You might remember that way back in April the Royal Commission heard about a litany of problems with the CBA’s financial services arm, including advisers charing dead clients for financial advice – in one case for more than a decade.
Orr and Commissioner Hayne want to know about the causes, and the consequences for those in charge.
Hayne’s asking about instances where the customer was paying a fee for ongoing service but was not even allocated a financial adviser.
There were cases where there was no assigned adviser and dare I mention it, there were cases where the dead were being charged?” Hayne asks.“Yes, Commissioner.”
He wants to know why no one “grappled” with the fact that money was being received by the financial services entity.
I’m not sure the extent to which they grappled with it ... I agree with both your and Ms Orr’s characterisation of the failure, which is at many levels,” he says.A little earlier, Comyn agreed with Orr that when the CBA’s associated financial services firms discovered customers were paying fees for no service they did “too little to uncover the full extent of the problem”.
Comyn says he wasn’t fully across the consequences within the financial services area, but that he suspects an “imbalance between the consequences that were applied”.
The audit was rated “red”, which, on first glance, doesn’t sound good.
The review identified 45 new issues, including seven high-rated issues. That’s on top of the 199 issues already known to the CBA’s management.
Comyn says he believes the CBA is making progress, but that he was “not surprised” by the findings.
“The audit was always going to be red ... we already had 199 outstanding issues. So they, they didn’t need to do any work,” he says.
He said the “majority” of the new issues identified by the audit were not of the same scale as those identified previously.
He says three of them relate to user access verification, another relates to “international foreign transfer instructions”.
It was established in about June, and includes members from the bank’s business units. The point, we’re told, is to “raise the visibility and stature” of non-financial risk in the organisation.
We’re taken to a report prepared by Pricewaterhouse Cooper in October this year about the committee, which Comyn says he asked them to prepare.
The PwC report found the committee was viewed as a positive development internally, but it also identified a failure to address a number of “specific requirements” of the committee’s charter, including “overseeing the health of the group’s risk culture”.
“I was not surprised by any of the findings,” Comyn says.
“There was a lot of work that we had taken on [in] the first three months and the purpose of the review was to identify opportunities for improvement quickly.”
He says he’s still not satisfied with “the rate of issue closure” within the organisation.
“I’m certain the board aren’t either,” he says.
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Orr says the “fundamental problem” that underpinned much of the breach was that it was unclear who in the CBA was responsible and accountable for making sure it was compliant.
“Yes, that’s right,” he says.
She asks Comyn whether he agrees that “senior levels of your organisation did not prioritise the identification and management of non-financial risks”.
“Yes. Yes, I do.”
In June, the bank agreed to pay $700m to settle civil proceedings relating to breaches of anti-money laundering and counter-terrorism financing laws.
It came after the government’s financial intelligence agency Austrac announced it was suing CBA for 53,700 alleged breaches of money laundering and counter-terrorism financing laws.
The case related to CBA’s use of intelligent deposit machines, a type of ATM launched in 2012, which let customers anonymously deposit and transfer cash.
The investigation, undertaken in partnership with federal police, NSW police and Western Australia police, found that the machines were being used to launder the illicit proceeds of crime.
Orr says failures by the CBA limited the ability of law enforcement to fight financial crime.
“Yes, that’s right,” Comyn replies.
In his statement to the commission Comyn has said at the time the CBA did not “sufficiently understand” its obligations under the legislation.
Orr wants to know how it’s possible that an organisation the “size and sophistication” of the CBA did not understand its responsibilities.
He gives quite an extensive answer:
At a higher level I would say that there wasn’t a sufficient understanding and awareness of exactly what the risks associated with money laundering was. Part of the reason why I don’t think the relationship either with Austrac or as I perhaps mentioned earlier around law enforcement was appropriate. There was a very poor understanding at an individual level about exactly what was required. There’s not a satisfactory answer to why, but in my view, having spent a lot of time on this particular matter, I don’t think it’s clear that we actually understood what was required. How could we ever fall into that sort of sense of complacency? I’ve asked myself that question many times.
“It may prove to be,” he admits.
It came off the back of questioning about a recent case where the CBA took two months to tell Asic that the Financial Ombudsman Service had found “a systematic issue with CBA’s policies and procedures for providing information and general advice on loan protection products”.
