The lender and financial regulators faced a new round of questioning in front of the economics committee yesterday (3 June), after the chair found discrepancies in responses that he said were “deeply concerning and require further scrutiny”.
Liberal MP for Goldstein, Tim Wilson, who is chair of the House of Representatives standing committee on economics, had asked ME Bank, the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) to attend a second “urgent public hearing” by video conference yesterday (3 June 2020) as part of the committee’s ongoing review of the four major banks and other financial institutions.
The bank revealed yesterday that the limit changes reduced redraws by $17,500, on average, equating to an approximate reduction of redraw facilities of $380 million (from $1.8 billion to $1.4 billion).
Around 21,000 customers affected
Mr Wilson opened the hearing by stating that since the committee scrutinised ME Bank on its actions earlier this year regarding its reduced redraw limits on some home loans, further information had been sought from APRA and ASIC on the bank’s conduct, which reportedly revealed a “discrepancy”.
This largely focused on the timeline of when ME Bank had informed the regulators of its decisions and actions, and its responses to the committee.
In its opening statements, ASIC commissioner Sean Hughes confirmed that the regulator first became aware of ME Bank’s redraw issue in March 2013, which reportedly arose out of an error from a legacy core bank platform.
“As a result of the error, in some circumstances, some limited cohorts of customers have accessed redraw funds, taking their loan balance above the amortisation curve. These customers will subsequently experience either an unexpected uplift in repayments amounts later in the loan term or a balloon repayment at the end of term,” Mr Hughes said.
ME Bank then identified two categories of affected customers: “Red” customers (where the loan balance was already above the amortisation curve) and “Amber” customers (where a full redraw of the available funds amount could have put the customer above their amortisation curve).
Mr Hughes added that in 2013, “ME Bank advised ASIC that affected Red category customers would be contacted by telephone and Amber category customers would be contacted by letter to explain the redraw error and inform the customers of their correct redraw amount. An option was to be given to customers to apply to retain the additional redraw by undergoing a credit assessment.”
At that time, approximately 400 home loans had drawn over the amortisation curve, with a further 6,500 at risk of doing so.
However, while redraw issues were flagged in 2013, ASIC outlined that they re-occured in 2015, but these were not identified by the bank until October 2019.
ME Bank informed ASIC of the issue in December 2019 and made the decision to reduce the redraw limits of at-risk customers in late March 2020. ME Bank said it informed ASIC of this decision on 16 April.
It then made adjustments to approximately 21,000 customers home loan redraw facilities between 23-27 April 2020.
‘A conscious decision’
Mr Wilson repeatedly asked ME Bank CEO Jamie McPhee when communications were made to affected customers, outlining that it did not appear that the bank had made contact with their customers regarding the issue until after media reports had made it public a few weeks ago.
Mr McPhee stated that 21,790 Amber customers had now been contacted and that communication with other affected customers was ongoing.
The committee chair asked: “So… the [contacts with affected customers] haven’t all been made, even though you’ve been aware of the problems since 2013?”
The CEO stated that the bank had in place a schedule of communications to affected customers but could not specify to the chair when these communications started (taking the question on notice).
Mr McPhee responded: “We’re working through contacting those customers at the moment, that’s correct.”
He later revealed that the bank made a “conscious decision” to contact customers about the change to their redraw limits after the move had been made, as a means of preventing customers from going above their amortisation schedule.
He stated: “[When] the communication plan was put in place, it was decided to make the redraw adjustments first and then communicate to customers. The thinking behind that was that the intent of what the bank was trying to do was to make sure that customers who hadn’t fully drawn on their redraw couldn’t inadvertently redraw over their amortisation schedule…
“So, as I said before, it was a conscious decision made,” reiterating that the bank “got that wrong”.
ASIC: The matter ‘could have and should have been handled better’
ASIC commissioner Mr Hughes said that ASIC had warned the bank in December of the “particular sensitivities around reducing access to funds to which customers had thought they were entitled”.
“ASIC also noted that it was important that ME Bank communicated both effectively and promptly with customers to explain why and when these changes were being made, i.e. to fix an IT system problem,” he said.
“For the avoidance of all doubt, ASIC did not endorse ME Bank’s remediation or communication plan, nor has it sought to do so,” he said.
Mr Hughes concluded: “ASIC does have concerns about how this matter has been handled. At a time when there are significant sensitives for consumers about the economic impacts of the COVID-19 pandemic, this matter could have and should have been handled better by ME Bank.
“It was ASIC’s expectation that ME Bank would communicate with their customers in a clear and transparent manner before making any adjustments to redraw facilities.
“This should have occurred in any normal setting, but in this instance there should have been heightened awareness and sensitivity to explain to customers what was happening to their account balances and why, given the strained economic environment impacting households,” he said.
When asked whether ME Bank had breached the law in regards to its redraw issue, Mr Hughes said he was not able to respond as ASIC’s “inquiries are ongoing”.
“Our inquiries are ongoing across a range of matters,” Mr Hughes said.
He stated that ASIC would “continue to closely monitor ME Bank’s conduct and engage with the bank on this issue, so as to ensure a fair and transparent outcome for ME Bank’s customers.
“This has been a disappointing experience for ME Bank and has had an avoidable impact on customer confidence.”
[Related: ME Bank called back in for questioning]
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.