Note: Where available, the PDF/Word icon below is provided to view the complete and fully formatted document
Standing Committee on Economics
11/10/2017
Review of Australia's four major banks

Go To First Hit


HARTZER, Mr Brian, Chief Executive Officer and Managing Director, Westpac Group

KING, Mr Peter, Chief Financial Officer, Westpac Group

Committee met at 09:15

CHAIR ( Mr Coleman ): I convene this hearing of the committee's review of Australia's four major banks. This is the third round of hearings that the committee is undertaking as part of its review. In November 2016 the committee published its first report, which followed the first round of hearings in October 2016. The report contained 10 recommendations for reform of the banking sector, including calling for new legislation and regulatory changes to improve the operation of the banking sector for Australian consumers.

In its second report, in April 2017, following its March round of hearings, the committee reaffirmed the 10 recommendations in its first report and made an additional recommendation that non-monetary default clauses be abolished for loans to small businesses. In the May budget, the government broadly adopted nine of the committee's 10 recommendations for banking sector reform, including a one-stop shop for consumer complaints, a regulated executive accountability regime and new powers and resources for the ACCC in investigating competition issues in the setting of interest rates. The government also adopted the committee's recommendations in relation to establishing an open data regime in banking and changing the regulatory requirements for bank start-ups in order to encourage more competition in the sector. The committee's mandate from the government to review the banking sector is ongoing, and these hearings provide an important mechanism to hold the four major banks to account before the parliament. The hearing today will focus on progress on implementing the recommendations and other matters, including issues in the banking sector that have emerged since the last hearings.

I remind witnesses that, although the committee does not require you to give evidence under oath, the hearings are legal proceedings of the parliament and warrant the same respect as proceedings of the House. The giving of false or misleading evidence is a serious matter and may be regarded as contempt of parliament. I would also like to outline a number of matters related to the conduct of today's hearing. I refer members and witnesses to the House resolution related to procedures for dealing with witnesses, at page 126, paragraph (9), of the House of Representatives standing orders. The resolution provides that should a witness refuse to answer a question they should be asked to state the grounds on which they object. The committee may either accept that objection or, alternatively, deliberate at a future private meeting on whether or not to insist upon an answer. During the course of the hearing, witnesses may be asked to provide documents at a later stage. If a witness subsequently refuses to provide documents, the committee may meet in private to consider the matter. Under standing order 236 of the House of Representatives, the committee has the power to compel witnesses to produce documents where the committee has made a decision that the circumstances warrant such an order.

I would also like to disclose that prior to being elected to parliament in 2013 I was a member of the board of directors of Yellow Brick Road Ltd. Yellow Brick Road is a financial services company that competes with the banks, particularly in the areas of mortgages and financial services. I resigned from the board on being elected to parliament.

We have representatives from Westpac Bank present for today's hearing. Mr Hartzer, I invite you to make an opening statement.

Mr Hartzer : Thank you, Mr Chairman. Peter King, our Chief Financial Officer, is here to help with questions today as well. Since we last met, Westpac celebrated its 200th anniversary as Australia's first bank and oldest company. This milestone has led us to reflect on what it takes for companies to survive for so long. In my view, there are four factors: a dedication to building long-term relationships, a willingness to adapt to changes in the economy and in society, a commitment to strong risk management, and a positive, service oriented culture where the best bankers can thrive.

The key to long term relationships is put our customers' interests first as we design our products and services and make decisions about pricing and other policies. That's why we are actively reviewing all our products, processes and policies to make sure they meet today's standards. Internally, we call this 'get it right, put it right'. If we find products and services that don't meet current expectations, we change them. If in these reviews we find there has been an unacceptable impact on customers, we put it right.

This work has led to a number of changes in recent months. We have launched our new basic credit card, Westpac Lite, with an interest rate of 9.9 per cent. We're simplifying fees on personal transaction accounts which will benefit over 1.3 million customers. We have improved disclosures for pre-existing conditions on life insurance. This willingness to adapt has been particularly important, given the impact of new technology and the large volume of new regulations. For example, later this year Westpac will launch our new small business finance agreement. This will be a shorter, plain English document which business customers can sign electronically, saving them time and getting them their funds faster.

We also acknowledge the issues raised by this committee around accountability. That's why we support the government's new banking executive accountability regime. Implemented well, it will clarify accountabilities in what are relatively complex and matrixed organisations. While the legislation has not yet passed, Westpac has begun implementing it now. We are reviewing our incentive systems to ensure they align with the BEAR rules. I should note, however, that we are conscious that BEAR imposes severe penalties where things go wrong and are keen to work with government and the regulators to avoid unintended consequences.

The principles driving the BEAR reinforce the third lesson of our history, around the commitment to strong risk management. Working with regulators, we have recently introduced a number of measures to better manage credit, funding and liquidity risks, and APRA has set higher capital requirements for banks to be seen as unquestionably strong. More recently, APRA has intervened to limit the growth in investor property and interest-only mortgage lending. The combination of these changes has meant a key driver of our pricing decisions in the last six months has been to meet APRA's balance sheet requirements rather than changes in cost to funds or market share. As an example, we have increased pricing on interest-only mortgages whilst at the same time offering lower rates for principal-and-interest mortgages. This encourages borrowers to move from interest-only to principal-and-interest payments at a time when interest rates are at 50-year lows. In recent months, we have seen high volumes of customers making the switch.

The final and most important area of focus for us is culture—embedding a strong service ethos and behaving in ways that earn and retain trust. As this committee has recognised, remuneration and incentives are a critical part of culture. Last year we removed all sales incentives for our tellers and our personal bankers are now incentivised equally for sales and service. We are well progressed on implementing all of the Sedgwick recommendations. For example, we have now removed accelerators from bankers' scorecards. We are committed to making sure that people who work in the banking industry maintain the highest standards of professional conduct. On 1 July, the industry launched the conduct background check protocol to stop individuals who have engaged in serious misconduct from finding further employment in our industry. At Westpac, all of our incentive schemes require staff to meet high standards for compliance and behaviour, and we can and do take action when people fall short.

We, like the other banks, have more work to do to restore trust. We also recognise that from time to time we will make commercial decisions that not everyone will like. However, our commitment is when we get something wrong, we set it right. I hope that committee members can see from the actions we have already taken that Westpac and the banking industry at large is changing and is committed to lifting our standards and running our business in the long term interests of our customers, our shareholders and Australia. Peter and I would be happy to answer your questions.

CHAIR: Thank you, Mr Hartzer. I wanted to start on this issue of intelligent deposit machines. Obviously, and you would be aware of the very serious allegations against the Commonwealth Bank. I just wanted to understand, from a commercial perspective, the commercial driver for your bank, or banks generally, in seeking to encourage the use of intelligent deposit machines.

Mr Hartzer : I should clarify that we don't have the machines that were the subject of that issue. The limit that we put on cash deposits in our machines is $4,000, which is well below the amount that was the issue. The commercial driver is pretty simple, which is the convenience for our customers to be able to manage their cash more efficiently and not stand in teller queues. Obviously, there is a savings in doing that.

CHAIR: And they would typically be small business customers who are depositing large amounts of cash?

Mr Hartzer : Typically.

CHAIR: So a higher limit, say—for instance, as you noted, Commonwealth Bank has a limit of $20,000; you have $4,000. A rationale for that might be to seek to encourage more small businesses to sign up with you, presumably.

Mr Hartzer : Potentially.

CHAIR: Then, once a small businesses signs up with you—as I understand it, these machines are not large profit centres—presumably, the relationships with those small businesses can be valuable, given the capacity to offer the small businesses other products.

Mr Hartzer : Small business banking is very competitive and it's an attractive market segment for all the banks. Anything that banks can do to make things more convenient for customers has been an important part of competition in the industry.

CHAIR: Why have you chosen to keep your deposit limit at $4,000?

Mr Hartzer : The issue of money laundering is a serious issue. It is a real scourge on society and it's a challenge for the whole economy. We work very closely with the regulators and with our own internal security people to make sure we identify, report and deal with money laundering, and we came to the view in our risk assessments that $4,000 was an appropriate limit.

CHAIR: There has been some reporting to the effect that some of the syndicates who are alleged to have been involved in the matters that AUSTRAC is pursuing the Commonwealth Bank about have also sought to make use of your teller machine networks. I am not asking you to go into anything that you are unable to by law but, more generally, are you confident that you have complied with all requirements of the anti-money-laundering legislation and other legislation in this area?

Mr Hartzer : As I said earlier, money laundering is a real challenge for the economy, and the criminals are very clever and they're constantly trying to find new ways to launder their cash. We are confident that we're complying with regulations. We work very closely with AUSTRAC, and I think it's important to mention in the context of this that just having a limit of how much you take is not the start and end of your controls. We have very extensive computer analysis that goes on that looks at patterns and transactions, and for people trying to avoid the reporting by, for example, breaking up their deposit and structuring it into multiple packets. We look for that with our systems on an automated basis.

CHAIR: I want to move onto the $3 million payment that you made towards financial literacy programs as a result of your traders, effectively, breaching the law and disclosing confidential details of clients' orders to other foreign exchange traders using code names. Two questions: what have you done to improve your processes as a result of this; and, secondly, has any senior executive been fired or otherwise held to account as a result of this?

Mr Hartzer : You're referring, I believe, to the foreign exchange enforceable undertaking that we came to with ASIC. This is a matter that dealt with some traders, mostly in the UK, going back a number of years ago. As you say, it was identified that some of these traders had disclosed information that they shouldn't have. What we have done, as part of that, is a very extensive review of all the supervisory duties around that. We have stronger controls in place now, and it's been an extensive process. There have been three separate disciplinary programs that have gone on in looking at, specifically, the accountability up and down the chain around that whole matter. None of the traders involved are with us anymore, and there have been consequences where we felt that's been appropriate.

CHAIR: What has happened to the executives who manage those traders?

Mr Hartzer : They've all been reviewed as part of this process and, where we found there to be an issue, action was taken.

CHAIR: So do they still work for the bank?

Mr Hartzer : The most senior executives do, yes, but that is after looking very carefully at the steps that they took both before and after to deal with the issue. I can say—and I think ASIC will agree—that the response of our executives when this issue emerged has been exactly what you would want in terms of getting into the detail and making sure control issues were addressed.

