Leading banking analyst Brett Le Mesurier has put an estimate of at least $6 billion on consumer refunds, reviews and litigation for the big four banks and AMP.
It comes as investors speculate that National Australia Bank will release some updated figures for its compensation scheme ahead of a grilling in the House Economics Committee on Friday.
The other big banks took some of their medicine last week in the lead-up to their appearance in parliament, where they apologised profusely for any number of things.
Le Mesurier’s $6 remediation billion figure is calculated on a pre-tax basis, and includes the cost of implementing the programs as well as forecasts for 2019.
It is worth noting that the $6 billion-plus compensation bill is by no means definitive. It has been calculated as an explosion of litigation erupts, the corporate regulator gets tougher and more shoddy practices come to light.
Since July 2011 the Australian Securities and Investments Commission (ASIC) has secured $1.83 billion in remediation for customers.
The Commonwealth Bank has been embroiled in the most scandals in recent years and it is therefore little surprise it has the highest remediation payout at $2.3 billion. This includes a settlement with Austrac in relation to the money laundering scandal, where it was alleged CBA had “serious and systemic non compliance” and its controls and procedures were not effective, which in some cases enabled customers to create fake names, enabling organised crime syndicates and terrorists to launder money.
CBA issued a statement to shareholders last week which showed it had spent $580 million in pre-tax improving the processes and administration of its advice business as well as determining the amounts to be refunded to customers. Only $270 million of that money had been spent remediating customers.
The amount relates to the periods 2012 to 2018. CBA bought these advice businesses nearly 20 years ago, which begs the question what was happening in the first decade of ownership and why it took so long to start fixing things up. It is also worth noting that its Colonial Financial Planning business was subject to a two-year enforceable undertaking from ASIC in late 2011 due to rampant misconduct.
Separately, Slater and Gordon last week lodged a “Get Your Super Back” class action against CBA and Colonial First State in the Federal Court, with the law firm estimating it could exceed $100 million. The case alleges trustees, who are supposed to act in the best interests of members, invested members’ savings with CBA and received uncompetitive bank interest rates.
CBA denies the allegations and is defending the claim.
This is one of a number of class actions expected to be launched in the coming months.
Other law firms are looking at misconduct in relation to credit cards, life insurance definitions and irresponsible lending.
Le Mesurier of Shaw and Partners ranks ANZ Bank second highest in remediation costs at $1.2 billion pre-tax, with over $200 million spent on customer remediation in 2017 and the first half of 2018. The majority of the remediation relates to banking products.
In the second half of 2018 ANZ allocated a further $300 million to customer remediation, again mostly related to banking products, and $230 million was spent setting up and running the scheme.
AMP ranked a close third at $1.17 billion. AMP’s remediation and associated costs in the first half of 2018 of more than $500 million pre-tax might seem like a large number but when it is put into the context that it has the largest funds under advice it starts to look inadequate, particularly given what has come out of the royal commission.
Some of the sensational revelations that poured out of the royal commission triggered five separate class actions as AMP admitted it deliberately charged consumers fees for no services on a systematic basis. It then misled the corporate regulator, in the process letting down shareholders and decimating the share price.
Westpac’s remediation bill ranks fourth highest at an estimated $1 billion pre-tax. Unlike CBA, the majority of its $1 billion is likely to find its way into customer pockets.
NAB’s bill is likely to become clearer this week. Given the recent announcements from ANZ, Westpac and CBA, an after tax figure of more than $200 million, is unlikely to surprise the market. The total cost may well be larger than this.
For instance, on July 26 NAB’s super fund trustee NULIS agreed to refund 305,000 superannuation customers an average of $220 after failing to explain to customers they could switch off a financial planning fee. This amounts to $67 million and then there is interest on top of that.
Since then ASIC has taken legal action against NULIS Nominees and MLC Nominees, alleging it misled super customers and wrongly took $100 million in fees.
There is also a lot of interest in the sale of ANZ’s OnePath Pensions and Investments business to IOOF after the boss of IOOF gave testimony at the royal commission that raised a series of issues and misconduct. The upshot was questions, including at a parliamentary hearing on Friday by shadow financial services minister Clare O’Neil, as to whether it was in the best interests of ANZ’s OnePath members to be offloaded to a company that had serious regulatory issues.
After the parliamentary hearing, ANZ executive Alexis George said the transaction with IOOF was scheduled for completion at the end of the first quarter of next year. The final report into the Hayne commission is due for release on February 1, which is expected to include findings on IOOF.
She said ANZ and the trustees separately have been having a lot of discussions with IOOF, including the independence of the board, governance and controls it has in place. She said IOOF was being asked for “certain” commitments on governance and policies.
She also admitted that some of the royal commission revelations were a surprise.
During the royal commission it became known that the Australian Prudential Regulatory Authority had written to IOOF at various times outlining serious issues such as “difficulty in obtaining accurate and current information in relation to issues such as … culture, identification of responsible persons and the information flow and relationship between the board and management and the Fairfax Media matter”.
That “Fairfax Media matter” related to serious misconduct including insider trading, allegations of front-running, misrepresentation of performance figures and the boss of the research division getting staff to cheat on his behalf on compliance exams.
In mid-2017 an internal memo stated: “Since December 2015, APRA has identified a number of instances where IOOF has failed to adequately identify conflicts of interest and either avoid or appropriately deal with them.”
The lack of regard for governance and processes was highlighted when a board meeting held the week before IOOF boss Chris Kelaher gave testimony resulted in the production of handwritten minutes on scraps of paper. When asked by council assisting Michael Hodge, QC, if Kelaher understood what was on the bits of paper, he retorted that he wasn’t a handwriting expert.
If ANZ and the trustees determine it is in the best interests of ANZ members that the sale proceeds it will leave them open to litigation and reputational damage if the royal commission makes damning findings or something blows up in the future.
The duty of trustees to act in members’ best interests has opened up a huge can of worms for financial institutions that own retail funds. Entrenched underperformance in many cases and the conflict between acting in shareholders’ best interests and members best interests is problematic.
Opposition Leader Bill Shorten raised the issue last week when he said Labor would consider forcing for-profit funds to outsource the trusteeship to an independent organisation and give APRA the power to sack trustees of funds that regularly underperform.
It is steeped in politics but given super is compulsory and conflicts have been on full display during the royal commission, it is an issue that needs to be addressed. In the meantime, there will be a lot of remediation to bandage up the wound.