards.

The twin problems were that the bank’s automated system failed to use declared living expenses when they exceeded an industry benchmark, and did not take into account the higher repayments at the end of an interest-only period.

Second, while Westpac has been able to say that the loans in question have performed as well as the rest of the book, the reality is that Australia has enjoyed the most benign interest rate period in living memory. Until recently, house prices have boomed as a result.

If regulators don’t enforce the appropriate standards during a boom, the 2008 financial crisis tells us that all hell will break loose in the inevitable bust.

The $35m penalty, which has to be approved by the Federal Court, might seem large, but in the current environment it’s all about deterrence to minimise the risk of imploding home-loan portfolios causing the next crisis.

Westpac upgraded its credit assessment processes in 2015.

Use of the benchmark, the Household Expenditure Measure was just one of about 200 inputs that went into the bank’s automated decision system. Still, HEM is much better out of the serviceability equation when declared expenses are higher.

The settlement with ASIC also means that chief executive Brian Hartzer has crossed off the second of three legal battles. The first was the bank bill swap rate case, where Westpac was found to have engaged in unconscionable conduct but not manipulated the BBSW. In the third case, the bank is awaiting a Federal Court judgment in relation to alleged contraventions by BT Funds Management of its “best interests” duty.

ASIC has alleged that BT provided personal financial product advice to customers in two telephone campaigns, recommending that they should roll out of their super funds into Westpac-related super accounts.

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