Charging For Services Not Delivered Means Banks Skating On Thin Ice

By Rodney Lester

Reports that our major financial institutions expect to refund around $180 Million to consumers who were charged for services they never received, points to problems in their service delivery model. This systemic bungle should never have happened. More internal oversight, though a better resourced system would have prevented the issue from ever occurring. Given major banks continuing record profits - who can they blame but themselves?

A major report released by the Australian Securities and Investments Commission (ASIC) into the financial advice arms of our major banks and financial institutions has found that they have been charging consumers for services they were never provided. Up to 175,000 people can expect to be refunded by the big four banks and AMP.

According to the report, the blunder was self-reported to ASIC by ANZ and the CBA. Recent FoFA legislation means that advisers now have to write to customers every two years, outlining the services they have rendered and what they have been charging. This new regime has been key in identifying failures in the fee-for service models that are replacing commissions based models that have traditionally been used in the advice industry.

The report found that there were “systemic issues” for most of the banks as they were not able to stop charging fees when services were not delivered. Some of the erroneous charges included charging for an annual review by an adviser – which was never provided, and charging a client for phone calls made to them that were never answered.

So far around $23 million has been repaid to 27,000 customers by the offending organisations. The Commonwealth Bank was revealed as the worst offender, and will have to stump up over $100 million in refunds plus interest, but to date it has repaid less that 1% - around $575,000. The CBA has said it will pay the rest back by June 2017.

The banking lobby group, the Australian Bankers Association (ABA), has said the issues identified by ASIC were mainly “administrative errors” caused by problems stemming from legacy manual systems and processes, and that banks have taken steps to remedy the problems. ASIC Deputy Chairman, Pete Kell said that most of the issues occurred before the recent FoFA reforms and that as a result of the reforms, these systemic failures are less likely in the future.

Despite these assurances for the future, the question must be asked, how is it that these massive organisations did not have the appropriate processes in place to eliminate these “administrative errors” in the first place? One can’t imagine an owner operator financial adviser making the same “error” – and if they did, they wouldn’t retain many of their clients! Similarly, you don't pull up to a petrol station, buy a packet of gum, and get charged for a tank of petrol you didn't receive. It seems quite basic when you have a think about it.

These sorts of troubles do more than damage the reputation of the banks, they diminish the reputation of the entire industry. Many are quick to blame the “bad apple” advisers for problems in the advice industry and advisers themselves have had to commit to tighter regulation and continual self-improvement. But what can be done when the “Key Pillars” of our financial landscape shoot themselves in the foot by obviously under resourcing their ability to service clients.

Vertical integration by the major players, where the banks encourage advisers they employ to sell financial products that they make is already a contentious topic for some when a client’s best interests are the supposed key issue. Major institutions already enjoy several advantages over their smaller competitors, like their size (economies of scale), their implicit government guarantee (that was made explicit during the GFC), a large conveyer belt of ready-made clients through their huge distribution and service networks and their sticky relationships with clients due to their ability to cross sell different products like credit cards, mortgages and saving accounts. With size however, comes the challenges of bureaucracy, administration and institutional inertia. 

Given their massive profits (NAB most recently announced a full year cash profit of nearly $6.5 billion) there really is no excuse not to allocate the appropriate resources into servicing clients who are paying to be ‘serviced’. This is a case where the institution is the one responsible for making sure the client is being serviced correctly - they should make sure their departments have the resources (both human and technological) to ensure appropriate, basic service levels are met.

Troubles such as these will continue to drag the name of financial advice through the mud. Large institutional players are so big they can recover from the mess – if problems linger, smaller players may not be so lucky. The outcome could well be further consolodation of advice networks and even less competition. A lose, lose situation for consumers.

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