“Was that acceptable?” Orr asks.
“Not at all.”
She asks whether he has an explanation for why it took so long.
I have an explanation but it’s not a good one. And that is ... the team that deals with FOS and specifically around individual customer matters or systematic matters, and this is one of the many reasons why it’s not a good one, are in different parts of the organisation.He goes on until Orr interjects: “They didn’t talk to each other?”
“They didn’t talk to each other,” he agrees.
In one instance, Comyn called Shipton to make him aware of media reporting into the Youthsaver scandal.
Fairfax Media reported in May thousands of children’s CBA accounts were fraudulently set up by retail branch staff. It was part of a widespread scam to earn bonuses and meet aggressive performance targets.
Comyn says he called Shipton to give him fair warning.
“I would try not to surprise the regulator,” he says.
But, we now discover that although he told Shipton, the CBA did not make an official breach report within 10 business days, as required under the law.
Orr asks Comyn why the CBA didn’t report the breach.
“Because at that point in time we didn’t understand the significant of that particular matter,” he says.
“We hadn’t specifically turned out mind to whether it was a breach or a likely breach ... I agree that we should have more explicitly.”
But, Comyn still can’t say whether they’ve reported the breach.
Comyn replies: “That’s probably a generous description.”
“Do you accept that CBA wasn’t cooperative or constructive in its dealings with the regulator?” Orr asks.
“Certainly not as cooperative or constructive as we should have been,” he replies.
Comyn says the bank has been “arrogant” in its dealings with Asic, and accepts the CBA had a history of poor engagement with the regulator in relation to the fees for no service and bad advice issues.
“We were narrow, legalistic, defensive and arrogant in our dealings with regulators and often we left it to our lawyers and compliance people in the organisation to deal with our regulators,” he said.
Extra 227,000 CBA customers identified as "high risk" recipients of credit insurance
We’re told the report found the CBA sold consumer credit insurance to 933,535 customers in the last five years.
Of those, approximately 227,845 were identified as being “higher risk of being affected” by some of Asic’s concerns with the product.
A further 444,000-odd customers were identified as at-risk, though with a lower risk profile.
These customers don’t include those who have already been identified as needing “remediation” and Orr wants to know whether the CBA expects it will need to extend its remediation program.
“If it’s necessary, yes,” he says.
“We certainly will consider these customers, yes, Ms Orr. I haven’t had the chance to discuss this report [but] of course we will consider EY’s findings.”
Orr suggests there is “clear potential” based on the Ernst & Young report that CBA will need to remediate “a significant amount of additional customers over and above those who are currently covered by your remediation programs?”
“That’s a reasonable conclusion from reading that piece of paper, yes,” Comyn replies.
“It’s completely unacceptable,” he says.
He said the company has focused on “precision, comprehensiveness” at the cost of timeliness.
“We had a general complacency and inability to be able to sufficiently prioritise,” he says.
He says the bank is aiming to bring the timeline down to 90 days, but admits “we will have some difficulty”.
We hear that the CBA expects to pay out about $15m to 64,000 customers over the sale of the CreditCard plus insurance.
They’ve already paid about $10.5m of that.
In regard to loan protection products the bank expects to pay about $31m to 90,000 customers.
We’re told that Asic has been “expressing concerns” about the status of those remediations, and has asked the CBA to conduct a review of the sales of its consumer credit insurance.
Comyn says the CBA commissioned Ernst & Young to do that work.
“What, in your mind, is the single most important thing for you to do personally to change the culture within your organisation?” she asks.
“The leaders inside the organisation,” Comyn says.
“And do you feel that CBA has had the right leaders in the past?”
“No,” he says.
“Do you feel that they have the right leaders now?”
“We will see. I hope so. Yes.”
CBA boss admits bank prioritised "financial objectives" over customers
“Yes,” he replies.
“Can you give us some examples of that?” Orr asks.
He can, in fact, give some examples.
“Fees for no service, in particular, would stand out. Less so essential super. Very different flawed thinking ultimately that supported that. AUSTRAC, I don’t believe was around commercial prioritisation or interest, not withstanding, of course, we could have invested and should have invested much more but that wasn’t the rationale of why we didn’t ultimately avoid failures ... the heart attack definition.”“Those are the examples you would give?” Orr asks.
