Issues raised in the inquiry
This chapter provides an overview of some of the major issues raised in
the inquiry about consumer protections in general and about specific sectors of
the banking, insurance and financial services industry. These issues are
considered in the context of evidence provided to the Financial Services Royal
Commission and arguments put forward in its interim report. It should be noted
that the list of issues arising from evidence as outlined in this chapter is by
no means comprehensive; rather, the issues were selected to provide a
'snapshot' of areas in the industry that may require reform.
Issues in the consumer protection system as a whole
A number of the issues outlined in evidence to this inquiry concerned
the consumer protection system as a whole. These included:
insufficient professional indemnity insurance held by financial
the importance of resourcing financial counselling and legal
services used by people from lower socio-economic backgrounds;
a lack of documentation, whether written or phone records,
outlining consumers' interactions with financial entities; and
a lack of enforcement on the part of regulators.
Insufficient professional indemnity
At the 22 February 2018 hearing in Melbourne, the committee heard from a
number of representatives from the Holt Norman Ashman Baker Action Group,
representing victims of firms associated with Peter Holt.
In 2012, the Australian Securities and Investments Commission (ASIC) banned
Mr Holt from providing financial services for three years after it found
that he had failed to comply with financial services regulations.
Mr Mark Korda, Managing Partner, Registered Liquidator, KordaMentha, noted that
'the principals in the business went into bankruptcy and the professional
indemnity insurance was woefully inadequate to compensate the victims of that
financial services practice'.
Some submitters suggested that expanded professional indemnity insurance
could prevent problems arising, such as those faced by members of the Holt
Norman Ashman Baker Action Group, because a financial services provider had
held inadequate professional indemnity insurance.
However, the Association of Financial Advisers argued that increasing
professional indemnity insurance would lead to increased costs on the part of
...the cost of operating under higher jurisdictional limits
will ultimately be borne by advised clients. Raise the cost of providing advice
too much...and you risk that the people who need financial advice most will not
be able to afford it. This raises the spectre of possibility that accessibility
to Ombudsman dispute resolution services may become more for the wealthy as
wealthy people will only be able to afford to engage financial advisers in
ASIC stated that although professional indemnity insurance does provide
some buffer should a licensee be unable to pay claims because of insufficient
funds, it is subject to 'significant limitations, including where there are
insolvency issues or multiple claims against a single licensee'.
The Financial Services Royal Commission's interim report did not discuss
professional indemnity insurance. However, the Australian Financial Review has
noted that misconduct in the financial sector has ignited:
...calls in some quarters for an independent oversight of
remediation programs as well as the introduction of a compensation scheme of
last resort for those who fall through the cracks when a licensee closes or the
professional indemnity insurance cover is inadequate.
Financial counselling and legal
Evidence to the inquiry emphasised the importance of properly resourcing
financial counselling and community legal services dealing directly with
consumers experiencing failures in the consumer protection system.
Ms Katherine Lane from the Financial Rights Legal Centre stated that financial
counsellors often deal with the most vulnerable and disadvantaged members of
the community who may need assistance to make complaints online or over the
phone to external dispute resolution (EDR) schemes.
She described the case load of her insurance law service as follows:
As it stands...we cannot get to 50 per cent of calls, and for
the national debt helpline we do not get to about 10 to 15 per cent. It is just
hard to keep up with the demand. Community legal centres are going to be very
busy in coming times. We have got to properly fund access to justice, and that
includes legal aid as well.
The Financial Rights Legal Centre submitted that all community legal
services 'are currently working to capacity to provide
The National Debt Hotline, which is run by the Financial Rights Legal Centre,
received close to 25,000 calls from individuals seeking advice and assistance
during the 2015–16 financial year. Matters related to insurance accounted for
7,500 calls and the remaining 17,000 calls were related to credit and debt
problems, with credit card debt the most common cause of concern. This was
followed by home loans, personal loans, car loans and energy debts.
ASIC noted the importance of financial counselling and consumer casework
services to its own work, given that these services identify problems in the
market, take complaints directly to ASIC or the relevant EDR schemes,
contribute to law reform and policy development, and directly engage with
ASIC's stakeholder teams and in ASIC's Consumer Advisory Panel.
Submitters stated that should consumers choose to take legal action
against financial entities, including in instances where claims may be above
the threshold permitted by an EDR scheme (such as in the case of small
businesses and farm finance), legal costs may be prohibitive.
One submitter argued that there are 'insurmountable obstacles against these
behemoth financial institutions, which have the capacity to throw their
limitless resources' into fighting consumer claims.