CHAIR: Given the upcoming implementation of the banking executive accountability regime, are you clear in your own mind as to where responsibility falls within the bank for this particular class of matter such that, in the future, it will be very clear to APRA and to the broader banking community as to where the buck stops in relation to these sorts of matters?

Mr Hartzer : Yes, I am. As I said in my opening statement, one of the subtleties around not particularly this issue but more broadly with some of the issues that have come up is that banks have typically been pretty heavily matrixed, where responsibility is shared amongst different people in the organisation. Some of that has been driven by regulators, around the responsibility for risk management and compliance policies and the like. What the BEAR is emphasising—which I think is a really good point—is that we need to make sure it is crystal clear who is accountable for each aspect of supervision, and this will drive that.

CHAIR: Okay. I want to move on to a particular case involving Mr Sudhir Kumar Sinha, who was a financial planner for Westpac and has been banned by ASIC from providing financial services, until 2022. The ASIC allegation is that Mr Sinha wrongfully advised 177 clients over a period of six years. You have been required to remediate $1.5 million in respect of those clients. This is something that went on for over six years. It obviously is not an isolated incident, given that isolated incidents generally don't go for six years, and it suggests a systemic failure within your wealth management division—we have discussed your wealth management division before—in failing to identify Mr Sinha's behaviour. We are aware that Mr Sinha has been banned. What has happened further up the chain as a consequence of his conduct?

Mr Hartzer : If I could put some context around the Sinha case. Mr Sinha was fired by us. His behaviour was discovered by us as a result of controls that we put in place—

CHAIR: After six years.

Mr Hartzer : No. We put the controls in place in 2013 and it was identified then. He was investigated, fired and reported to ASIC at that point.

CHAIR: Sure. You reported it once you were aware of it. But the unlawful treatment of customers went on for six years, according to ASIC.

Mr Hartzer : There was poor treatment of customers and that is totally unacceptable, which is why we have remediated the case—

CHAIR: You shouldn't be congratulating yourself that you belatedly worked it out, should you?

Mr Hartzer : The financial planning world has evolved from what was an insurance brokerage model of wealth sales back in the 1990s and 2000s. It is gradually becoming a much more professionalised system that has picked up issues that needed to be better controlled. BT has been at the forefront of driving some of that, including changing the way people got paid, putting controls in place like this, which helped us identify that.

CHAIR: What were the consequences for the relevant executives involved in Mr Sinha's area?

Mr Hartzer : There was a very significant and independent review done out the managers of Mr Sinha, and up the chain. We looked all the way up and down, and the consequences were significant for several of the managers in that—

CHAIR: What do you mean?

Mr Hartzer : There were issues on performance rating and compensation, and role responsibilities were changed for a number of people.

CHAIR: But nobody was terminated?

Mr Hartzer : No-one was terminated over that, no.

CHAIR: What is your view in relation to the current conduct of the wealth management division, given this is not the only incident that we've seen?

Mr Hartzer : I think the culture is very strongly about trying to do the right thing, to find any remaining issues that are out there, and if a customer has been affected, to set it right for that customer, and to make sure we have training and controls and the quality of culture and people that our customers would expect.

CHAIR: I want to move to the issue of interest-only mortgages and so on. Can you explain to the committee what percentage of your mortgages, as at your most recent half yearly report, were held in interest-only loans?

Mr Hartzer : I believe it's about 82 per cent.

CHAIR: Interest only?

Mr Hartzer : Interest only? Sorry, I was thinking variable rates. Interest only is about 50 per cent.

CHAIR: Let's be really clear on this: so basically half of all people who have a mortgage with Westpac are not paying back any principal; they are just paying interest?

Mr Hartzer : That's not the way I would put it.

CHAIR: The value.

Mr Hartzer : No, I wouldn't say it quite like that. The subtlety is that they have the ability that they can pay interest only, but many of them have offset accounts, and they also make principal payments, effectively, either in bulk, when they want to make it, or they hold equity in the offset account. So the amortisation of interest-only accounts is roughly similar to the amortisation of someone who structured the product as principal and interest. People do that for tax reasons and they do it to manage their cash flow.

CHAIR: But they're not required to pay back principal?

Mr Hartzer : Correct.

CHAIR: Are you aware of any major bank in Australia that has such a high level of interest-only loans?

Mr Hartzer : I couldn't tell you off the top of my head, but we are aware it certainly is a significant portion for Westpac.

CHAIR: Certainly, from the research I've done you appear to be the highest of the big four banks in relation to interest-only loans. As you know, on 3 April ASIC announced it was concerned about the issue and it required several banks to change their practices relating to interest-only loans. Also, in March APRA announced it would be requiring the banks to limit their new interest-only loans to no more than 30 per cent of new mortgages. That is right, isn't it?

Mr Hartzer : That's correct.

CHAIR: To make this as simple as possible, what APRA is basically saying is that for every, say, 100 new mortgages, no more than 30 of those new mortgages should be interest-only.

Mr Hartzer : That is correct. But can I just put a subtlety on that, which is that at the time the requirement was brought in, which was a goal that we needed to meet by August, from memory.

Mr King : This quarter.

Mr Hartzer : This quarter. It was based on the net flow of mortgages. Our understanding at the time was that it wasn't just the new loans being written but also the net change in mortgages. It's just a subtlety.

CHAIR: Is that correct, Mr Hartzer? My understanding—

Mr Hartzer : That was absolutely correct, at the time the announcement was made. APRA has subsequently clarified that.

CHAIR: My understanding is that APRA has said it relates to new loans and to top-ups of existing loans—so, if someone goes from 800,000 to 900,000, that 100,000 is new, so that would count, but nothing else counts.

Mr Hartzer : That has been clarified subsequent to the original announcements.

CHAIR: Are you saying you didn't understand the impact of APRA's original announcement, or you misunderstood it?

Mr Hartzer : No, I am saying that at the time it was unclear. We engaged with APRA on that discussion and it took a number of months for them to clarify. The point is that, now, how you describe it is correct.

CHAIR: So it doesn't apply to existing loans, only if there's an increase in the limit, and APRA, as I understand it, has been very clear in spelling that out to the banks. So it's very surprising, to say the least, that you would profess any uncertainty about that.

Mr Hartzer : There is no uncertainty now, but at the time it was announced there was uncertainty and we sought clarification from ASIC, and we didn't receive it for several months.

CHAIR: Okay, so that clarification was provided.

Mr Hartzer : Yes.

CHAIR: So you know where you stand. You know it applies only to new interest-only loans, with some limited caveats for increases in existing loans. To follow through, if you only had to make sure that, say, 30 of every new 100 loans were interest only, that's pretty simple, isn't it? Don't you just say, 'Okay, we'll make sure that of 100 upcoming loans, no more than 30 are interest only.' You must know how many loans you are issuing. Surely you could just say, 'When we get to 30 per cent, we stop and we just leave interest rates as they are.'

Mr Hartzer : That's one way to do it. Can I put a little bit of backdrop on this—because it's important, as this issue has got a lot of public attention—and talk about what is driving this. There's two elements of this. There's a macroeconomic issue, which the Reserve Bank is concerned about, which is that, in the event that interest rates were to rise, if lots of customers are only paying interest they may find they have to devote more of their income to paying their mortgage, and therefore there's less resilience for economic spending in the economy as a whole.

I think it is important, because this has been picked up in the press as if this is some giant credit issue. And it's not a giant credit issue. It's an economic issue about the resilience of the economy for the future, around the ability to sustain spending. Secondly, it is an issue about making sure that both bank balance sheets and consumers have an appropriate cushion, and that it's the right time for consumers to be paying down their loans, when interest rates are at near 50-year lows. To paint this as a fundamental concern about our credit portfolio—I have personally spoken to the governor of the Reserve Bank, who has confirmed to me that the Reserve Bank's concern is not about the credit quality of the Australian banks; it's a concern about the economic resilience of the nation in the event that interest rates rise.

CHAIR: That it is all very interesting, but what we are focused on is the requirement that APRA issued to you, and that was that no more than 30 per cent of new loans be interest only. To go back to my question, why couldn't you just simply say, 'We'll leave interest rates where they are and we'll ensure that no more than 30 out of every 100 future loans are interest only'?

Mr Hartzer : We have two objectives. One is to meet the APRA requirements. The other is to make sure that the shape of our book is resilient and that our customers are heading in the right direction. In doing that, you're right, one option we have is that we can simply stop lending. That is an option. Our view is that that is not the best option for customers' choice. There are legitimate reasons—

CHAIR: Just to clarify: APRA's requirement is that no more than 30 per cent of loans be interest only. Presumably you're not suggesting it's optional whether or not you comply. It's clear that you need to limit it to 30 per cent. It's also clear that in a statistical sense it's a pretty easy thing to do. You just say that for every 100 loans no more than 30 are interest only. My question is a simple one: why wouldn't you just leave everything as it is, other than just saying you'll ensure that no more than 30 per cent of future loans are interest only?

Mr Hartzer : Because we're dealing with individual customers who have a preference and we're trying to serve the needs and desires of customers. Customers walk in and, for their own good reasons in some cases, say that they want to structure their loan as interest only.

CHAIR: Are you saying you're not going to meet the 30 per cent?

Mr Hartzer : No, we are. We took the view a better way to achieve that was to use the pricing mechanism to send the right signal to existing and new customers.

CHAIR: Let's go through that. Basically, you took the view that a pricing signal was the way to do it. But obviously it's entirely within your capacity simply to say, 'We're just going to say that no more than 30 out of 100 new loans are interest only.' You could have done that if you had wanted to.

Mr Hartzer : We could have. But the implication of that is that we then we tell customers who have good reasons to get an interest-only loan that they're too late and they can't have one.

CHAIR: Presumably you're going to do that anyway, because you have to limit it to 30 per cent. The way you're answering the question implies that it's an optional thing and you will determine whether or not you comply with it. Whether the interest rate is lower or higher, the compliance issue is the same, which is that no more than 30 per cent of loans in the future be interest only. It's a very simple question. Very clearly, why did you decide, in response to that, not just to say you'll limit it to 30 per cent, and to raise rates instead?

