CBA report detailed compliance issues with Aussie Home Loans
The Australian 12:00am March 28, 2018
Richard Gluyas
An internal Commonwealth Bank audit report last year identified a range of compliance issues with the bank’s Aussie Home Loans business, including a failure to enforce key CBA policies that the broker was contractually bound to observe.
The nine-page report, which was released as an exhibit yesterday by the financial services royal commission, rated the control environment for Aussie as “marginal”, or unchanged since 2014.
While the report recognised that CBA management under home-buying boss Dan Huggins was taking “significant” steps to improve assurance activities, it said the assessment should extend to employee due diligence, customer identification requirements including “know your customer”, and various assurance procedures over individual brokers.
“Home buying do not have sufficient oversight of aggregators to confirm they are meeting key legislative requirements they are required to perform on behalf of the group,” the report said.
A marginal grade from an internal audit means that controls are operating but require improvement in the short term to ensure all risks are being managed appropriately.
CBA leads the home lending market with a 21 per cent share.
The broker channel submits more than 12,000 loan applications a month to the retail bank, which represents about 40 per cent of funded loans.
Retail broker relationships include 29 aggregators comprising 13,000 active brokers.
In her closing submission on last week’s consumer lending hearings, senior counsel assisting Rowena Orr invited commissioner Kenneth Hayne to consider several misconduct findings against CBA. These include possible breaches of the National Credit Act and Corporations Act over remuneration arrangements with brokers that could have created a conflict of interest disadvantaging the customer.
Second, CBA might have failed to do everything necessary to ensure financial services were offered efficiently, honestly and fairly to customers, with the failure to disclose commissions also fitting into that category.
The fourth form of misconduct was a catch-all breach of the Banking Code of Practice.
The audit report warned CBA that broker discussions with customers on the suitability of products were not being validated by the retail bank to confirm the product met the customer’s needs or desires. Audit analysis showed that three-quarters of broker-introduced loans reflected living expenses below the household expenditure benchmark, which was described in the commission as overly simplistic.
“In such cases, while HEM is used to credit-assess the application, this may reflect that brokers are not capturing all customer living expenses,” the report said. “Despite being a known issue that management is addressing both within CBA and through an industry working group, without accurate expense information, the risk that customers are not able to repay their loan is increased.”
When considered in tandem with customer needs, the report said there was heightened risk that loans provided by brokers might not meet customer requirements in the long term. This highlighted the need to develop an ongoing assurance program, adding a requirement to confirm the loan’s purpose directly with the customer. “We have raised a high-rated issue with regard to this and the overall assurance model,” the internal audit said.
The final recommendation was to further enhance monitoring of brokers. Consistent with industry practice, the report said management relied on brokers to identify customers in line with anti-money laundering and know your customer requirements, and to comply with the National Credit Act.
While management was implementing a process to obtain customer-identification documents for all broker-submitted loans, the report said there were limited mechanisms to confirm that a face-to-face meeting had taken place between the broker and the customer.
As the commission heard in evidence, there were 332 cases in the previous 12 months where borrowers and brokers were in different countries at the time of the application and 4119 cases where they were in different states.