Lack of documentation
A number of submitters stated that a lack of evidence such as documents
or phone recordings following their interactions with financial entities had
negatively impacted their attempts to fairly resolve their disputes.
In some instances, after pressure from government regulators, financial
entities subsequently provided the documents requested. Other submitters and
witnesses stated that their signatures had been forged, or that they had signed
blank documents, incomplete documents or documents without sufficient
explanation about what they were signing, making it difficult for them to
dispute that they had never seen or understood documents when they raised
complaints about misconduct.
The Financial Services Royal Commission's interim report also made note
of this issue. It discussed how effective auditing is undermined without a
'complete and accurate file recording the dealings between adviser and client'
and that 'there can be no effective audit if the adviser keeps control of the
file and will not release it to the licensee'. In addition, it stated that
'[t]oo often, bad audit results have had no, or no significant, consequences
for the adviser'.
Witnesses and submitters raised concerns about the lack of resources for
agencies tasked with enforcing consumer protection laws. For example, Caxton
Legal Centre argued a 'general lack of resourcing for enforcement across both
the regulatory sector and the consumer advocacy sector' has led to a
'persistent frustration that breaches of the existing regulatory regime so
often go unchecked'. Caxton Legal Centre added that consumers are often being
'restrained, by lack of resources, from seeking redress' and '[w]ithout better
resourcing for regulation and advocacy, good policy and good law can only
achieve so much'.
LF Economics placed blame on the regulators for the lack of enforcement,
stating that there is an intentional disregard by regulators to investigate and
enforce Australian law and serious financial crimes committed by 'politically
and economically powerful lenders'. Their disregard meant 'Australians face a
high risk of becoming victims of financial crime'.
The Consumer Action Law Centre identified a lack of resources and insufficient
penalties as the problem, and called for additional resources and powers to
ensure that ASIC 'can tackle the challenges ahead'.
The Financial Rights Legal Centre did not question the adequacy of the
regulations, stating that Australia has 'the best responsible lending laws in
the world'. However, its Co-Principal Solicitor, Ms Katherine Lane, opined:
What has failed here is enforcement, although ASIC is now
taking action. I do not want to go against ASIC, but it is a long time coming.
We have a failure of enforcement; it has taken a long time.
Ms Lane further stated there is 'a general lack of resourcing for
enforcement across both the regulatory sector and the consumer advocacy
sector', and noted that 'breaches of the existing regulatory regime so often go
unchecked and our clients are restrained, by lack of resources, from seeking
At the time, Ms Lane called for ASIC to receive long-term and enhanced funding,
based on an industry funding model
to enable ASIC to 'attract and keep good-quality staff' and adapt to the
changing financial sector landscape.
While there were criticisms of the enforcement regime, the Association
of Financial Advisers held the view that 'Australia has some of the most
rigorous regulation, policing and protections of consumers of financial and
credit services in the world'.
In October 2016, before the commencement of the committee's inquiry, the
Hon. Kelly O'Dwyer MP, the Minister for Revenue and Financial
Services, announced a taskforce to investigate ASIC's enforcement regime. In
April 2018, the taskforce's report was released in conjunction with the Commonwealth
The Taskforce's recommendations covered self-reporting of misconduct by
financial services and credit licensees; harmonising and enhancing search
warrant powers; ASIC approval of industry codes; and strengthening ASIC's
licensing powers, its ability to ban individuals, its directions powers and
penalties for misconduct.
In response, the Australian government agreed or agreed-in-principle to all of
the recommendations, but deferred implementation of several until the
conclusion of the Financial Services Royal Commission.
Financial Services Royal Commission
The Financial Services Royal Commission reinforced the concerns
expressed to the committee about enforcement in the financial sector. The
interim report identified significant deficiencies with regulatory oversight of
the sector and was critical of ASIC which, it stated, 'rarely went to court to
seek public denunciation of and punishment for misconduct', and the prudential
regulator, APRA, which never went to court.
The interim report noted inaction when misconduct was revealed, and explained
...little happened beyond an apology from the entity, a drawn
out remediation program and protracted negotiation with ASIC of a media
release, an infringement notice, or an enforceable undertaking that
acknowledged no more than that ASIC had reasonable 'concerns' about the
The interim report added that infringement notices issued against the
large banks imposed immaterial penalties, and if a community benefit payment
was required, 'the amount was far less than the penalty that ASIC could
properly have asked a court to impose'.
ASIC has recently responded to the observations made by the Royal
Commission in its interim report. On 19 October 2018, the Chair of ASIC,
Mr James Shipton, appeared at a hearing of the Parliamentary Joint
Committee on Corporations and Financial Services (PJCCFS). Mr Shipton
recognised that the Financial Services Royal Commission had 'appropriately
questioned and commented on the role of regulators in preventing or dealing
with poor conduct'.