Mr Hartzer : Because we felt the pricing mechanism was a better way to ensure that we achieve the requirement—which we were absolutely going to do—but that we do it in a way that preserves the choice for individual customers who strongly want to get an interest-only loan.

CHAIR: The problem with that answer is that you haven't mentioned the profit impact on the bank at all. This committee is very supportive of a stable banking sector, and banks obviously do need to consider commercial issues. But I think your answer there in not mentioning the profit impact on the bank is—I would be very surprised if that was not a key part of your motivation.

Mr Hartzer : I'm telling you why we did it.

CHAIR: So it didn't have anything to do with the profit impact on the bank?

Mr Hartzer : Potentially, no. The primary driver was to manage the balance sheet. In a bank we always have to balance regulatory requirements, our funding structures, what's right for the customers and what's right for the bank. In this case, our view and our experience was that a response of increasing the interest rate on interest-only lending, reducing the interest rate on principal and interest lending, and communicating with customers and encouraging them to switch for free, was the best way to achieve the outcome for the regulator and do the right thing for the customers.

CHAIR: Can you understand why the Australian public might react very cynically to that? To suggest that your motivation in raising rates was in no way related to the profitability of the bank, which is what you just said—do you really think that's a credible response?

Mr Hartzer : I'm saying that the primary driver—obviously we consider commercial issues in things that we do. You're asking me about a specific change in interest rates. I'm telling you the truth, which is that the driver of that was the meet the APRA requirements while preserving choice for customers. By the way, we put that explicitly in our press release at the time.

CHAIR: I'll come to your press release in a moment. Let's go through that in a bit more detail. We know that it only applies to new loans, and we have clarified from your earlier statement that it didn't apply to all the old loans—it only applies to new loans. We also know that about half of your mortgage book is interest only. I did some rough numbers. You don't publish the exact number of interest-only loans, but if you look at the averages and so on you can work it out. I came up with a rough number of about 800,000 interest-only mortgage loans that you may have on your books. What do you say to those 800,000, or whatever the correct number is, of Westpac customers, who have existing interest-only loans, where APRA's action had nothing to do with them, where you said to all of those existing interest-only customers, 'We're going to put up your rate in June by 34 basis points'? What's your message to them?

Mr Hartzer : Switch to a principal and interest loan; it's cheaper.

CHAIR: Why have you applied that APRA requirement to them when it doesn't relate to them?

Mr Hartzer : As I said, there were two goals we were trying to achieve. One was to meet the APRA requirement; the other was to shift the book to principal and interest loans because it's the right thing to do at this stage in the economy. That's why we have lowered the interest rates on principal and interest loans, which are available to all those customers, giving them the ability to switch for free. We have written to them to encourage them to do that—and many are.

CHAIR: I had a look at some analysts' reports following on from your movements on these interest-only loans. I want to paraphrase from a few of those. On 30 June, Macquarie said, 'We estimate a 3.6 increase in earnings due to Westpac's movements on rates.' On 26 June, Credit Suisse said, 'So far Westpac appears to be the key beneficiary of the industry's successful mortgage repricing; upgrade Westpac to outperform.' On 19 July, Morgan Stanley said: 'Upgrade Westpac to overweight. In our view, Westpac is a major beneficiary, more than its major peers, from the accelerating trend towards differentiated repricing.' On 6 October, CLSA looked at the same issue and thought that this repricing would increase your net interest margin by 11.6 basis points.

It does appear that what you have described as a response to the regulator has had, from your perspective, the happy coincidence of a meaningful increase in earnings. You're saying to the committee that that's not something that is materially factored into the decision-making process?

Mr Hartzer : I'm saying that the decision that we made in June was a decision about meeting the APRA requirements in a way that sent the right signals to our customers and our balance sheet as well as meeting the APRA requirements. Of course, when we have changes in margin, it's going to have an impact for a period of time. I would also say there's a significant level of switching going on. I think the level of switching increased by about 70 per cent in the third quarter. Therefore, the ultimate effect on our margin and our profitability remains to be seen. Our financial year just closed in September and our results will be fully out in the public in early November, and you're welcome to look at that and I'm happy to comment on it at the time.

CHAIR: Certainly the analyst consensus seems to be that those changes will have a very positive impact on your earnings. On this issue of compliance, you're obviously saying this is a compliance issue. I'm sure that most in the committee would understand when companies take action to effectively cover the cost of compliance. If there's a new regulation that is introduced and has a cost, I think most people would accept and understand that companies would need to take some action to, in a sense, leave themselves no worse off. But it would seem to be quite a different matter if that is the public justification, but what the underlying numbers suggest is that compliance is effectively being used as a profit centre. It would appear, certainly based on the analysts' work on this issue, that there's a strong case that's what you have done.

Mr Hartzer : I would reject the suggestion that compliance is profit-centred. In fact, compliance with new regulations that we're dealing with will probably cost us between $300 million and $400 million a year. That's not an amount that we are recovering.

CHAIR: We had ASIC before the committee a couple of weeks ago, I asked the deputy chairman about this issue and whether they would be concerned if the public justification for a rate rise was different to the underlying justification. Mr Kell said: 'Yes, it would be a concern. In effect, it would go to whether the public justification or explanation for an interest rate rise was inaccurate, false or misleading, and therefore in breach of the ASIC Act. We've noted concern around this. We're looking at this issue. We'll be working with the ACCC, who, as you know, have a specific brief to look at some factors that have contributed to interest rate settings. It's an issue we're concerned about.

I think, as you know, under the leadership of Marcus Bezzi at the ACCC there is now the financial services unit team. I think there are 12 or 13 people now who are going through all the internal documents—the internal emails, the board minutes, the subcommittee minutes—in relation to these matters and interest rate pricing. When Mr Bezzi's team go through all of the internal documents in relation to this June interest-only rate rise decision, do you think that they'll find that the internal discussion within Westpac reflected that an increase of an interest-only book of this size, the entire book, was required in order to leave the bank no worse off?

Mr Hartzer : We are highly aware of the ACCC review of this, we're highly aware of ASIC's comments and we are scrupulous in making sure that what we are saying about what we're doing is consistent with that, both internally and externally. When the review comes—and we have already submitted significant documents—they will be consistent with what I'm telling you.

CHAIR: That wasn't my question. My question was: will they find that a rate increase of the size that you've pushed through was required in order to leave the bank no worse off as a result of the regulation?

Mr Hartzer : No worse off—I'm not sure what you mean by that. I've explained the goal was to reach the APRA requirements.

CHAIR: You said that your motivation was not a profit based motivation and I've said that I think the vast majority of people, if you were responding to the regulation and saying, 'This is what we need to do to be whole,' so to speak, after the regulation, would accept that and understand it.

Mr Hartzer : I'm just not sure I'd accept that formulation of 'being whole'. It wasn't about that; it was that we have to reach this 30 per cent cap as we understand it, and we want to reshape our balance sheet so that customers are oriented toward paying down their principal at a time when rates are low, and we cut principal interest rates to do that. In the end, it is a judgement about the extent of the pricing gap that's going to be needed in different products with different segments to effect the change you want to effect, but that was our judgement of the change we needed to make.

CHAIR: On that criterion, that is a subjective criterion which would effectively say that any judgement you made in relation to a purported response to a regulatory change was okay. Is that the way you think about it?

Mr Hartzer : I wouldn't characterise it that way, but I would say, yes, pricing is a judgement. We don't run the bank purely with a simple calculation and a spreadsheet. We make judgements about what's going to happen in markets, what's going to happen with regulation, what our competitors are going to do and how customers are going to respond, and in the end we take those things into account and make a judgement.

CHAIR: Will Mr Bezzi's team find that there is a document where the bank has sought to calculate the cost to it of this regulation?

Mr Hartzer : Not exactly. Peter, do you want to comment on this?

Mr King : The discussions internally have been about the shape of the mortgage portfolio in the future. One of the first objectives, as you stated, is that our portfolio has a skew towards interest only and we want to move that over time.

CHAIR: You've got lots of financial analysts. I would have thought that somebody would have calculated—'We're at 50 per cent interest only now. If we go down to 30 per cent of new, because interest-only loans are more profitable, that's going to have an impact on the bank and this is what the impact, broadly, is likely to be.' Surely, someone would have done that analysis.

Mr King : It's a difficult one to answer because it is—

CHAIR: It's a simple question.

Mr King : It's behavioural economics about what price point makes people change.

CHAIR: And my question is: did you do that analysis or not?

Mr King : We're working in a market. It's judgement; there is not a document that exists that says, 'At different price points, this is what we think will happen.'

CHAIR: So you wouldn't have done an analysis to demonstrate the impact on profitability to the bank if the interest-only future book went to 30 per cent as compared to the existing trajectory?

Mr King : No; we would have modelled the impact on profitability of the changes, and a big input into that is how much switching will happen.

CHAIR: I understand that.

Mr King : The very important point is we're writing to customers to make sure that they understand the difference in the price, and they can make a choice about whether or not they want the interest-only flexibility.

CHAIR: That's well understood. So you would have done that analysis to work out what the profitability impact on the bank would be of that change in flow of the interest-only book, and then you've represented to the public and to probably 800,000-plus borrowers who are affected by this that this is in response to that regulatory change. So, when Mr Bezzi's team go through and look at the public statements you've made in relation to this issue and the actual financial impact, which is effectively what Mr Frazis in your press release of 20 June used to justify the change, will they see those two things are correlated or will they see that the change is actually materially bigger than the financial impact on the bank was likely to be?

Mr King : Again, it depends on how many customers switch.

CHAIR: Yes, I know, but you've just said that you've done the analysis.

Mr King : But we don't know the final outcome.

CHAIR: No, of course you don’t know the final outcome.

Mr King : It's gone up 70 per cent, so it's a question about the future. We'll see.

CHAIR: That's not my question, Mr King. My question is: did you do the analysis? I would have thought, as a $100 billion organisation, you probably would have. Of course, it's financial analysis—it could be right; it could be wrong—but there was a fact set that said, 'Here is what we, Westpac, think the impact on profitability would be of complying with this 30 per cent interest only change.' You've established that that exists—that you've done the analysis. It might be right or wrong, but you've done the analysis. So, we know that. We know that you've publicly justified the rate rise on the basis of the regulatory impact imposed by APRA. My question is: when Mr Bezzi's team from the ACCC goes through all these documents very carefully—which I'm sure they will—will they find that there's a correlation between those things, or will they find they're actually very, very different?

