The big four banks have launched a strident defence of vertical integration, lending benchmarks and executive bonuses in a direct challenge to a series of radical and probing questions posed by Commissioner Kenneth Hayne.

The banks have baulked at suggestions that current practices are in breach of their legal obligations or in conflict with the best interests of customers, arguing the systems in place today are streets ahead of the flawed frameworks they used to rely on.

Commonwealth Bank in its submission has warned the royal commission to tread carefully with its final recommendations around lending or risk a massive transfer of responsibility from borrowers to lenders.

“[Which will make it] less likely that credit will be made available by the larger financial institutions or be higher priced, which will inadvertently push lending into the unregulated shadows of the financial services system,” the bank says.

The banks have also pushed back on suggestions that would tilt the playing field too far towards the favour of customers, warning of higher costs and reduced services.


They have rejected the idea of blanket bans for junk insurance, defended the use of cash kickbacks to third-party mortgage referrers and recommended that no changes be made to processes where homes are used as security for business loans.

Among the areas of agreement between the banks are that forcing them to separate their wealth management or financial advice is unnecessary, that executive bonuses are appropriate and the use of a controversial loan serviceability benchmark is adequate.

Serious reservations

The arguments are contained in submissions made in response to the Hayne royal commission’s interim report which contained 693 questions. The banks have cherry-picked the most pertinent questions to meet the commissioner’s 50-page limit.

CBA also expressed serious reservations about the viability of financial advice businesses if tougher regulation was introduced.

AMP says extra regulation will push up the cost of financial advice, hitting people on middle and low incomes hardest.

“Over the last several years, advice has become less affordable as the regulatory burden has increased and costs have risen,” the AMP submission says.

“It is now the case that many in the community who most need advice cannot afford it. That is neither in the national interest nor in the interests of those affected.”

NAB has warned of higher costs for financial services companies if Hayne was to proceed with a recommendation for structural separation, seeing many Australians priced out of financial advice altogether.

“An enforced separation would likely lead to the removal of these benefits and increase the costs of provision of products and services to clients, including advice,” the bank says.

Controversial benchmark

Westpac, one of the few banks to push ahead with the vertically integrated model in which banks offer transactional and investment products, argued that conflicts occur everywhere and do not “arise from the structural features of a business”.

The bank also defended its use of a controversial benchmark for assessing loan affordability known as the Household Expenditure Measure (HEM), saying it was a critical backstop and an important part of any bank’s serviceability toolkit.

“HEM helps protect overly optimistic borrowers from obtaining a loan they may not be able to afford,” the bank says.

Two months ago Westpac agreed to pay a $35 million fine for using the HEM to automatically approve 10,000 loans. The reliance of the banks on the measure, which is criticised for underestimating expenses such as entertainment and childcare, was explored in depth during the royal commission hearings.

ANZ says it continues to use the HEM while NAB says it should “continue to be used as a benchmark for borrowers’ living expenses”.

Mortgage giant CBA goes further than either of its three rivals in defence of HEM, saying under current legislation banks are required to take reasonable steps to verify a consumer’s financial situation and there is no specific reference to expenditure.

“Accordingly, it does not follow that in all cases there must be specific verification of all expenditure in order to comply with the responsible lending obligations,” the bank says.

The banks were also forceful in their defence of pay structures despite conceding that they had contributed to poor outcomes for consumers in the past. The banks pointed to the introduction of balanced scorecards which have de-emphasised financial performance.

The banks all pointed to the introduction of the Banking Executive Accountability Regime which includes mandatory deferral periods for bonuses.

Industry transition

However, banks such as NAB returned to the argument it was vital the packages for senior executives were comparable in a global market.

“At a certain level of leadership … the role is organisationally focused and strategic in its intent and outcomes. NAB considers that variable reward can and should continue to play a part in relation to those roles.”

There was some variation among the views of incumbents, however, with ANZ supporting the introduction of a flat fee payment for third-party referrers of mortgages or introducers.

ANZ also articulated the view that a point of sale exemption that protected car dealers from the National Consumer Credit Protection Act should be removed and there was “no policy justification not to apply the consumer lending protections”.

NAB, which is in the process of selling its wealth business, said it was “supportive of an industry transition away from the remuneration of financial advisers being dependent on the value or volume of product sales”.

CBA, which is in the process of divesting its mortgage broker business Aussie Home Loans, said it supported more transparency around upfront and trailing commissions but that specific details of the payments were the responsibility of the mortgage broker.

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