In particular, he emphasised criticisms of 'ASIC's approach, especially in relation
to court based enforcement'.
Mr Shipton reassured the PJCCFS that ASIC has 'always been committed,
and dedicated to preventing misconduct in the industry'; however, it accepted
that changes need to occur to 'deliver more effective deterrence'.
Mr Shipton acknowledged comments by leaders from the financial sector
about change, but expressed concern that change was not happening as quickly as
it should, referring to the financial institutions' slow, delayed and overly
technical responses to ASIC's queries. Although recognising that due process
was important, Mr Shipton reminded financial institutions that they were
professionally obliged to be 'timely, open and honest in their dealings with
regulators'. Further, he warned that if:
...institutions lie or are otherwise dishonest with us, we will
use every power available to us to punish that behaviour. I am a firm believer
in the importance and effectiveness of court based enforcement tools.
ASIC explained there would be a further review of its enforcement
processes, to identify any changes that need to be made to its enforcement
In addition, ASIC announced it would review matters relevant to the enforcement
of law using criminal and civil proceedings or other regulatory options, as
well as the 'effectiveness and timeliness of the conduct of litigation and of
Whilst acknowledging the importance of internal strategic and structural
reforms, ASIC emphasised that external changes are also required for ASIC to
meet community expectations. Mr Shipton made specific reference to 'increased
penalties and regulatory powers', such as product intervention powers, design
and distribution obligations and direction powers, and subsequently called for the
Parliament to pass these laws as soon as possible.
Further, Mr Shipton argued that the size and resourcing
of ASIC needed to be considered, within the context of:
...how ASIC has been designed over the arc of its history and
how Australia’s financial system has evolved over the years to have its own
unique characteristics. Accordingly, with the introduction of a new industry
funding regime (this financial year), now is the right time to ask whether ASIC
should be resourced differently to meet the community’s expectations and the
unique challenges of Australia’s financial system.
On 25 October 2018, the House of Representatives (HoR) Senate Economics
Legislation Committee heard from APRA's Chairman, Mr Wayne Byres. The Chairman
explained that APRA was re-examining its enforcement decisions, including its
use of court-based sanctions and the 'potential for greater use of enforcement
powers to achieve general deterrence across the industry'.
Issues in specific sectors
The committee also received evidence raising concerns about issues in particular
sectors of the banking, insurance and financial services industry. These issues
conflicted remuneration arrangements and grandfathered
fraudulent home loan applications and irresponsible lending;
valuations and foreclosure;
engagement with Aboriginal and Torres Strait Islander groups;
gambling limits and credit;
consumer leases and payday loans;
debt management firms; and
receivers, administrators and liquidators.
ASIC noted in its submission that 'there is still an unacceptable level
of poor-quality advice in Australia'.
The Insurance Council of Australia emphasised that the greatest risk of
consumers not being paid compensation is in the financial advice industry.
The Financial Ombudsman Service also recognised this in its figures outlining
which sector has the most unpaid determinations, with 57 per cent of
non-compliant financial entities being financial planners and advisers.
The Association of Financial Advisers addressed the issue of
noncompliance of financial advisers with determinations, suggesting that:
The corporations law system makes it too easy for the
directors of licensees to choose noncompliance with Determinations –
incentivising directors of licensees to elect to place their company into
administration despite a rigorous investigation and finding of misconduct by an
Ombudsman scheme about the actions of representatives of the licensee.
The Australian Institute of Superannuation Trustees suggested that
retail superannuation funds may be exploiting a current gap in the regulatory
system, in which the requirement that advisers or sales staff must act in the
best interests of their customers is not applicable if they can prove that they
provided general advice.
The Financial Planning Association of Australia also drew attention to issues
with current definitions of personal and general financial advice. It argued
Framing 'general advice' as advice plays into the behavioural
aspects of financial decision-making by giving the impression that the advice
has a reasonable basis or is appropriate for the client...Anecdotal evidence
shows that it is common for individuals to interpret general advice as personal
advice because it is relevant to their circumstances at the time it is
ASIC outlined that in the first half of 2018, it intended to give
attention to instances where financial services licensees claimed to provide
general advice to retail clients to avoid the best interests duty but had
actually provided personal advice.
The committee also heard concerns about the regulation of financial
advice given to sophisticated investors and wholesale clients. The Corporations
Act 2001 (Cth) sets out a framework for disclosure prior to the sale of a
financial product. Within that framework, in certain circumstances that are
specified in the Act, an offeror of the security or issuer of a financial
product does not need to meet the disclosure requirements for, among others,
Depending on the type of financial product being offered, the definition
of sophisticated investor, wholesale investor and professional investor varies.
