One of the leading global credit rating agencies has upped the ante on the evolving argument here over the quality of bank culture, warning it could impact the banks’ performance.
Interest rate manipulation, claims payments problems in life insurance and poor financial advice in some of the banks’ wealth management arms yesterday saw Fitch Ratings highlight the “increased regulatory scrutiny on conduct and culture” facing Australia’s banks.
The stockmarket took the culture wars story in its stride yesterday – Westpac shares rose 0.6%, ANZ shares were up 0.3%, Nab shares rose a touch, and the CBA shares eased 0.2%.
It is a debate given greater prominence by Wednesday’s criticism of bank culture by the Prime minister Malcolm Turnbull, and the cases launched against the ANZ and Westpac over their alleged rorting of the key money market indicator rate, the Bank Bill Swap Rate (or BBSW).
As well there has been poor record keeping in their home loan business, especially in the way regulators have forced the banks to reclassify loans made to ostensible owner occupiers and investors.
Regulators, led by APRA and ASIC found fixed rate interest lending was being done with little regard (in many cases) to accurate details of the borrower’s financial position. Prudential controls over home loan lending were weakened, especially in the area of investor loans.
“Fines, class-action law suits, increased regulatory oversight and remedial action are all possible outcomes from this push,” Fitch said in a statement yesterday.
Fitch warned of the possibility that conduct issues could emerge from other parts of the banks but said the pressure from regulators will force the banks to improve their compliance culture.
“This is likely to take some time to filter through all levels of the institutions, while the more immediate impact would be banks suffering some reputational damage,” Fitch said.
Fitch said that the fines, penalties and cost of remedial action are likely to be modest in the context of $37 billion of annual profits. And it also said that if any class action law-suits emerge, they are likely to evolve over many years, further limiting the financial risk. Fitch said that resolution with regulators was only a first step, with civil cases likely to follow.
The situation in Australia is nowhere near as bad for the banks as in the UK where miss-selling of financial products has so far cost the banks close to 30 billion pounds in fines and interest, with a reported 20 to 22 billion in principal payments to be repaid in coming years.
Fitch’s warning follows a statement in March from Moody’s warning of potentially “significant” damages facing the ANZ should the Australian Securities and Investments Commission (ASIC) succeeds in its civil case against the bank.
Moody’s also said the ASIC litigation would harm ANZ’s reputation. “The legal proceedings and allegations are credit negative for ANZ because they could lead to reputational damage and punitive settlement,” Moody’s said.
The ASIC legal actions carry a fine of $1 million for each transgression, which suggests a possible total fine of more than $16 million for Westpac and $44 million for ANZ. ANZ offered as much as $50 million to settle its case but negotiations reached a stalemate after the bank refused to concede it manipulated interest rates.