“They’re examples. I am not suggesting they’re exhaustive.”
Orr brings him back to that reference to “the heart attack definition”.
“That last one you gave reliance on CommInsure of outdated medical conditions, you accept that was an example of CBA prioritising financial objectives over customer outcomes?” she asks.
“Yes,” he replies.
“Because CommInsure failed to update the definition of heart attack in 2012, and again, in 2014 to accord with accepted medical definitions at those times?
“Yes, that’s right.”
“And there were financial objectives that led to and underpinned those decisions?”
“Yes, that’s right.”
You say in your statement that CommInsure failed to have sufficient regard to the interests of good customer outcomes?
“Yes, that’s right.”
We’re told that in April 2016 Narev agreed to an internal review of the products, but it never went ahead. Later, Comyn suggested in an email that both he and the head of the wealth division mount arguments in an attempt to convince Narev of their position.
But, he says, Narev never responded to his email.
“Did you discuss these matters again?” Orr asks.
“Not in as structured a way after this point in time, no. I think they continued to be a topic but I had ... in my view I couldn’t think of too many other options,” he says.
Orr asks if he “gave up”.
“I wouldn’t say I gave up, but I was struggling to find another path,” Comyn replies.
He says he was “insufficiently persuasive” in convincing Narev to drop the products.
He said there had been “reductions to short-term variable awards”, but says he couldn’t recall anyone losing their job over the issue.
“Well, we dealt with this matter very poorly,” he says.
But the knockout question was not introduced for online sales of the product for another two years, until May 2017, which Comyn says was a mistake.
“Well, I think the rationale at the time, which is clearly inadequate, was that the online channel was different and we were, again, overreliant on disclosure. It was a very poor decision,” he says.
The commissioner, Kenneth Hayne, asks what he means by that.
“I think the assumption at the time, commissioner, was the channel was quite different and, therefore, customers would read the disclosure and the information that was available to them online,” Comyn says.
He said that was “clearly not the case for the majority of customers”.
“It was a very poor decision,” Comyn says.
We’re told the CBA didn’t introduce any knockout question into the sale of any other consumer credit card insurance at the time either. Comyn says the decision was “flawed”. He says the knockout questions should have been introduced more widely back in 2015.
Comyn says Kasparov attended a client meting. He was a fascinating dinner guest, we’re told.
According to Comyn’s notes of the meeting, Narev gave him feedback to “temper your sense of justice”.
Comyn tells Orr he took this to mean he needed to “calm down” and “focus more on my personal conviction”, “better manage competing agendas” and “to pick which battles”.
Counsel assisting Rowena Orr is asking Comyn about the CBA’s sale of junk credit card insurance, and his advice to the bank’s former chief executive, Ian Narev, to cease the sale of the products.
Comyn says he had a “robust discussion” with Narev over the products, but that he did not take up his recommendation to suspend the sale of the junk products. They had three other meetings in April, May and June 2016 to discuss this topic, but the recommendation wasn’t taken up.
He said he believed Narev was getting “different views from a different part of the organisation” and took the view the CBA product was deficient compared with other similar products in the market.
First though, here’s a quick wrap of what we learned on what turned out to be quite an eventful Monday:
- Comyn admitted there was little, if any, ongoing service provided by mortgage brokers to customers, despite them charging trail commissions.
- CBA balked at removing perverse incentives for mortgage brokers to sell larger loans. The bank had come extremely close to introducing a flat-fee model for brokers, instead of commissions. This would have delinked payments to brokers from the size of the loans. CBA was a week out from announcing the change in 2017. But it suddenly decided that it couldn’t make the change without being certain the rest of the industry would follow suit.
- Much of the morning session yesterday was devoted to the role bonuses played in misconduct. Comyn said he had considered removing bonuses, but decided against it. He said such a move would have significant impacts on parts of the business, particularly in home lending. Comyn said they were necessary to “uncover the unserved financial needs of our customers and ensure we always provide good customer outcomes”.
- The inquiry heard CBA removed bonuses for its teller staff last year. The change had no impact on their performance.
Source: The Guardian