In particular, sophisticated investors are certified by a qualified accountant.
A qualified accountant must not certify that a person is a sophisticated
investor unless that investor:
had an income of more than $250,000 over the past two financial
has net assets amounting to more than $2.5 million in value.
One witness said he did not consider himself to be a sophisticated
investor despite meeting the requirements of the test outlined above. He argued
that the definition of sophisticated investor should be based instead on a
consumer's knowledge of a particular industry.
ASIC expressed concerns about the current distinction between wholesale
and retail clients which forms the basis of the types of obligations financial
advisers have to their clients. It highlighted 'the ease with which today's
investors can satisfy the wealth tests, compared to when the tests were
The Financial Planning Association stated that it 'strongly supports a review
into the definitions of retail, sophisticated and wholesale investors' in the
Corporations Act, arguing that current definitions are based on an investor's
wealth, rather than their financial literacy, and 'when paired with a
disclosure based system of regulation, the definition encourages documentary
compliance with little consumer protection benefit'.
Issues concerning financial advice were referenced in the Financial
Services Royal Commission's interim report. Its focus concerned four topics:
fees being charged to clients for financial advice that was not
inappropriate financial advice that does not comply with
regulation (for example, the 'best interests' obligation under the Corporations
Act) or advice that does not account for a client's circumstances;
improper conduct by financial advisers (for example, the
falsification of documentation, the misappropriation of customer funds and
misleading or deceptive conduct); and
issues concerning disciplinary matters.
The interim report made clear that the prevalence and persistence of
dishonesty and greed within the financial advice industry has resulted in these
cultural, regulatory and structural issues.
Conflicted remuneration and
The committee received evidence asserting that despite a ban on
conflicted remuneration, significant exemptions remain. These may include
commissions for bank staff and financial advisers to recommend that customers
switch to retail superannuation funds, and conflicted remuneration for property
investment advice, unless this is in the context of using self-managed super
funds to purchase property.
The Association of Financial Advisers outlined that conflicted
remuneration is permitted where financial advice is given to a wholesale
client, or where the financial services representative can prove that they gave
only factual information to a retail client, or what is termed 'general
The Association called for exemptions to the ban on conflicted remuneration for
general advice to be overturned.
ASIC stated in its submission provided in March 2017 that the ban on
conflicted remuneration did not apply to some products or forms of advice, such
as some life insurance and general insurance products, while other products
have been 'grandfathered' – that is, because the client invested in the product
or platform before 1 July 2014, provisions on conflicted remuneration that
came into force after that date do not apply.
ASIC emphasised that the 'impact of adviser conflicts of interest on the
quality of life insurance advice is an industry-wide problem'.
In December 2017, ASIC published an updated guide on conflicted and
other types of banned remuneration outlining recent regulatory reforms that
remove the general exclusion for life insurance products. However, the guide
noted that 'a benefit is not conflicted remuneration if it only influences
advice provided to wholesale clients'.
CHOICE expressed concerns about the extent of grandfathered commissions.
It stated that in 2014, on average a third of the total income of financial
advice licensees 'came from grandfathered benefits. This income tends to be a
greater proportion of the revenue of large licensees like the big four banks'.
In April 2017, Mr Stephen Sedgwick released his review into retail
banking remuneration. This review was initiated by the Australian Bankers'
Association (ABA), and examined remuneration practices in retail banking not
affected by the Future of Financial Advice reforms.
In that report, Mr Sedgwick recommended that in 2020 the ABA independently
review the adoption of its recommendations to determine 'whether further
regulatory or legislative change is required'.
Pending the outcome of that review, the report also recommended that:
...any post implementation review of the operations of the
proposed product intervention power for ASIC examine whether the government should
legislate to extend ASIC’s intervention powers to address conflicted
remuneration in circumstances in which the industry cannot or does not address
[remuneration and governance of mortgage brokers]
adequately without such an intervention.
Although welcoming the recommendations of the Sedgwick review, and
expressing surprise at the banks announcing they would implement Mr Sedgwick's
recommendations, CHOICE reminded the committee that even after Mr Sedgwick's
review, banks continue to police themselves and as demonstrated from 'multiple
inquiries into the banking sector, constant public pressure is needed to make
sure that reforms go through'.
With the release of the Sedgwick review, the ABA announced 'Australia's
banks will change the way they pay and reward their retail staff to deliver
better banking for customers' and that it intended to 'implement [the
recommendations] in full as quickly as possible'.