Mr King : Mr Bezzi will see that there were a lot of discussions internally on the shape of the mortgage book that we're trying to achieve, as well as hitting the APRA regulatory requirement—

CHAIR: That doesn't answer the question.

Mr King : That's what he'll say.

Mr Hartzer : The answer is: they will see what we have said we did.

CHAIR: Neither of which answers my question. I've asked you, 'Was there a profitability analysis done in relation to this?' and you said yes. Then I asked you, '   Does the size and scope of the change that you've put on interest-only loans reflect that estimate of the bank of the impact of this regulation?' Because, as I said, if what you're doing, as you've said, is responding to the regulation, and the change that you've pushed through corresponds with your internal analysis, then I think it would be difficult for people to be critical of that. If, however, the analysis of the impact to the bank is X, and the rate rise that your customers have to pay is actually a lot higher—and the analysis of the investment banks suggests that that is the case—then I think it would be a matter that would be of great interest to Mr Bezzi's team.

Mr Hartzer : I think it's the other way around. We made estimates as to how big of a differential we would need to change in the different rates in order to achieve the regulatory outcome that we were striving to achieve, which was the primary driver. Then, yes, of course, we update our forecasts, financially, as a result of those changes—not the other way around. We didn't make a financial forecast and then say, 'What rates should we change?' We said, 'How much do we need to change the rates to drive the behavioural outcome we're trying to achieve?' and then, 'What do we estimate the financial impact of that is going to be?' What Peter's saying is that we made a forecast, but the truth is that whereas often our forecasting is pretty accurate, in this case, we found and continue to find it very hard to know what the net effect is going to be, because we don't know what the switching is going to be.

CHAIR: The key question is: will the internal analysis that Mr Bezzi goes through, in terms of your assessment of the profitability impact of these changes on the bank, be correlated, in an economic sense—because that's what you used as a public justification, right? But then you've gone and said, it goes up 34 basis points—front book, back book, everybody. If there isn't a correlation between those two things and they're different numbers—and, again, the fact that the analysts are saying this is so profitable for you suggests they may well be different number—then, you know, looking at Mr Kell's comments about the importance of you making accurate statements about the reasons for the decisions that you take, I think that may well be of interest to Mr Bezzi.

Mr Hartzer : The statements are accurate and they will be seen to be accurate, but they do reflect judgement. It's not a mathematical formula; it was a judgement that we made.

Mr King : We had two objectives; one was to meet the APRA requirement, and the other was to reshape the mortgage portfolio to have less interest-only, which required some back book switching.

CHAIR: I will do one more issue and then pass to Mr Thistlethwaite. I have a couple of other matters; I might come back to you later. This issue around contactless payments and payWave: as I understand it, if somebody has a debit card, say a Visa or Mastercard debit card, and they use payWave, it's generally the case that that transaction is routed through the credit network rather than the EFTPOS network—is that right?

Mr Hartzer : I saw that article that you're referring to. Maybe just a little bit of background on this. First of all, it's really important that the public understands: customers do not pay anything different depending on whether they tap or insert the card. There is no difference in the fees paid by customers depending on how you use your card; it's completely agnostic.

Tap and go, which has been extremely successful in Australia, is an initiative of the international card schemes. It uses standards set by Visa and Mastercard, and the Australian banks have rolled that out and it has been embraced by businesses as well as consumers. EFTPOS is a domestic scheme. Until recently it had no ability to do contactless payments. So when you used a contactless card you were, by definition, using a Visa or Mastercard that participated in that scheme, and therefore there was the interchange fee, which is a fee paid internally between the banks to compensate each other for the cost of the transaction, because you were essentially doing a credit transaction via the scheme rails, if you will. More recently, EFTPOS developed its own contactless capability and, if a customer uses an EFTPOS card at a terminal, it will go as an EFTPOS transaction. So the point is not—

CHAIR: Hang on. Most people would think of a debit card that has a Visa chip as being EFTPOS capable, which presumably it is?

Mr Hartzer : Yes.

CHAIR: But are you saying that that transaction will now go through EFTPOS, or that, because there is a Visa chip on it, it will go through Visa?

Mr Hartzer : If it is a Visa or Mastercard chip and has the functionality of that, it goes through Visa or Mastercard.

CHAIR: So now that EFTPOS is available, and because, as I understand it, EFTPOS has materially lower fees—which, as you say, are usually paid by the merchant—

Mr Hartzer : Are always paid by the merchant—

CHAIR: If they are always paid by the merchant then obviously the merchant can take action in relation to that. Shouldn't it be the case that that should be routed to the EFTPOS route because that is a better outcome for the customer, because it is a lower fee?

Mr Hartzer : There is no difference for the customer. The customer pays no fee. There is no fee to a customer to use a debit card or a—

CHAIR: The customer in this case being the merchant?

Mr Hartzer : Well, the merchant can choose. This is about: which card does the customer pull out of their wallet? If the consumer wants to use their cheque account to access their money—

CHAIR: I know where you're going with this, but let's just stay anchored to the real world. As I understand it, for the average person who has a debit card, their card will often have a Visa chip on it, or a Mastercard chip or whatever it is. They are not experts in the internal systems of bank payments and routing networks and so on. If that person presents with a debit Visa card, if you, the bank, route it through EFTPOS, the fee to the merchant is, according to the Reserve Bank, about 40 basis points lower than if you choose to route it through the Visa system. You are right that the consumer doesn't always directly pay for that, but obviously the merchant does. So the question is: in that case, where someone presents with a Visa or Mastercard linked debit card, surely, from a competitive perspective, in a competitive market what should happen is that the lowest cost route should be chosen, which is EFTPOS rather than the credit route.

Mr Hartzer : That is an interesting perspective. It depends on what that card is. One of the things that is relatively distinctive about the Australian market is that we do have the ability to carry both credit and debit on the same card. Most markets don't have that. Typically, someone has a savings account or a cheque account linked to their credit card, and so, when they pull that card out, the merchant doesn't know which account they mean to use—

CHAIR: But the system does, presumably?

Mr Hartzer : Well, it depends—

CHAIR: If it is a debit-only card—

Mr Hartzer : If it is a debit-only card and it has got the functionality of a Visa and Mastercard, then it is going to run on the Visa and Mastercard rails.

CHAIR: Yes, but why? That is the question. EFTPOS is lower fee.

Mr Hartzer : Because Visa and Mastercard built the system and, until recently, EFTPOS didn't have one.

CHAIR: Okay, so now EFTPOS has a system—

Mr Hartzer : You can use an EFTPOS card in an EFTPOS terminal. We are issuing those. If that's what people want, they can have it.

CHAIR: Okay, but someone is presumably not going to say, 'You know what? I want to save 40 basis points on the merchant's fees, so I'm going to take out my card and tap in my PIN and press EFTPOS.' Again, to stay practical, people like payWave—

Mr Hartzer : They can do that.

CHAIR: It is a good service, payWave, and people like it, but, if the capacity is there to route it through EFTPOS, which is materially cheaper to the merchant, and to provide the same service to the consumer, that functionality is now available. In a competitive market, isn't it the logical thing that it should go to the lowest cost producer not the highest cost?

Mr Hartzer : There are a couple of different issues that are overlapping here. The point is that a contactless EFTPOS card can be used in an EFTPOS terminal and it would go that way. When you talk about a Visa debit card, you don't know the functionality associated with that card. Visa and Mastercards often come with extra benefits to have an instalment loan to get reward points, and even debit cards will often have special rewards associated with them. That is afforded by the interchange that comes out of that. It is important to remember that banks don't make money on interchange. Interchange is a cost recovery mechanism that is set by the Reserve Bank of Australia, and Australia has one of the lowest interchange rates in the world.

What you are suggesting in saying you will automatically default a Visa or Mastercard branded card to an EFTPOS rail potentially has a significant impact for the value that the consumer will actually get from using that card in the future. As to the fact that EFTPOS can do contactless—it is available; you can have it; we offer it, I don't understand the issue.

CHAIR: Why wouldn't you just have the standard contract that it goes to the EFTPOS route, the lower cost route, unless the cardholder expresses otherwise, rather than automatically going to the higher cost route?

Mr Hartzer : It's more complicated than that. We don't know which card the customer wants to use and which account the customer wants to use. I think it's important to say that merchants get benefits out of the fact that Visa and Mastercard are there and provide this technology. We are able to take advantage of a global scale of technology innovations by offering this sort of thing. It doesn't come free. The merchants benefit from this.

Mr THISTLETHWAITE: I would like to ask some questions about the AUSTRAC allegations against the Commonwealth Bank. In their statement of claim, AUSTRAC alleged that half of the six money-laundering syndicates that they have identified as using Commonwealth Bank funds to wash funds through also used ANZ and Westpac accounts to wash major portions of their funds. Is that true?

Mr Hartzer : I don't know and I couldn't comment on a specific case. What I can say is that money laundering is a very serious issue for all financial institutions. It's something we take very seriously. We spend tens of millions of dollars on systems and controls around this. We work closely with our regulators to identify and report any suspicious transactions. We take action and work with the police when they have an issue that they want to deal with. We carefully review all of our processes and our technology to make sure that we can have that. But the criminals are very clever and they are constantly trying to come up with new ways to launder their money.

Mr THISTLETHWAITE: Are you aware that AUSTRAC made these allegations in their statement of claim and that they included Westpac?

Mr Hartzer : I saw the statement. We speak closely with AUSTRAC and we are constantly working with them constantly. Money laundering is a serious issue in this country and the banks are working hard with the regulators to stop it.

Mr THISTLETHWAITE: When you saw those allegations, did that concern you?

Mr Hartzer : It's always a concern to me that money laundering is going on but it is not a surprise to me. There are lots of criminals out there trying to launder huge amounts of money. We are in a constant escalating battle to make sure that we identify and shut down any avenues for them to do that, and we are working closely with the regulators to do that.

Mr THISTLETHWAITE: In the wake of those allegations, did you ask AUSTRAC about the information that they are alleging? Did you seek to audit any of those transactions to see if this is the case?

