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Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry

Westpac Group progress update - March 2019

Overview
 

The Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was released publicly on 4 February 2019.
 

In response to the report, Westpac commits to:
 

  • Adopting the spirit of the report: We will consider the spirit and intent of the report’s recommendations and not take a technical approach to interpreting and implementing recommendations;
  • Being proactive: We will move ahead of the legislative and regulatory agenda where appropriate and where we are able;
  • Actively participating: We will engage constructively to ensure positive outcomes for our customers and the economy; and
  • Being transparent: We will be open about our response and update on our progress.
     

Of the 76 final report recommendations, 53 will require action by financial services participants, such as Westpac. Of the 53, we have completed, or are currently implementing, 25 of these recommendations. The remainder will require further guidance from government or regulators.
 

We are making good progress, including already removing grandfathered commissions for our employed financial advisers and implementing the recommendations of the Sedgwick review for our own people. We will also shortly remove variable reward for tellers and replace it with fixed pay, and ensure that farmers directly affected by drought and natural disaster are not charged default interest.
 

Through the Royal Commission it became clear that the financial services sector did not effectively and rapidly respond to customer complaints and their root causes. This is particularly true when it concerns vulnerable customers, or where the consequence of a service failure is potentially severe for the customer. We are investing in people and policies to make sure we resolve complaints in a fair, consistent, and timely way, and improving the visibility of complaints at the highest levels in the company.
 

Further detail on our progress is included in the below table.
 

We know we have more work to do to regain the trust of the community. We will continue to work constructively with policy makers, regulators and other stakeholders to implement the response to all the recommendations in the Royal Commission Final Report.

Actions in response to Royal Commission Recommendations

The table below includes Royal Commission recommendations where Westpac has already taken steps to implement or meet the expected regulatory or legislative requirements.
 

RECOMMENDATION WESTPAC ACTIONS

Recommendation 2.4 – Grandfathered commissions

Grandfathering provisions for conflicted remuneration should be repealed as soon as is reasonably practicable. 

In June 2018, Westpac announced that it would cease the payment of grandfathered financial advice commissions to employed advisers from 1 October 2018 and invited its third party advisers to stop accepting grandfathered commissions.

We welcome legislative change to extend this position across the industry and will work with the Government on the legislative amendments. Additional detail will be required to understand how some aspects of the repeal will work, for example, rebating of certain types of conflicted remuneration, and amending contracts with third parties. 

Recommendation 2.7 – Reference checking and information sharing

All AFSL holders should be required, as a condition of their licence, to give effect to reference checking and information-sharing protocols for financial advisers, to the same effect as now provided by the ABA in its ‘Financial Advice – Recruitment and Termination Reference Checking and Information Sharing Protocol’. 

Westpac already complies with the ABA Protocol. 

Recommendation 2.8 – Reporting compliance concerns

All AFSL holders should be required, as a condition of their licence, to report ‘serious compliance concerns’ about individual financial advisers to ASIC on a quarterly basis. 

Westpac already has processes in place to report any of its own financial advisers where there are ‘serious compliance concerns’. 

 

Recommendation 2.9 – Misconduct by financial advisers

All AFSL holders should be required, as a condition of their licence, to take the following steps when they detect that a financial adviser has engaged in misconduct in respect of financial advice given to a retail client (whether by giving inappropriate advice or otherwise):

  • make whatever inquiries are reasonably necessary to determine the nature and full extent of the adviser’s misconduct; and
  • where there is sufficient information to suggest that an adviser has engaged in misconduct, tell affected clients and remediate those clients promptly. 

Westpac already has processes in place to investigate and remediate misconduct by its own financial advisers. 

RECOMMENDATION WESTPAC ACTIONS

Recommendation 3.1 – No other role or office

The trustee of an RSE should be prohibited from assuming any obligations other than those arising from or in the course of its performance of the duties of a trustee of a superannuation fund. 

This recommendation will require Westpac to change certain legacy and administrative arrangements in which the same entity is the trustee of a superannuation fund and responsible entity (RE) of a managed investment scheme (MIS). We have begun the process of replacing the REs of affected MISs. We will continue to monitor and review any conflicts and manage in accordance with our Conflicts Management Policy.

We will work with the Government on the legislative amendments necessary to give effect to this recommendation. 

RECOMMENDATION WESTPAC ACTIONS

Recommendation 4.2 – Removing the exemptions for funeral expenses policies

The law should be amended to:

  • remove the exclusion of funeral expenses policies from the definition of ‘financial product’; and
  • put beyond doubt that the consumer protection provisions of the ASIC Act apply to funeral expenses policies. 