However, the issue of conflicted remuneration was not adequately addressed
until the onset of the Financial Services Royal Commission.
ASIC in its submission to the Financial Services Royal Commission in
May 2018 called for the grandfathering of commissions to 'cease as soon as
reasonably practicable and to the maximum possible extent'.
The Financial Services Royal Commission's interim report noted that despite the
Future of Financial Advice reforms, conflicted remuneration for financial
advice has continued under 'grandfathering' provisions of the Corporations
Regulations 2001 (Cth).
The interim report questioned the justification for grandfathering
provisions to remain, and considered stakeholders' arguments on this matter,
including ASIC's principle point that 'any exemption to the ban on conflicted
remuneration, by definition, has the ability to create misaligned incentives,
which can lead to inappropriate advice'.
Since the Financial Services Royal Commission hearings about financial
advice, Westpac, Macquarie, NAB and ANZ have announced they would cease paying
grandfathered commissions to advisers these entities employ.
On 10 October 2018, the ABA announced that it would 'seek new
legislation to end grandfathered payments and trail commissions for financial
advisers'. The CEO of the ABA, Anna Bligh, commented that the removal of
'grandfathering provisions in relation to financial advice' is an 'important
piece in the puzzle of ensuring there are no conflicts for advisers'.
ASIC expressed concern about the current model of upfront and trail
commissions for mortgage brokers, leading to conflicts of interest because
'commissions are linked to the size of the loan, so the more money a consumer
borrows, the more the broker will be paid'. It also noted bonus commissions
from lenders to mortgage brokers may increase poor consumer outcomes.
These concerns were shared by other submitters and witnesses.
For example, the CEO of CHOICE, Mr Alan Kirkland, called for changes to the
minimum obligation that lenders and brokers only be required to determine that
a loan is 'not unsuitable' for a customer. He described this as 'an
unacceptably low bar' that 'creates massive risks for consumers [who] are then
embedded in their long-term banking relationships'.
The Financial Services Royal Commission's interim report looked at
matters related to intermediaries, including mortgage brokers. With regard to
misconduct in connection to home loans, the interim report identified two
primary concerns: first, for 'whom do intermediaries in the home loan market
act and second, what are the effects of value-based remuneration
Both are considered briefly below.
The interim report acknowledged the complexity of this legal question,
but pointed out that the intermediary is paid by the lender, not the borrower.
The relationships between the broker, aggregator and the lender are regulated
by a contract, which contains 'no agency' provisions.
Subsequently, the interim report considered questions about representation that
relate to the beliefs and expectations held by the borrower,
and outlined key issues such as:
intermediaries owing 'no general duty to the borrower to seek out
the best and most appropriate deal for the borrower';
obscured relationships between brokers and borrowers, and the
negotiation of unsuitable loans; and
the expectation that the 'broker's task is to sell...[the] lender's
The interim report identified evidence that revealed ways in which
remuneration affects the outcome of a loan and advice about mortgages. Further,
the report highlighted that:
...value- and volume-based remuneration for intermediaries in
the home loan industry has been an important contributor to misconduct and
conduct falling short of community standards and expectations and poor customer
Fraudulent home loan applications
and irresponsible lending
The committee heard that calculations of living expenses used to
determine the amount that someone can borrow for a home loan may not be an
accurate estimate of a household's living expenses. Indeed, on some occasions,
these expenses may be grossly underestimated.
LF Economics noted 'many claims by alleged victims' that lenders had
fraudulently tampered with their loan application forms. It argued that because
the internal processes of lenders should enable them to detect and deny a loan
with incorrect details, 'mortgage fraud should therefore be all but
non-existent. It is the lenders themselves, however, who are the prime
instigators of mortgage fraud'.
The Financial Services Royal Commission considered the issue of
irresponsible lending practices.
It examined responsible lending for consumers (such as home loans, car loans
and credit cards) and businesses
(such as small to medium enterprises, agricultural businesses and guarantors of
business loans). The interim report highlighted the importance of the
responsible lending provisions under the National Consumer Credit Protection
Act 2009 (NCCP Act), in particular the requirement for credit licensees to
determine whether a 'credit contract will be unsuitable
for the consumer if the contract is made or (in the case of a credit limit
increase) the limit is increased'.
The interim report detailed breaches of responsible lending requirements,
and determined that this issue is related to entities' 'interpretation and
application of obligations imposed by the [NCCP Act]' to verify a customer's
Subsequently, the interim report listed questions on this matter, such as:
What steps should be taken by a lender to verify a borrower's
expenses that are consistent with responsible lending obligations?