Mr Hartzer : We are in constant conversation with AUSTRAC on these things. I am sure those conversations would have happened. It is an ongoing conversation. We're constantly making reports. We make thousands of reports all the time when we spot suspicious transactions, and we work on matters with them and with the Federal Police all the time.

Mr THISTLETHWAITE: It sounds to me like you are giving a preprepared standard answer. I'm just trying to get to the bottom of how widespread this is across the banks. For this reason, I'll give you a quote from Ian Narev» . In the wake of these allegations, he said, 'Any CEO of a major bank anywhere in the world who says they definitely don't have a problem with financial claims compliance would be a very bold CEO'. That concerns me, because, as you've identified, money laundering is quite serious. He is saying, as the CEO of one of the biggest banks in this country, that all banks have a problem with complying with this legislation and that it's too complicated. For us as legislators, if that is the case, we need to know. Can you comment on that? Is it the case? If these allegations have been raised by AUSTRAC about your bank, was it discussed at a board level? Did you seek to audit it? Did you increase the compliance associated with it? These are rather serious allegations.

Mr Hartzer : I can't comment on a competitor's situation or their assessment of it. What I can say is: we talk to AUSTRAC all the time. I have personally spoken to the head of AUSTRAC. Obviously, when this issue at that bank arose we were all very concerned to make sure that we didn't have that issue. We have had it in writing from AUSTRAC that we do not have the issue, and they have said that publicly—with respect to the issue that the Commonwealth Bank had. We continue to deal with them on lots of issues. Money laundering is a very complex topic. There are overlapping regulations from different countries. We have many businesses. Criminals are clever. What I can say is: we have a very thorough process, strong controls. We invest heavily in systems and people. We talk about it at the board—to that part of your question. It is reviewed at our risk committees constantly. We have special committees looking at issues every time they arise. We take it very seriously.

Mr THISTLETHWAITE: When this issue was raised by AUSTRAC in their statement of claim and your bank was named, was it discussed at the board level?

Mr Hartzer : I can't recall whether that specific item was discussed. I can assure you that, given the attention that the AML issue has had since Commonwealth Bank's problem, it has received a lot of attention at the board. We talk about the issue and what we're doing about it in a tremendous amount of detail, as we do at my executive committee.

Mr THISTLETHWAITE: Were there any interactions with the risk committee by any executives or yourself about increasing the compliance, looking at further auditing to see if what is alleged by AUSTRAC is true?

Mr Hartzer : Our board is very concerned about AML controls and compliance, as am I and my executive team. So we have absolutely talked about it. We have ramped up focus on reviewing and resolving any outstanding issues that we may have. We're in constant contact with AUSTRAC on any issues that they have.

Mr THISTLETHWAITE: Ian «Narev also claimed that the CBA would seek to use court discovery to query whether rival banks have made sufficient disclosures regarding suspect trading. Has CBA sought to use court discovery with Westpac?

Mr Hartzer : Not that I'm aware of. But that's a matter for them.

Mr THISTLETHWAITE: So there has been no interaction with your lawyers about using discovery of your disclosures to AUSTRAC?

Mr Hartzer : Not to my knowledge.

Mr THISTLETHWAITE: Are you confident that your bank has made the necessary disclosures in every case to AUSTRAC regarding the anti-money laundering legislation?

Mr Hartzer : Yes.

Mr THISTLETHWAITE: I will move on to the next issue—that of an ANZ executive's identity being stolen and used for a $30,000 Westpac loan. Are you aware of this issue?

Mr Hartzer : I have heard about that issue.

Mr THISTLETHWAITE: Were you surprised to learn about this—that someone had stolen the identity of an ANZ executive? I understand it was as simple as photocopying a driver's licence. They then used this to get a loan for $30,000 with your bank.

Mr Hartzer : I don't think it's appropriate that I comment on a specific customer issue. I think what it highlights is that the risk of identity fraud and cyber security is a very serious issue, and we're all paying a tremendous amount of attention to it.

Mr THISTLETHWAITE: Surely this has exposed some failings in your organisation regarding identity verification. Have you done anything about it?

Mr Hartzer : What it exposes is that the criminals are continually trying to find ways to defraud us. We have to continue to invest in improving controls around that. We do do a lot of identity checking. Again, I'm not specifically sure what happened in this case. I can take that on notice if it's of interest. I'm confident that there's plenty of attention on making sure that our customers' data is secure.

Mr THISTLETHWAITE: Did this incident trigger an audit or a review of the circumstance?

Mr Hartzer : It would have done, but I would have to confirm that on notice.

Mr THISTLETHWAITE: Did it identify that some of your processes, in terms of maintaining security of important documents, like drivers' licences, were insufficient?

Mr Hartzer : I'm not aware of any finding like that. What I can say is: people do try these things on all the time. We do catch things and we stop it. But we can't guarantee that nothing is ever going to get through.

Mr THISTLETHWAITE: Was it reported to ASIC?

Mr Hartzer : I would have to take that on notice. That incident, as far as I can see, attracted attention because of the profile of the person involved. But criminals are trying to do this all the time, and we have huge teams of people and investment designed to catch and stop this stuff.

Mr THISTLETHWAITE: I want to move to the issue of David St Pierre. We have asked questions about this in the past, and in the last round of hearings I asked you a series of questions regarding David St Pierre. You said, in response to one of my questions regarding when you reported him to ASIC: 'We did report it, but I have to take it on notice. I believe it would have been right around the time that we launched the investigation.' It has been uncovered that it was actually two years after you were aware that he was being investigated by your bank. Why is it the case that it took two years after you were aware that he was being investigated for dodgy practices? Why did it take two years to report him to ASIC?

Mr Hartzer : I don't know the detail on that one. It is obviously unacceptable. I am sure as part of the review on this we would have tightened up the disclosures on those things.

Mr THISTLETHWAITE: How do you not know the detail? I asked you questions about it last time and you answered them. It was a further subject of questions on notice in this last hearing, and in the answers to the questions on notice it became apparent that the response you had given at the hearing was wrong and that it was actually two years later. The other alarming issue about this is that ASIC didn't know that it took two years to report him. They found out again through a hearing of a Senate committee. Do you think it is acceptable that you started an investigation into this bloke in October 2010 but it took you two years to report him to ASIC, when you knew that he was potentially engaging in dodgy practices?

Mr Hartzer : It is completely not acceptable, and I make a full apology for that. Our processes should have been better. This guy did the wrong thing. He took advantage of customers who were vulnerable and he was fired. It took us too long. We have reviewed the process and tightened up our controls around this. I am sorry, but I don't remember the detail now. It was six months ago and we have had a lot going on. He has gone. I know that the issue has absolutely been looked at, and my message to our people is very clear: the culture is that when we find these things we highlight them and report them to ASIC.

Mr THISTLETHWAITE: In the two years between highlighting these issues, the bank beginning an investigation and the reporting to ASIC, did he continue to advise customers?

Mr Hartzer : He stayed on the books for a while. From memory, the issue with Mr St Pierre was he was fraudulently creating documents and things like that that made it difficult to get to the bottom of what was going on. Do you remember the detail a bit more?

Mr King : No.

Mr Hartzer : I'm sorry. I thought this one was gone, otherwise I would have prepared more detail on this. I am very happy to come back and give you more comprehensive detail on this. I would reiterate: we are absolutely clear that this should not have happened. The guy deserves to be fired and banned from the industry, and our process of finding him and dealing with him was inadequate. We have made changes to make sure it doesn't happen again.

Mr THISTLETHWAITE: They are quite serious allegations. This was someone who was subsequently prosecuted and sentenced in February this year. You are saying that he continued to advise customers over that two-year period. That is alarming because they had doubts about him. You began an investigation. You are saying that he was involved in forging documents for two years. That continued to occur. That is quite serious.

Mr Hartzer : Again, I would rather come back to you in detail on this than try to search my memory from six months ago. I can tell you that all the customers that he affected were reviewed, and where we found any issues we would have remediated them.

Mr THISTLETHWAITE: We might put some further questions on notice about some of the details regarding that. I want to ask some questions about the ASIC case against Westpac concerning responsible lending. Has Westpac recently amended your consumer credit assessment for customers with respect to residential home lending?

Mr Hartzer : We make changes all the time and have been in consultation with ASIC on a number of matters. The background on some of these things is that you have the National Credit Code, which lays out legally what needs to happen. Banks then have to interpret how to put those laws into practice. In some cases the specifics of the regulations are not clear, and at later times the regulators will then provide more specific guidance about what they believe the interpretation of the law means people have to do and not do. There have been some cases where our intent was to comply with the law, and then the regulators have found a different interpretation of what we need to do, and when that happens, we change our practices. The responsible lending issue that you are alluding to, where ASIC has taken legal action against us, is an example of that, where it is our contention, and we are defending the case, that we have complied with the law and have met the requirements around assessing those customers and lending responsibly. However, ASIC's interpretation of the law is different, and therefore we have a dispute about whether or not we've met the obligations as they see them.

Mr THISTLETHWAITE: There's a heightened sensitivity, in the wake of the global financial crisis, about responsible lending. APRA have introduced new lending requirements for banks about the amount of capital that they need to hold. It appears that all the banks do this. They use benchmarks for living expenses rather than actual living expenses. What's best practice?

Mr Hartzer : We use both. Peter might want to talk a bit about how to do this.

Mr King : The change you're referring to was back in 2015, where we moved to the higher of declared expenses or benchmarks. What we find is a lot of people underestimate their expenses. That's why benchmarks have a role in assessing people's applications, because the expenses they declare are too low. That's one of the challenges when you're verifying expenses, in particular about income. It's more natural for people to know what they're earning, because if they're a salary earner, they'll get a monthly or fortnightly payment, but in relation to expenses, it's not something they can easily recall. We have to look at both declared expenses and benchmarks, particularly for people who aren't declaring enough expenses.

Mr THISTLETHWAITE: Why don't you just use actual expenses?

Mr King : In the case of someone who's not declaring enough expenses, underestimating their expenses wouldn't be the right thing to do.

Mr THISTLETHWAITE: If they're existing customers with you, surely you'd have access to their transaction records and you'd be able to sit down with them and say, 'We think you've under-declared here; can we go through this together?'