Westpac no longer offers funeral expenses products.

Recommendation 4.3 – Deferred sales model for add-on insurance

A Treasury-led working group should develop an industry-wide deferred sales model for the sale of any add-on insurance products (except policies of comprehensive motor insurance). The model should be implemented as soon as is reasonably practicable. 

Westpac has already ceased the sale of Consumer Credit Insurance through branches and customer contact centres, and will cease through all channels from 1 July 2019.

Recommendation 4.4 – Cap on commissions

ASIC should impose a cap on the amount of commission that may be paid to vehicle dealers in relation to the sale of add-on insurance products. 

Westpac does not sell add-on insurance products through vehicle dealers.

Recommendation 4.6 – Avoidance of life insurance contracts

Section 29(3) of the Insurance Contracts Act should be amended so that an insurer may only avoid a contract of life insurance on the basis of non-disclosure or misrepresentation if it can show that it would not have entered into a contract on any terms. 

Westpac’s practices are already consistent with this recommendation.

That is, as recommended, Westpac will not avoid a contract for innocent non-disclosure of a health issue. In these circumstances, Westpac would provide the cover that we would have offered should that non-disclosure have not occurred. In some cases, however, we may not have provided cover under any circumstances and we would avoid the contract.

Recommendation 4.9 – Enforceable code provisions

As referred to in Recommendation 1.15, the law should be amended to provide for enforceable provisions of industry codes and for the establishment and imposition of mandatory industry codes.

In respect of the Life Insurance Code of Practice, the Insurance in Superannuation Voluntary Code and the General Insurance Code of Practice, the Financial Services Council, the Insurance Council of Australia and ASIC should take all necessary steps, by 30 June 2021, to have the provisions of those codes that govern the terms of the contract made or to be made between the insurer and the policyholder designated as ‘enforceable code provisions’.

Westpac is a subscriber to major insurance industry codes, including the Life Insurance Code of Practice, General Insurance Code of Practice and the Insurance in Superannuation Voluntary Code. It seeks to operate consistently with their obligations.

We will work with the relevant industry bodies to implement this recommendation. 

Recommendation 4.10 – Extension of the sanctions power

The Financial Services Council and the Insurance Council of Australia should amend section 13.10 of the Life Insurance Code of Practice and section 13.11 of the General Insurance Code of Practice to empower (as the case requires) the Life Code Compliance Committee or the Code Governance Committee to impose sanctions on a subscriber that has breached the applicable Code.

Westpac will work with the Financial Services Council and the Insurance Council of Australia to implement this recommendation. 

Recommendation 4.11 – Co-operation with AFCA

Section 912A of the Corporations Act should be amended to require that AFSL holders take reasonable steps to co-operate with AFCA in its resolution of particular disputes, including, in particular, by making available to AFCA all relevant documents and records relating to issues in dispute. 

Westpac already seeks to engage with AFCA co-operatively, including being open and co-operative in providing relevant documents. 

Recommendation 4.15 – Status attribution to be fair and reasonable

APRA should amend Prudential Standard SPS 250 to require RSE licensees to be satisfied that the rules by which a particular status is attributed to a member in connection with insurance are fair and reasonable.

Westpac will work with APRA to implement this recommendation. We are comfortable that we already comply with the proposed new standard, and have recently undertaken a process of reviewing the fairness and reasonableness of its status attribution methods.
RECOMMENDATION WESTPAC ACTIONS

Recommendation 5.4 – Remuneration of frontline staff

All financial services entities should review at least once each year the design and implementation of their remuneration systems for front line staff to ensure that the design and implementation of those systems focus on not only what staff do, but also how they do it. 

Westpac already regularly considers its remuneration practices.

Over recent years we have made a number of changes to remuneration including:

  • Removing all individual product specific targets (product agnostic approach) for personal bankers and reducing financial measures in bonus scorecards to no more than 30% for all customer facing employees.
  • Ensuring in-house financial advisors are rewarded based on a balanced scorecard with 80% on non-financial measures and total reward linked to an adviser’s level of capability, education and seniority.

In addition, from 1 April 2019, we will end variable reward for tellers and replace it with guaranteed fixed pay.

Recommendation 5.5 – The Sedgwick Review

Banks should implement fully the recommendations of the Sedgwick Review. 

Westpac implemented the recommendations of the Sedgwick Review for our own employees effective from 1 October 2018, two years ahead of schedule.

In addition, we made changes to mortgage broker remuneration from 1 January 2019 to align with Sedgwick recommendations including ensuring commissions are paid on the amount of the loan drawn down by the customer rather than the gross loan limit approved. We have actively worked with the industry through the Combined Industry Forum to implement the Sedgwick recommendations relating to mortgage brokers.

