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Tuesday 1 August 2017

17-254MR ASIC reports on Australian bank audits following Wells Fargo misconduct

ASIC today outlined the results of audits conducted by eight banks in Australia following the regulatory action taken in the United States against Wells Fargo Bank, N.A. (Wells Fargo) in late 2016. Overall, the audits did not find evidence of systemic misconduct involving illegal opening of accounts as seen at Wells Fargo.

While not identifying systemic unlawful conduct, the results of the audits indicated that improvements should be made to the sale of consumer credit insurance (CCI), which is leading to further action announced today (refer: 17-255MR).

Conduct at Wells Fargo

In late 2016, Wells Fargo was fined US$100 million by United States regulators after it was found that its staff had systematically and unlawfully opened as many as two million customer accounts since 2011. Many customers incurred fees and other charges as a result.

The misconduct at Wells Fargo involved widespread secret opening of accounts by employees in order hit sales targets spurred by compensation incentives. In most cases, customers were completely unaware that the accounts had been opened.

Audits by Australian banks

Although ASIC did not have information to suggest that similar systemic misconduct had been occurring in Australia, in December 2016 ASIC required eight banks to audit their sales practices. The audits were designed to identify whether aggressive sales targets had driven bank staff to act illegally by issuing products without customer knowledge or consent.

ASIC required audits of:

  • ANZ
  • Bank of Queensland
  • Citibank
  • Commonwealth Bank
  • HSBC
  • NAB
  • Suncorp
  • Westpac

The audits examined processes in relation to three common consumer banking products: basic deposit products, credit cards and CCI from 2014 to 2016. The audits reviewed:

  • Account and product onboarding processes, with a focus on customer acknowledgement and account activation controls;
  • Details of the processes in place to proactively detect potential misconduct arising from sales incentives;
  • Analysis of complaints where customers claimed they had not applied for an account or product;
  • Details of internal reporting processes to ensure senior management had visibility of potential issues; and
  • Organisational whistleblower processes and protections.

All of the audits found that the systemic misconduct that occurred at Wells Fargo had not been occurring in the banks and that, overall, controls were adequate to prevent and identify misconduct.

However, while systemic illegal misconduct was not identified, the audits highlighted CCI as a standout product for customer complaints and at heightened risk for sale without proper informed customer consent. The audits also identified potential weaknesses in account opening and activation controls, record keeping, and change of address processes in relation to CCI. The banks have commenced enhancing their controls and processes in light of the audit findings.

ASIC Deputy Chair Peter Kell said the audits were an example of ASIC proactively responding to potential issues in the market: 'These audits were all about ensuring that banks were not – intentionally or inadvertently – encouraging illegal sales practices by staff and that the banks have processes in place to identify unlawful selling of retail banking products,' he said.

Following the audit findings, ASIC has announced today it will be working with the banking industry and consumer advocates to improve sales practices in relation to CCI, including the introduction of a deferred sales model for CCI sold with credit cards over the phone and in branches (refer: 17-255MR).

Changes to bank sales incentives

The Retail Banking Remuneration Review conducted by Mr Stephen Sedgwick AO (published on 19 April 2017) identified that some current sales incentives could promote behaviour that is inconsistent with customers’ interests. All banks involved in the review will be moving away from a primary sales-based reward structure for frontline staff to one that reduces conflicts of interest between staff and customers.

Mr Kell welcomed the banks' move toward sales incentives based on customer experience: 'Sales staff should be ensuring first and foremost that consumers understand what they’re purchasing and that what they buy meets their needs. ASIC supports sales processes and incentives that are consistent with these objectives.'

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Last updated: 02/08/2017 03:59