Mr King : That's how we use the benchmark. That's the role of the benchmark. The benchmark is different between states and different between cities and regional areas. We also look at the benchmark depending on total levels of income. We'll adjust expenses higher if you earn more.

Mr THISTLETHWAITE: When did you make the change?

Mr King : 2015.

Mr THISTLETHWAITE: How does this sit with loans that were made prior to your making that change in terms of credit assessment with your responsible lending duties?

Mr King : We were using a different process. We think it was in accordance with the law, but ASIC believes there are some questions, and that's why they've launched the case that they have.

Mr Hartzer : The overarching statement, though, is we're very comfortable with the quality of our credit book. We don't lend to people who can't pay it back; it's not in our interest to do so. We have a whole bunch of other controls that go on in the lending process, including interest rate buffers and the like, which are all designed to make sure people can afford their loan even if rates were rising.

Mr THISTLETHWAITE: I would like to ask some questions about BT's approved product list in terms of life insurance products. According to some reports in The Australian newspaper, under the approved product list, Westpac's BT financial advisors recommend only one life insurer—that is, Westpac Life. This is contrary to industry recommendations. It's contrary to recommendations of the Trowbridge review on retail life insurance advice. The Financial Services Council have said it's not acceptable to have just one life insurance product offered. Is it the case that BT financial advisors have only one life insurance on their approved product list?

Mr Hartzer : No, that's not the case. While BT advisors overwhelmingly sell BT life insurance—and that shouldn't be a surprise to someone who's coming to a BT life insurance rep—they have the ability to access non-BT product if that's appropriate. The point is that we're very happy with the quality of the products that we put out in BT Insurance. They win awards all the time. They're designed for different life stages. We pay over 90 per cent of claims.

I know that different people, particularly if they're independent brokers, have a different view, but our view is that insurance is a very appropriate product for us to provide to our customers. We have a motivation to pay claims when something goes wrong because we're trying to sustain the long-term relationship with our customer. Our view is that, if we have a suite of products that suit different life stages and that are well structured and good value, that's what we can and should recommend. But, if one of those products is not suitable for a customer for different reasons, our advisers have the ability to access other products, and, in some cases, they do.

Mr THISTLETHWAITE: ASIC recently conducted an audit of life insurance products for certain providers, and they found that BT Financial Group was the worst performing in terms of claims history.

Mr Hartzer : I disagree with that.

Mr THISTLETHWAITE: Sorry, I meant claims rejection rates.

Mr Hartzer : That was a specific issue that related to total and permanent disability insurance, and it related to a very small number of claims. It's subsequently been seen that some of the data really is an apples to oranges issue. That's a very broad statement that's not correct. The broad view of BT's overall insurance products is that they are very highly regarded and very highly rated, and the claims payment history is very good.

Mr THISTLETHWAITE: Are your financial advisers encouraged to offer the BT life insurance product?

Mr Hartzer : Yes, they are. That's because they're good-quality products, and we stand behind them.

Mr THISTLETHWAITE: How can you say that if there's this report from the independent regulator that says that that's not the case in terms of claims rejection rates?

Mr Hartzer : Again, the report you're referring to is about a specific category of product, which is total and permanent disability.

Mr THISTLETHWAITE: Which is a large part of life insurance.

Mr Hartzer : The number of claims for that to happen is relatively small. There were some statistical issues in the way that that data was reported, including the fact that the way that we tracked claims that were denied included people who didn't even have the product with us. It was thought that they did have the product and did make a claim. So we're happy to come back on notice and give you more detail on that specific thing, but I reject the generic observation about BT insurance products because it's not true. That was about a specific product category, and the broader view on BT's insurance products is that they're very highly rated and provide very good value.

Mr THISTLETHWAITE: You say that advisers can offer other products. In response to a question on notice to the Parliamentary Joint Committee on Corporations and Financial Services, it was uncovered that, yes, you can offer other products. But it takes four days from request, which is reviewed by the group's advice research team and, in rare cases, is escalated to senior management. It appears that you try to do everything you can to stop that person accessing another product. That's the case, isn't it?

Mr Hartzer : The point is that, for insurance, we offer a suite of products that we work really hard to make sure are good value, and that's what they're offering. They're not pretending to be an independent insurance broker—that is another offer that's out there in the market. However, the products were structured, and the bias that we have is that we want to pay claims and we want to provide good value for our customers because we want them to stay with us for long periods of time.

Mr THISTLETHWAITE: Is this particular product the only one on your approved-product list?

Mr Hartzer : No, there's a variety of products there. There are a number of different insurance products that are designed for different life stages for people. Someone who's young and doesn't have dependents has different needs than an older couple, for example. The way that the BT suite of products is designed is to be suitable for those different groups.

Mr THISTLETHWAITE: But are they all BT products?

Mr Hartzer : What do you mean by 'all'?

Mr THISTLETHWAITE: You said that there's a suite of BT products.

Mr Hartzer : Yes, there's a suite of BT products.

Mr THISTLETHWAITE: They're not other products from other providers?

Mr Hartzer : No.

Mr THISTLETHWAITE: Isn't that contrary to the Trowbridge recommendation that was made in March 2015?

Mr Hartzer : I'd have to see specifically what you're referring to. Again, we feel confident about the quality of the products that we're offering. We're very transparent with people about what's available to them from our life insurance people. That's what they're doing. For those insurance products, we think that that's a suitable business model.

Mr THISTLETHWAITE: Don't you think, if you are acting in the interests of your customers, it would be better to put more products on that list to suit their circumstances, perhaps non-BT products?

Mr Hartzer : As I said, we do have a best-interest duty. We believe our products are very competitive and provide good value because they suit the life-stage needs of the customers and we do have the ability, if those products aren't suitable, to go outside.

Mr THISTLETHWAITE: I just want to have a look at the issue of some of your retail superannuation funds. You've got a range of retail super funds, and it appears that some of them act as shell companies with no investment fees or investment expenses. For example, Westpac Master Trust super fund has 247,000 member accounts with a total of $5.8 billion in funds under management, but they record zero per cent investment fees and zero per cent investment expenses. Does that super fund really cost nothing to run?

Mr Hartzer : Essentially, these are pass-through structures. Our approach on the investment side is that we want people to have a big choice and be relatively product agnostic. We make available a variety of different funds, through structures for people, that suit different life-stage needs.

Mr THISTLETHWAITE: Are there associated entities that relate to that fund, that Master Trust super fund, where the fees are charged?

Mr Hartzer : I would have to take that on notice. But I expect that's a structure that then passes through different external funds on which people would see the reporting of what the fees were that were associated with those different funds. I don't—can you help me with this one?

Mr King : No.

Mr Hartzer : I'm sure that is a legal structure but it's transparent to the customer, which funds they're invested in, and the fees associated with those would be transparent as well.

Mr THISTLETHWAITE: So you don't know what the fees are?

Mr King : I think we'll take that one on notice.

Mr Hartzer : I'm pretty sure I know what this is. We have a corporate structure that brings together the ownership of a whole bunch of different funds. A customer would own a proportion in those different funds and they would see what they owned, and they would have the disclosure on each of those funds as to what the fees were that were associated with that.

Mr THISTLETHWAITE: So you do disclose the fees in each portion of those other funds to the customer.

Mr Hartzer : Yes, as far as I know. We'll take that on notice and double-check.

Mr THISTLETHWAITE: Do you disclose to the customer how much profit each one makes and how much is transferred back into BT principal?

Mr Hartzer : I'm afraid I don't understand that question.

Mr THISTLETHWAITE: If divisions of those funds make profits on the fees and the commissions—

Mr Hartzer : Those are investments, so they go to the members. The fees are the administrative fees and different fund managers would have some margin built into that. But that is taken out of the fee that the customer's paying. The rest of the growth in the fund is for the customer's account.

Mr THISTLETHWAITE: I'm assuming, in offering the retail funds, you make profits on them at some stage?

Mr Hartzer : We would, typically, charge an administration fee overall for managing the account, and that's disclosed to the customer.

Mr THISTLETHWAITE: So that's how you make a profit?

Mr Hartzer : Typically, yes. In our approach to wealth management you will have noticed that we sold down our holding in BT Investment Management, which is an asset manager. What that represents is our strategy around wealth. For the most part, we don't want to be the owner of the actual asset manager who is making the investment decisions, we want to provide the platform that allows customers to manage their money however they want to do it, whether directly or with the adviser. Then we charge an administration fee, to give the customer the ability to manage those assets.

Mr THISTLETHWAITE: Are those fees typically higher than the industry funds?

Mr Hartzer : It's an apples-and-oranges comparison because we're providing a platform to manage multiple funds. An industry fund is a simple product; it's like what would be a component of what you would hold on the platform. A better comparison, depending on the nature of the fund, is the management fee of an asset, of an industry fund versus another fund's management fees. The platform fee is something different that those different kinds of funds would plug into.

Mr THISTLETHWAITE: I want to ask some questions on technological change and branches. It's a fact that the world is changing and technology is changing at a rapid pace. In many industries, computer-based technology and robots are replacing humans. This is the case in the banking industry as well, isn't it—that technological change is seeing a number of staff being made redundant?

Mr Hartzer : There's some of that. We're seeing a lot of shifting, though. We're also seeing new jobs being created as a result of technology. But it's the case that customers are voting with their feet and with their plastic cards, and they're walking into branches less often to make cash deposits and cash withdrawals. So our branch network size and staffing reflects that.

Mr THISTLETHWAITE: Have your staffing levels decreased or increased over the last couple of years?

Mr Hartzer : They have come down a bit.

Mr THISTLETHWAITE: By how much?

Mr Hartzer : It would depend on the time period. It's in our annual report.

Mr King : One or two per cent.

Mr THISTLETHWAITE: Roughly, what does that equate to in terms of the number of people?

Mr King : Less than a thousand or about a thousand.

Mr Hartzer : About a thousand people over the course of the last two years.

Mr Hartzer : But that's across the whole bank; that's not just in the branch network.

Mr THISTLETHWAITE: Many are worried this is going to increase over time. I'm not singling out your bank or the banking industry for this; it's happening in a number of industries. Do you have a strategy to deal with this—particularly, to manage that workforce transition with technological change and to assist employees?