Recommendation 5.6 – Changing culture and governance

All financial services entities should, as often as reasonably possible, take proper steps to:

  • assess the entity’s culture and its governance;
  • identify any problems with that culture and governance;
  • deal with those problems; and
  • determine whether the changes it has made have been effective. 

Westpac already regularly reviews these issues, and is committed to ensuring its culture and governance remain effective and appropriate. 

RECOMMENDATION WESTPAC ACTIONS

Recommendation 7.1 – Compensation scheme of last resort

The three principal recommendations to establish a compensation scheme of last resort made by the panel appointed by government to review external dispute and complaints arrangements made in its supplementary final report should be carried into effect. 

Westpac has advocated for the establishment of such a scheme and will continue to work constructively with the Government to implement the scheme.

We will also fully cooperate with the process to be undertaken by the Australian Financial Complaints Authority (AFCA) to consider disputes dating back to 1 January 2008 that have not been heard before. 

This table sets out other actions Westpac has taken in response to industry issues which arose during the Royal Commission.
 

TOPIC WESTPAC ACTIONS

Vulnerable customers

A key lesson for us from the Royal Commission has been that we were not always sufficiently focussed on the needs of vulnerable customers.

We have developed an Internal Position Statement and 2020 Action Plan on Customer Vulnerability to guide our people as we develop ways to better serve our customers experiencing vulnerability. It sets out our approach and includes a set of principles to guide the work we will do over the next two years, including complying with the new Banking Code of Practice by 1 July 2019.

As part of our Action Plan to date we:

  • Have set up a team of specialist bankers dedicated to giving these customers the extra care they may need;
  • Have launched a Priority Assist 1800 telephone line across our Retail brands to support customers experiencing domestic and family violence, financial abuse and dementia;
  • Are rolling out training to support all frontline staff in understanding different types of customer vulnerability and how we can provide these customers with support; and
  • Where a customer makes a complaint, we assess them on a range of criteria to determine if they are vulnerable.

Customer complaints

A further lesson for us from the Royal Commission has been that we did not sufficiently understand and analyse customer complaints and, in many cases, they were not dealt with promptly enough.

Westpac has elevated the management of complaints to the Executive Team with the appointment of a new Group Executive for Customer and Corporate Relations.

Key areas of focus include resolving long‐standing customer matters, and improving the visibility of complaints at the highest levels in the company.

We have established a Customer Outcome Committee which meets every week to work through any complex cases. As a result, since July of last year, we have resolved more than 500 long dated complaints.

We have reduced time to close complaints by 30 per cent in the past six months.

Guarantors

The Royal Commission examined case studies relating to the provision of personal guarantees for small business loans. While the Royal Commission recommended that the law was appropriate, it noted that banks should take steps to ensure that guarantees are provided appropriately.

Westpac is enhancing its processes in relation to guarantors to align with the new Banking Code of Practice. As an additional measure, Westpac has introduced a requirement that any personal parental guarantor of a SME loan be in a position to continue to live in long term owned or rented accommodation should the guarantee be called.

Culture

The Royal Commission noted that, because primary responsibility for misconduct lies with the entities concerned and those who manage and control them, amongst other things, an appropriate culture with the entities is fundamentally important.

In September and October 2018, Westpac held a half day culture program called Navigate led by Westpac CEO Brian Hartzer, for all our people to review and recommit to our values, our service standards, our code of conduct, and our expectations around ethical behaviour and treatment of our customers.

It was an opportunity to demonstrate that we are serious about driving a service culture where our people feel safe to speak up, know what is expected of them, and are supported to make the right decision for our customers, our community and each other.

We also wanted to reinforce to everyone who works at Westpac that if they breach the high standards we have set, it will not be tolerated, and they will face consequences—which have been clearly outlined in the new Group Consequence Management Framework.

To build on this, every quarter we will release a new, mandatory Navigate scenario for our People Leaders to run with their teams.

Holding people accountable

A key focus of the Royal Commission has been on ensuring that there are just and appropriate consequences for misconduct.

Westpac’s long-established practice is to hold people accountable for instances of misconduct.

In July 2018, Westpac introduced a new Group Consequence Management Framework. Consolidating and reinforcing pre-existing expectations, the Framework sets out the standards expected of our employees and ensures greater consistency and transparency in the management of employee conduct matters across the Westpac Group.

The Group Consequence Management Framework sets out consequences that can be applied including impact on variable reward and termination of employment for serious misconduct.