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As soon as the proceedings kicked off, it became clear that this inquiry was on a whole different level to anything the financial services industry has seen before.
Mr Hayne’s probe makes the Productivity Commission look like amateur hour. In fact, I doubt anyone will remember the Productivity Commission at all within a week or two — the scathing news headlines from the royal commission will simply smother it into obscurity.
Cash bribes in “white envelopes”
NAB’s EGM of broker partnerships, Anthony Waldron, was first to appear before the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
Senior counsel assisting Rowena Orr QC wasted no time lifting the bonnet on NAB’s mortgage business, including a deep dive into its “introducer program”, a network of referrers that collectively sent that bank $28 billion worth of mortgages between 2013 and 2016.
Based on the calculations that the bank was paying commission of 60 basis points to a referrer for every referral that was eventually drawn down (or 40 basis points for existing customers that took out a new loan over the value of $50,000), the court suggested that the bank therefore paid more than $100 million in commissions to introducers during this period.
The commission also heard of alleged bribery at the major bank.
Ms Orr highlighted an email between NAB employees, and it revealed that a whistle-blower had alleged that NAB staff members were “charging NAB customers a fee for personal loans. These fees are allegedly made as cash payments under the table”.
It was revealed that a customer and a broker had highlighted the behaviour, which involved a branch manager and two customer advisers.
“This was not about the introducer program at all, was it? It was, in fact, an allegation of bribery,” Ms Orr said, to which Mr Waldron tentatively agreed: “Potentially, yes.”
That branch manager was subsequently dismissed.
The hearing later revealed that in a separate issue, but in a similar geographical area, NAB had already begun looking into another suspected case of misconduct.
“Our Forensic Services team are continually doing reviews looking for misconduct,” Mr Waldron said.
In this case, another whistle-blower was concerned with a “syndicate” comprising 11 people (six of which being branch managers) who were reportedly taking bribes.
The whistle-blower told NAB that these people were making up fake payslips, fake IDs and fake Medicare cards, and had reportedly “seen a little bit of evidence, and ha[d] also heard from others, in the local area market (one of them a branch manager at a different store, not involved) that they charged $2,800 bribery for each customer for home loans mainly, but also personal loans”.
The QC also went on to reveal that the customer adviser “went for a home loan and someone thinks he used a fake guarantee. They could not identify the person on the guarantee”.
The whistle-blower was reputedly recorded as saying that one customer recently said, at a particular breach, they told him he could borrow 800,000 but the valuation was only 450,000.
Ms Orr outlined that the whistle-blower alleged that “money exchanges hands in cash in envelopes — white envelopes, usually over the counter”.
CBA boss flagged broker commission flaws
Australia’s largest mortgage provider, CBA, got off relatively lightly compared to NAB. But mortgage brokers didn’t.
In fact, during Thursday’s hearing, where CBA EGM of home buying Daniel Huggins appeared as witness, the commission learnt of a “confidential” letter in which outgoing CBA boss Ian Narev outlined his concerns with the current mortgage broker remuneration model.
Mr Narev wrote to Stephen Sedgwick (of the infamous Sedgwick review) and basically told him that broker commissions were conflicted and suggested extending FOFA to include the mortgage industry.
The following day (Friday, 16 March), which saw Aussie Home Loans CFO Giles Boddy in the witness box, Mr Narev’s letter was read out again. This time it was counsel assisting Eloise Dias asking the questions.
Mr Boddy struggled to agree with Mr Narev’s remarks, which flagged a higher portion of interest-only and higher LVR loans through the broker channel. He noted that Aussie’s arrears rate was “around the 1 per cent part”, similar to that of the banks.
The Aussie CFO was also pressed on whether he believes that a flat-fee model would remove conflicts.
“You need to be careful” moving to a flat-fee model, the CFO said.
The big question is what all this will ultimately mean for mortgage broker remuneration. While it’s too early to tell, there have been a few worrying signs.
During Friday’s hearing, Commissioner Hayne and counsel assisting Eloise Dias seemed fairly confident that broker commissions are ultimately paid by the customer. And they didn’t look too pleased about it.