Mr Hartzer : It's a real issue. We absolutely understand the concerns that people have around this across the economy. It's something we think about a lot. We see it with our customers as well as with our own business. There's no question that technology is having an effect on jobs. I think some of the hype about it is a bit overdone, in that I personally think the impact of technology will be more about aspects of jobs than about whole jobs. A lot of the technology is really about replacing the parts of people's jobs they don't really enjoy—you know, keying data in or performing manual tasks. It's freeing people up to spend more time on higher value activity. We recognise it is a real issue for the company and we have been spending a lot more money investing in our people's skills and in the ability to create work that's more flexible and to help people move around and try different things. I think the best investment we and other businesses can make is giving our people more skills so they can adapt as jobs evolve.

Mr THISTLETHWAITE: Does this strategy have a name within your organisation?

Mr Hartzer : The general theme we call the workforce revolution, internally. It's a combination of projects that are looking at the skill set of our people, providing leadership training, skill development, working on culture and a whole range of things. For example, we have changed the way we incentivise our people. Our management program is now called 'Motivate'. Essentially, we've gone from very simplistic scoreboard-based measures of success to one-on-one discussions with people about their own aspirations and where they're going, with a more customised and frequent level of feedback for each employee.

Mr THISTLETHWAITE: Are you communicating and engaging with staff regarding these changes?

Mr Hartzer : We do. We talk about it a lot. Personally, I do roadshows with all staff every six months. I just finished a round of them in August. I spoke in person to probably 10,000 or 15,000 people, and by webcast to the entire company. This is certainly one of the topics we talk about.

Mr THISTLETHWAITE: I want to ask quickly about branch closures. In September you announced the closure of nine branches from your retail network—seven Westpac branches. Is that right?

Mr Hartzer : I don't know the number off the top of my head, but it could be. We certainly are making changes. That goes back to what I said before—people are voting with their feet and voting with their cards, and we're continuing to adjust our network. We also invested over $100 million last year in our branch network and ATM network. My personal view is that branches remain very important. Our frontline people are a really important part of how we deliver the service quality we're trying to deliver and to build relationships with the customers, and that's not changing.

Mr THISTLETHWAITE: So there were nine branch closures and seven of them were in rural and regional areas. Does that concern you, given that many of those rural communities rely a lot more on a local bank branch than, perhaps, city customers do, just because of vicinity? If you've got a branch in a rural community, the next one may be 700 kilometres away, whereas in a city network it may be a couple of kilometres down the road. Isn't that an issue for those communities, and particularly for employees of those organisations in those communities?

Mr Hartzer : We're very conscious of the concerns in regional Australia around branches, and that is why, as part of the changes we have made in our branches, we have done an arrangement with Australia Post that has opened up 3,500 new locations all over the country where people can do their transactions. We have also put videoconferencing capabilities into many of our regional branches—in fact, all branches now have videoconferencing. A customer can go into a regional branch and talk live to a specialist financial planner, a mortgage specialist, whatever it might be. In a sense we're putting more service back into regional areas. We're reflecting the reality of where people are choosing to transact, and where we make adjustments in branch numbers it's typically following changes in the traffic patterns. It's a phenomenon across the country that economic activity is moving more to regional centres.

Mr THISTLETHWAITE: Do you have any further branch closures planned for the next couple of years?

Mr Hartzer : We don't set out with a big long program. We look at each local area and monitor how customers are transacting in that area, and in some cases we consolidate branches and in some cases we open new ones, depending on how the traffic patterns go.

Mr THISTLETHWAITE: My final question relates to the bank levy approved by the parliament. You said in response to this:

There is no 'magic pudding'. The cost of any new tax is ultimately borne by shareholders, borrowers, depositors, and employees.

How will depositors and employees pay for this?

Mr Hartzer : At this point in time, we have made no adjustments to our pricing as a result of the bank tax. The effect of that is that it has come out of shareholders' retained earnings so far.

Mr THISTLETHWAITE: Is that how you continue to intend to pay for this?

Mr Hartzer : I can't talk about what we might or might not do on pricing. I certainly support the statement that I made before, that there is no magic pudding. In the end, the cost gets borne somewhere. Up until now, that cost has been borne by shareholders' equity.

Mr THISTLETHWAITE: That sounds like in the future you are planning to make customers and employees pay for it.

Mr Hartzer : I'm not going to talk about what we might or might not do on pricing. I'm prohibited from doing that. I'm just stating a fact, that extra costs eventually go somewhere.

Ms BANKS: CPS 220 is a prudential risk management mechanism. It doesn’t go to matters of culture; it goes to matters of finance and prudential. However, this committee's recommendation 7 recommended a more robust risk management framework and indeed an independent review of your current systems, Westpac rejected this recommendation and said the efficacy of CPS 220 is good enough and you have regular reviews with APRA and ASIC. But they are not the panacea—certainly APRA is not the panacea to robust risk management, particularly in the areas of misconduct. Do you still reject the recommendation?

Mr Hartzer : Can you just remind me exactly what the recommendation is?

Ms BANKS: It says:

The committee recommends that the major banks be required to engage an independent third party to undertake a full review of their risk management frameworks and make recommendations aimed at improving how the banks identify and respond to misconduct. These reviews should be completed by July 2017 and reported to ASIC, with the major banks to have implemented their recommendations by 31 December 2017.

Your response was, well, we've got CPS 220, we've got ASIC, we've got APRA and we report those to ASIC. In other industries, certainly in the consumer goods industry, in the pharmaceutical industry, they have robust risk management frameworks that specifically go to matters of misconduct. Do you still stick by your rejection of this recommendation?

Mr Hartzer : Our point is that we don't think it's necessary in that there is an extensive amount of review going on of our risk management frameworks, of our culture, of how we deal with misconduct, of how we review staff as part of our incentive and reward schemes. We feel that that's been very thoroughly looked at and reported on, both internally, through our regulators, through reviews that have been done of different aspects of it at the behest of our regulators. Internal auditors, external auditors—we feel pretty heavily reviewed.

Ms BANKS: I understand that, but unless you have the actual structure and mechanism to address specifically misconduct issues, they won't be addressed. In your opening submission you said, 'If we get something wrong, we will put it right.' In my view, you shot yourself in the foot there, because the whole idea and the whole purpose of a robust risk management framework which would overlay something like CPS 220 is that it's preventive. You have this framework, you have regular reviews, you identify the risks and you put in place mitigating factors to stop those things from happening. But that's not in case, is it, with Westpac? We've still got issues of misconduct. We've got sexual harassment, rigged forex trades, 'liar loans'—all these things happening that all go to conduct.

Mr Hartzer : To me, that's conflating a number of different issues. We have a very strong control framework on many aspects of our business. We have clear risk appetite and, wherever we can, we continually upgrade our controls and our detection to try to find and stop things. We make adjustments all the time. These are big, complex businesses, and I don't think any business of our size can ever guarantee that nothing's ever going to go wrong. That's just not realistic.

Ms BANKS: I'm not suggesting that, with respect. The management systems that I'm talking about go to businesses that are as big as, if not bigger than, Westpac. These are systems that are applied globally, from a global perspective. I'm not sure if the bankers who are attending this committee even know what I'm talking about, because, from my point of view, the banks are in a paradigm about risk management because of the protection of APRA and ASIC. You're looking at it purely in the paradigm of prudential regulation, and then you're sitting back, wondering—and obviously finessing your HR processes and all the rest of it, in relation to misconduct, but these things are still happening and they're reported to the media. My question to you is: would you review recommendation 7, as a substantive review, rather than rejecting it outright and saying that CPS 220 is good enough? That would require, necessarily, I suggest, consulting external counsel who would have put these systems in place for other industries which are larger than the banks.

Mr Hartzer : I'm happy to take another look at the recommendation. Perhaps you could give me an example of the sort of thing that you think should be there that isn't. I don't accept that our risk management starts by just listening to what APRA wants. We think about this for ourselves. We think about risk in all sorts of dimensions—people dimensions, conduct, compliance, credit risk, huge amounts of market risk. In a bank, risk is everything we think about, and—

Ms BANKS: Absolutely, and that is the same for, say, the pharmaceutical industry, but all that thought process gets embedded into a risk management framework, with four key areas, one of which is misconduct, or employee conduct, and that goes directly to strategy and leadership of the company.

Mr Hartzer : We have conduct risk as an explicit part of our risk appetite statement and control and review process today.

Ms BANKS: But, in terms of the risk governance framework, it's a circle of risk. It's a circle in terms of governance and enforcement. Let me go to the case of Martyn Wild. There have been a number of allegations. Martyn Wild was a very senior person, a chief investment officer, I understand.

Mr Hartzer : In the BT business, yes.

Ms BANKS: There was a sexual harassment case, and it took six weeks before you did anything about it. I understand the allegations happened in December, and it appears that Westpac waited till everyone got back from Christmas, in mid-January. A report was done externally, by Clayton Utz. I'm not suggesting this, but quite often an independent report is requested to be done to protect professional privilege. I question why a report had to be done externally. I would have thought that Westpac had the resources to do an internal investigation. It's not like you are investigating the HR function. That's what usually happens in that sort of situation. He got a slap on the wrist, a la Tim Worner, even though many of those allegations were proved. You obviously followed your HR practices, but this person had only been in your employ for six months, I think. He has these allegations made against him, he gets a first and final warning, the two people who report to him are required to go back to work, but they necessarily need to take leave—and we can all make assumptions about that—and he's required to make an apology to his staff for his conduct, and yet his manager doesn't sign off on the professionally privileged report.

This goes directly to my point about a risk management framework which would require all those boxes to be crossed in terms of who is accountable. Who is accountable for his conduct? It's him himself but also his manager. You don't have those mechanisms in place. They seem to get lost in the mix and then we read about it in the paper and they just keep coming. That sort of preventative response is, I believe, a significant gap in Westpac's processes.

Mr Hartzer : Thank you for raising that case. If I could make a few comments on that, I wouldn't categorise the situation quite the way you did. Let me be clear: it's a really unfortunate situation. His behaviour was totally unacceptable. As soon as I heard about it, I made sure that it was investigated and that action was taken, and he is no longer with the company—and that's exactly as it should be. I can't speak to the exact timing. What I can say is that, as soon as senior management heard about those allegations, we kicked off an investigation immediately. I remember personally discussing it with the head of HR at the time. It is very clear, and I am on the record internally—I have zero tolerance for disrespect for women and zero tolerance for sexual harassment. When I hear about that stuff, it is not permitted and I treat it extremely seriously.

