The head of the Australian bank has acknowledged that his organisation wrongly sold credit card insurance to more than 60,000 unemployed customers and balked at removing perverse incentives for mortgage brokers to sell larger loans.
Matt Comyn, the chief executive of Commonwealth Bank, also admitted that CBA has been waiting for the banking royal commission to make a recommendation that banks should stop paying volume-based commissions to mortgage brokers, even though the bank has known the practice encourages brokers to write larger-than-necessary loans, which puts customers at risk.
Comyn said CBA had come close to changing the perverse incentive for brokers but it balked at the last minute, explicitly ignoring a recommendation from the 2017 Sedgwick review.
Comyn said CBA didn’t believe its competitors would follow its lead and CBA would therefore lose its brokers to its competitors – and millions of dollars in profits from new mortgages along with it.
Regulators who presided over this banking mess must be named and shamed
Senior counsel assisting the royal commission, Rowena Orr QC, asked Comyn why CBA had no plan to meet the recommendation, despite knowing that it led to risky mortgages being written.
Comyn said: “Well, we’re wondering what might be recommended from the commission.”
Orr asked: “You’re waiting for us?”
Comyn replied: “You seem to be probing in the, in the right areas, yes.”
Orr said: “You have this obligation to report to Asic about this, though, and you haven’t done so?”
Comyn replied: “Not that I’m – I personally have not. Not that I’m aware of on behalf of the institution but I – I would have to follow up.”
The chief executive also heard that an audit report published in 2015 found CBA should not have sold its Creditcard Plus insurance to 64,000 customers, because the customers were ineligible – given they were unemployed at the time.
Orr: “So the product should never have been sold to those people?”
Comyn: “That’s right.”
Orr suggested the failings were caused by the bank’s lack of response to an Asic report in 2011.
Comyn answered again: “That’s right.”
The banking royal commission began its seventh and final round of hearings on Monday. This round will be dedicated to hearing from the chief executives and chairmen of the big four banks.
Comyn gave evidence for over six hours – the first time he has appeared before the royal commission – and he will be returning on Tuesday again.
Orr began the day by saying the commission did not want to hear more apologies from the banks. Instead, she said, the commission wanted to hear why misconduct in the banking sector had occurred to such a significant degree and what policymakers needed to do to stop it.
Comyn said one of the hardest things to do was to change a bank’s culture, because “culture” was hard to measure, but he knew CBA had problems.
He said after he had received a review into banking misconduct from the financial regulator, Apra, he sent it to 500 top executives and asked for them to report back to him. CBA’s general manager for compliance, Larissa Shafir, returned a scathing report about CBA’s attitude towards compliance.
Orr summarised Shafir’s note to Comyn: “Ms Shafir referred to the lack of authority of the compliance function which she said was rooted in senior management’s lack of appreciation of the regulatory environment, and the legitimate expectations of good conduct the community place on an organisation of CBA’s size, scale and history.
She asked Comyn whether this was an “indictment” on CBA: “Mr Comyn, Ms Shafir’s comments are an indictment of the culture within CBA in relation to treatment of compliance risk, and operational risk, more generally. Do you agree?”
Comyn replied: “Yes, I do.”
He also admitted that short-term bonuses for staff often carried an inherent risk that they would encourage staff to put their own interests ahead of a customer’s.
He was reminded of the Dollarmites scandal, which involved branch staff creating their own accounts, or depositing small amounts of money – either the bank’s money or their own – into children’s accounts to meet their own personal targets.
Comyn conceded that he had ultimate power to end bonuses, or as he called them “short-term variable remuneration”, but he had decided against it.
Removing bonuses could cause significant problems, he said, particularly in the home lending space. But he also admitted that when CBA removed financial incentives for its tellers in 2017 it did not lead to a deterioration of teller performance.
The commission heard about an email chain between Comyn and Ian Narev, Comyn’s former boss, in 2016. Comyn had informed Narev of changes to remuneration in the Netherlands, where a cap was introduced on variable pay for bank staff, and in the UK, where the regulator had warned and punished banks for incentivising staff on product sales performance.
Evidence suggested the changes resulted in better customer outcomes in both countries.
But Comyn then explained to Narev, in those emails, that Australia was different because its banks were not responsible for the global financial crisis and so hadn’t been subject to the same sort of regulatory scrutiny. He told Narev there was “no evidence of widespread mis-selling in Australia” and that Australian banks were more customer-focused.
Re-disseminated by The Asian Banker from The Guardian