What processes do entities have in place to verify that a
borrower's expenses meet the requirements of the NCCP Act, and do those
processes meet the requirements?
Should the Household Expenditure Measure (HEM) continue to be
used as a benchmark for borrowers' living expenses?
Issues with valuations and foreclosure
Some evidence concerned issues with foreclosure. The Australian Small
Business and Family Enterprise Ombudsman stated that banks may require
customers in default on their loan repayments to pay the fees of valuers or
investigating accountants to assess business operations or the value of assets.
The Ombudsman submitted that many banks then refuse to provide the customer
with copies of valuations or accountant reports, despite the customer paying
for these. Customers who approach the valuer or investigative accountant
directly may be told that the documents are confidential and cannot be shared
because the bank requested the report, not the customer.
In its 2016 report on the impairment of customer loans, the
Parliamentary Joint Committee on Corporations and Financial Services devoted an
entire chapter to the issue of property valuations. The committee suggested
that if the banks and the ABA did not address 'matters as simple as providing
borrowers with copies of valuation reports...the government should bring forward
appropriate legislation or regulation' to require banks to provide borrowers
with copies of valuation reports and valuation instructions as soon as these
It noted that customers may not be aware of EDR arrangements for loan
valuations and that the valuation industry did 'not have appropriate compliance
and dispute resolution arrangements in place' in any case.
The committee recommended that 'nationally consistent arrangements be put in
place for...the professional standards and conduct of valuations in relation to small
The Government is yet to respond to the report's recommendations.
The new ABA Banking Code of Practice, which ASIC approved in July 2018,
explicitly addresses the issue of external property valuers, including a
commitment that 'We will provide copies of property valuations and valuer
instructions (except when enforcement action has already commenced)'.
The ABA's Chief Executive Officer, Anna Bligh, stated in the Code's foreword
that 'the high standards of behaviour and service set out in this Code are
enforceable rights for customers'.
The Financial Rights Legal Centre described the insurance sector as
being 'at least 20 years behind the banking sector in terms of addressing basic
consumer issues', from claims handling, to unfair contract terms, to problems
with disclosure, some products and business models.
The Insurance Council of Australia stated it was committed to
'continually enhancing outcomes for consumers buying general insurance'.
The Council argued that because of prior and imminent reforms to the regulatory
framework governing insurance:
...the focus must be on identifying whether there are examples
of poor consumer outcomes that remain without a remedy. The Insurance Council
is not aware of any issues that are not being actively addressed.
Several submitters outlined concerns about add-on insurance products.
ASIC echoed this, suggesting that 'consumers are being sold expensive, poor
value products that give them very little to no benefit, in a sales environment
with pressure selling, high commissions and conflicts of interest'.
ASIC noted that one of its reports found that car dealers earned four times
more in commissions from add-on insurance policies than consumers received in claims.
The magnitude of the problem of add-on insurance has been highlighted by
the Financial Services Royal Commission. The interim report specified that
between 1 July 2010 and 28 February 2018, financial service entities paid
consumers over $128 million in remediation due to conduct connected to add-on
insurance. Approximately $117 million of this total was paid for car loan
add-on insurance remediation, and $10 million for credit card add-on insurance.
Approximately $900,000 was paid for home loan add-on insurance remediation.
Some submitters highlighted difficulties experienced by people with a
mental health condition accessing insurance products.
For example, Beyondblue submitted that:
Empirical evidence and anecdotal reports demonstrate that
many people with a mental health condition experience significant difficulties
in obtaining and claiming on different types of insurance products, compared to
the rest of the population. These difficulties occur across the general and
life insurance industries for products such as travel insurance, income
protection, total and permanent disability (TPD) and life insurance.
Beyondblue argued that the 'insurance industry treats all mental health
conditions as a single group', with 'blanket mental health exclusions' in
The Public Interest Advocacy Centre asserted that insurers had avoided paying
out policies by relying on medical records to impute medical conditions that
did not exist at the time of applying for insurance, particularly mental illness.
Such practices led a former insurance executive to call in March 2018 for the
Financial Services Royal Commission to examine how insurers treat customers
with mental illness.
Round 6 of the Financial Services Royal Commission focused on issues with
the insurance industry treatment of customers with mental health conditions;
however, because of the timing of this round of hearings, evidence relating to
this issue was not referenced or reflected upon in the interim report. The
Royal Commission is scheduled to submit its final report to the
Governor-General by 1 February 2019.
Engagement with Aboriginal and
Torres Strait Islander groups
A number of submitters highlighted concerns about funeral insurance sold
to Indigenous people.
The Financial Rights Legal Centre focused on funeral insurance as a particular
example of an instance where financial entities have been engaged in misselling
The Broome Circle Financial Management Program noted that a 'lack of
cultural and geographical awareness from frontline customer service staff'
exacerbated the difficulties that many Indigenous clients experience engaging
with financial entities, particularly those from remote Aboriginal communities.
These difficulties may include language, staff being unable to understand
customers, or customers being unable to provide sufficient identification.
Round 4 of the Financial Services Royal Commission's hearings focused on
issues faced by remote communities, in particular Indigenous Australians. The
interim report referenced issues concerning basic accounts, informal
overdrafts, dishonour fees and identification issues as primary matters of
concern, and examined efforts by financial services and regulatory bodies to
address these issues.
The Financial Services Royal Commission also received evidence on
funeral insurance. The interim report observed that evidence pointed 'to
predatory behaviour by insurers and salespeople' and proposed questions to
develop policy on how best to regulate funeral insurance.
More broadly, the interim report identified that a common issue is the
use of 'culturally appropriate communication, a lack of which aggravated the
existing difficulties in the interaction between entity and customer'.
Some submitters focused on the issue of credit card repayments.
A representative from CHOICE in the inquiry's public hearing on 26 April 2017
argued that 'credit cards are where we see real, extreme consumer harm'.
Ms Susan Quinn, a Senior Policy Officer with the Consumer Action Law Centre,
told the committee that each week the Centre receives 'at least one call from a
person with credit card debt exceeding $100,000'.
The Financial Rights Legal Centre and a representative from the Consumer Action
Law Centre argued that credit cards should only be issued if it is clear that
the customer is able to pay back the full limit within three years.
ASIC released a report in July 2018 with findings from its review of
credit card lending between 2012 and 2017. The report found that 18.5 per cent
of consumers with a credit card–or one in six consumers who own a credit
card–met at least one problematic debt indicator. These indicators were that
the consumer had made repeated low repayments, the account showed persistent
debt, the account was at least 60 days overdue, or the account had been written
off. The report found that 'few credit providers take proactive steps to
address persistent debt, low repayments or products that are unsuited'. It also
noted the work of the Senate Economics References Committee in its inquiry into
credit cards, highlighting that ASIC's findings 'suggest that the "debt trap"
risk for balance transfers noted by the Senate Inquiry exists and affects a
substantial proportion of consumers'.
Evidence provided by ASIC to the Financial Services Royal Commission
revealed that between 1 July 2010 and 28 February 2018, more than 34,000 customers
of financial services received over $11 million in remediation payments 'in
response to breaches of responsible lending obligations in
connection with credit cards'.
In response to these matters, the four major banks
...disclosed that they had identified a range of misconduct and
conduct falling short of community standards and expectations in connection
with home loans, car loans, credit cards, add-on insurance and so-called 'processing
A further concern expressed by the Financial Services Royal Commission
related to unsolicited offers of credit card limit increases. The interim
report linked this practice to the banks' pursuit of profit above all other
concerns, and stated:
Despite being told plainly by ASIC that it considered that
practices of the kind followed by Westpac did not comply with the responsible
lending provisions, Westpac chose to continue those practices until ASIC
threatened legal action. And Westpac chose not to seek, at any time in the
intervening two years, to tell ASIC that it proposed to continue with its
previous practices or to persuade ASIC that ASIC’s stated views of the law were
The Financial Services Royal Commission heard that credit card debt is
the primary reason for consumers accessing support services, 'especially those
people on low incomes or who are otherwise marginalised or vulnerable'.
Gambling limits and credit
Some submitters expressed concern about the ease with which consumers
are able to access credit for gambling.
Financial Counselling Australia argued that consumers 'struggling with gambling
addiction present a unique and important test of whether consumer protections
in the finance industry are adequate'. It stated that credit provided by
financial entities for gambling purposes caused considerable harm, and was
unaddressed by government reform. However, it did note that some banks 'already
prohibit gambling transactions on their credit cards', and several of the big
four banks may be considering whether to limit the use of credit cards for
The Financial Services Royal Commission heard evidence from one witness,
Mr David Harris, who detailed the consequences of the Commonwealth Bank of
Australia (CBA) issuing credit increases despite Mr Harris advising the CBA of
his gambling problem.
Issues relating to access to credit for gambling were, in the Financial
Services Royal Commission's view, 'traced to [financial] entities preferring
pursuit of profit to pursuit of any other purpose'.
Consumer leases and payday loans
Several submitters stated their concerns about payday loans and 'rent
now, buy later' consumer leases targeting customers from lower socio-economic
Such products, Financial Counselling Australia suggested, were a 'major cause
of financial harm for people on low incomes'.
ASIC stated that under consumer leases, consumers 'will pay significantly more
than the retail price of the goods and be charged more than a lender is
permitted to charge under a small amount credit contract'.
The Financial Services Royal Commission did not examine consumer leases,
payday loans or in-store credit arrangements, as it considered that these areas
are outside its terms of reference.
Debt management firms
Financial Counselling Australia contended that debt management firms
constitute a problem among lower socio-economic groups because they 'target
vulnerable and financially desperate consumers with high, front-loaded and
opaque fees and promise a lot more than they can deliver'.
Types of debt management firms include credit repairers, debt negotiators and
ASIC stated that it agreed with the recommendation of the 2017 Ramsay
review of the EDR framework that debt management firms should be required to
become members of an EDR scheme, with the provision that additional conduct
obligations be required of this type of entity.
Debt management firms were not examined as part of the Financial
Services Royal Commission; however, this matter falls within the terms of
reference of the committee's inquiry into credit and financial services
targeted at Australians at risk of financial hardship.
Receivers, administrators and
This inquiry received a small amount of evidence concerning the conduct
of liquidators that managed outstanding debts of insolvent companies, such as
Timbercorp, as well as receivers and insolvency practitioners.
The Parliamentary Joint Committee on Corporations and Financial Services
in its report on the impairment of customer loans, tabled in May 2016,
dedicated a chapter to issues raised about receivers and investigative
accountants. These issues included allegations that receivers sold properties
and assets under value, that they did not consider or take up sale options put
forward by borrowers, that there was a lack of information provided to
borrowers by receivers, and there was a lack of effective dispute resolution
The committee expressed its concern that 'there is no clearly
established requirement for receivers to be part of an industry-wide
independent external dispute resolution scheme supported by internal dispute
It recommended that receivers be 'required to take every reasonable step' to
ensure that 'assets are sold at or as close to listed market value as possible'
in accordance with Prudential Standard APS 220. The committee also recommended
that ASIC administer a strong penalty regime for breaches of section 420A of
the Corporations Act, which requires assets be sold for fair market value.
The Financial Services Royal Commission's interim report identified that
a central complaint about the conduct of receivers 'was that receivers
appointed by banks did not realise fair value for the assets under management'
and called into question the behaviour of receivers 'when taking possession of
assets or when in possession of those assets'.
Despite submissions identifying concerns with the conduct of this sector, the
Financial Services Royal Commission considered that these matters were outside
its terms of reference. However, the interim report did consider evidence that
related to the conduct of financial institutions that appoint a receiver.
The interim report made note of NAB's statement that it is not in the
interest of the customer or the bank to appoint an external administrator, and
that this step is viewed by those in the banking sector as an option of last
With regard to misconduct, questions were raised concerning the use of
administrators in connection with agricultural loans.
The evidence provided to this inquiry about the consumer protection
system in general highlighted issues with insufficient professional indemnity insurance,
record keeping and sharing of records by financial entities, and under-resourcing
of financial counselling and legal services. The committee holds concerns that
weaknesses in current legislative and regulatory requirements, monitoring and
enforcement arrangements have exposed consumers to harm. In particular, the
under-resourcing of financial counselling and legal services may especially impact
vulnerable Australians, who often make use of these services and may be
targeted by providers offering low-quality and/or low value for money products
with high interest rates to the people who can least afford to repay them.
Many of the industry-specific issues identified by the committee during
this inquiry have aligned with those raised in the Financial Services Royal
Commission. The impact of these revelations has already been felt. For example,
moves have been made by the banking sector to address some of these issues,
including the removal of grandfathered commissions and an announcement by the
Australian Banking Association to seek new legislation to ban this practice.
The committee is supportive of proactive action made by the financial services
industry to address these matters of concern, but notes that these efforts are
The committee acknowledges that a number of issues remain outside of the
Financial Services Royal Commission's terms of reference and subsequently have
not received necessary scrutiny. These matters include consumer leases and
payday loans, debt management firms, and administrators, receivers and liquidators.
For this reason, the Senate has referred an inquiry to the committee into
credit and financial services targeted at Australians at risk of financial
hardship, which will provide further scrutiny of matters such as consumer
leases, payday loans and debt management firms.
Given the ongoing work of the Financial Services Royal Commission, the
committee has determined that it will refrain from making specific policy
recommendations; however, it will closely monitor the work of the Financial
Services Royal Commission and its forthcoming recommendations, particularly as
these relate to the issues specified in this report. Chapter 5 outlines the
committee's conclusions and recommendations regarding the Royal Commission's
work to date and its terms of reference.
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