When I heard about that, we immediately kicked off an investigation. The reason we used an independent person in this case was that we knew it was serious and we have in the past been accused of whitewashing things internally. I didn't want any possibility that we could be accused in this case that we had somehow brushed it under the carpet. That was not what we were going to do. In fact, we also knew, because the nature of the allegations had an element of 'he said, she said' about them, that the chances were, if this ended in his dismissal, that he would quite possibly take legal action against us, and we wanted to make sure that every box was ticked to make sure that we were prepared in that case. From my standpoint, our response is exactly what you would want. I have no tolerance for that. I wish we had picked this up and not hired the guy in the first place, but unfortunately that got through. But we took action immediately.

Ms BANKS: What you have just said and, indeed, the question of timing go directly to my point. An early trigger system in a risk management framework would have meant that Mr Hartzer would have been made aware of this much earlier; indeed, senior management would've been. I'm grateful that you are going to provide on notice a review of the risk management framework system.

Mr Hartzer : I certainly think it's a great suggestion. I would view that the spirit and philosophy of our risk management system is exactly in line with what you're describing. What I take as a good suggestion is that we go back and make sure that we have fully documented what the procedures need to be in cases like this. My view is that it probably is in place, but we'll check that.

Mr King : And, Ms Banks, we offer that we'd be pleased to come and talk to you about your thoughts on the systems, if that's appropriate.

Ms BANKS: It actually goes specifically to recommendation 7, and that's what I ask that you review. Are you prepared to do that?

Mr Hartzer : Yes.

Proceedings suspended from 10:54 to 11:04

CHAIR: We'll reconvene the hearing.

Mr KEOGH: Thank you for coming along, Mr Hartzer and Mr King. I want to talk a bit about fees. I would imagine that even small fees per transaction, or on a customer basis, when added up, are significant revenue for the bank. They might not be as big as interest made on mortgages, but it's a reasonable number so that when you consider removing a fee, it's a board level decision, I presume.

Mr Hartzer : No, it's not a board-level decision; it's a management decision. What I would say is transaction fees are significant but they've been falling pretty rapidly as a feature of the business, over time, as people switch to electronics, and most customers have been on a flat-fee package for many years now. Those excess transaction fees, which we announced yesterday that we're removing, those products, haven't been on sale for many years.

Mr KEOGH: When you look at making a fee change though, whether it's to remove a fee or reduce a fee—and not just looking at those changes you announced yesterday—there's a bit of, 'What is the modelling, what is the effect of this going to be and why are we going to do it?' It doesn't strike me as the sort of decision you make overnight.

Mr Hartzer : Correct.

Mr KEOGH: Can you take me through the decision-making process around removing ATM fees, what was involved in coming to that decision?

Mr Hartzer : Just as a background, as a reminder—I know you understand it but there are a lot of people in the community who don't—it's important to remember that we do not charge, and have not for many years charged, our own customers fees for using our ATMs.

Mr KEOGH: I think everyone gets that, because they use them.

Mr Hartzer : I know, from my own conversations, a lot of people don't quite get that in the way it has been played in the media. The fees that were still out there were fees, for example, for a customer of another bank using a Westpac ATM.

Mr KEOGH: What was the decision-making process to decide Westpac was happy to remove this fee?

Mr Hartzer : It is something that we had looked at over the last couple of years. We are aware of community issues that have been raised and customer feedback in the media and directly on different types of fees. That was one item that had been on our radar as, perhaps, a step we might take. It had been falling as a source of revenue as people shifted more to tap-and-go type payments. Then one of our competitors made a move—and we came to the conclusion, fairly rapidly, that that was the moment to remove them.

Mr KEOGH: There is analysis you need to do, you have considered it, you are aware of customer feedback around this and your competitor makes a move. I want to take you through this time line. On the day the Commonwealth announced it was removing that fee for non-customers of the bank to use an ATM they did that in the morning. By 1.53 ANZ announced it was cutting that fee. By 2.31 you announced you were making the same cut, and NAB cut at 3.12. That strikes me as a little odd, in this regard. Either you managed to assemble the people required to make a decision to cut that fee within several hours or you had already come to the view that the fee should be cut, subject to what your competitors were going to do?

Mr Hartzer : I would describe it in the way that I did, which is that it is something we had looked at, over time, so it wasn't an issue that wasn't familiar to us. We didn't have any plans immediately to do that. When we heard about the action of our competitor, exactly what you described happened, which is a bunch of us got on the phone and very rapidly came to the view that now is the time to cut it, and that's what we did.

Mr KEOGH: That's an interesting point you made there: you came to the view that you would remove that fee but came to the final decision to do it once a competitor removed it.

Mr Hartzer : No, I didn't say that. What I said is that we had considered it as a possibility of something we might do.

Mr KEOGH: Why did you not do it before?

Mr Hartzer : Frankly, because we think it's a legitimate fee. We know that customers are happy it's gone but, in a broader context, there's been a move for many years to try and remove cross-subsidies in the banking system—

Mr KEOGH: Let's look at that process. You said you think it's a legitimate fee, and I know from when I asked you questions about this before and you gave the committee information on notice that the additional marginal cost for you to provide that service to someone who's not a customer of your bank, given you're already providing it to all of your existing customers, is virtually negligible but, in any event, far less than the amount that was being charged to those people who were not your customers. You came to the view that you might look to remove that fee. You obviously did that sometime before the Commonwealth Bank decided to remove the fee. You immediately, upon the Commonwealth Bank deciding to remove the fee, followed suit within hours of the Commonwealth making that announcement. It strikes me that the bank was going to be happy to continue to charge that fee until someone else moved, which inevitably happened.

Mr Hartzer : That's hypothetical. I wouldn't necessarily see it that way.

Mr KEOGH: It seems realistic right now.

Mr Hartzer : That's your view. What I'm saying is we have looked at and continue to look at all of our fees and to balance up economic requirements, customer expectations, community issues and the like, and from time to time we make different decisions. That was absolutely an option that was on the table, but we had not, at that point, made the decision to do that.

Mr KEOGH: To me, that sounds a lot like the answers you gave to this committee when we had the first hearing about a year ago, about how the banks make decisions about whether to raise or reduce interest rates, particularly out of cycle with changes made by the Reserve Bank. You said that you keep all of our interest rates under review constantly and you make decisions as you make them. Interest rates are a big part of your business; it makes sense you have them under continual review. Continual review of ATM fees is a bit different. But, as you pointed out, you had reviewed them and you had looked into it, but you decided you could effectively get away with continuing to charge a fee that is much more than the marginal cost to providing that service. Given you have given me effectively the same answer for two quite different things, it does look like the small number of players that are in this game, while you might not have all spoken to each other, were all happy to stay there and charge a fee until one of you broke ranks. Then you all had to move because of the competitive pressure you were going to feel. Otherwise, you were happy to charge some quite potentially exorbitant fees to the Australian public while you thought you could get away with it.

Mr Hartzer : I don't accept the premise that the fee is exorbitant.

Mr KEOGH: It is when you look at it compared to the marginal cost of providing the service. It's 400 times the cost of providing the service.

Mr Hartzer : There are very significant costs of managing an ATM fleet that are more than the cost of the individual transaction.

Mr KEOGH: We know that, but you were going to provide that to your customers anyway. That's why the marginal cost was the important question.

Mr Hartzer : The number of transactions around ATMs, as a general statement, has been coming down and, therefore, the costs of sustaining that—the fixed costs aren't changing.

Mr KEOGH: We know all of that, but the point is that the cost is much lower than what you were charging. You were happy to keep charging it and you would have kept charging it until the Commonwealth Bank decided to change. It's not the point about the Commonwealth Bank; the point is that it would appear that all three of you were happy to keep charging that fee until one of the others changed.

Mr Hartzer : Again, I come back to point I was making before about fees. Running a modern banking network is very expensive. There are huge investments in technology and in physical footprint that are exacerbated by the geography of Australia, particularly when it comes to issues like ATM networks. Over the last decade or two, the regulators have encouraged us to move to an environment where user pays. ATMs are an example of that. You can go down a path—it is a very competitive market, and, of course, we pay attention to what our competitors do on things. The general point I am making is that those fees evolved as part of the economics of continuing to support a network. If you keep eliminating all the fees, there is a danger that you start introducing other cross subsidies, which I don't think is ultimately in consumers' interests.

Mr KEOGH: I don't think that really got to the point of my question, Mr Hartzer.

Mr Hartzer : Ask it again; I am happy to have another go.

Mr KEOGH: My point is there seems to be a pattern of behaviour here where the big four banks are happy to maintain rates or fees—maybe the questions Mr Coleman was asking you are another example of this—that are higher than necessary or required to recover cost, but are also happy to take money out of customers' pockets and will continue to do so unless there is some big influence that comes from the outside. In this particular case, it was that the biggest competitor that you have decided to remove the fee and you felt the competitive pressure, even though you considered removing the fee before they had moved, but had decided not to do it at that stage or had not reached a final decision at that stage. That's a pattern of behaviour that is looking very troubling to Australian consumers.

Mr Hartzer : It's a competitive market and we have seen significant changes that different banks make based on their assessment of where the opportunities are. We do, of course, pay attention to what other banks are doing. We also have to manage our own economics. In the end, we make judgements about these things, and on that occasion we made the judgement that the sensible thing was to eliminate the fee.

Mr KEOGH: To look at this another way, I am interested in competitive pressures. One of your largest competitors is running an advertising campaign at the moment that says that, apparently, three out of every four dollars it makes goes to shareholders. What is the statistic for Westpac?

Mr Hartzer : Probably the same.

Mr KEOGH: Broadly the same?

Mr King : It's actually higher—75 per cent.

Mr KEOGH: That's a little higher, isn't it?

Mr Hartzer : Yes. That is referring to the dividend payout ratio. Of our earnings, we pay a certain percentage out in dividends. In our case, our dividend payout ratio for the last half was—

Mr King : It was 78 per cent.

Mr Hartzer : There you go—78 per cent. So that is what that is saying.

Mr King : The vast bulk of our shareholders are domestic people. Super funds, insurance companies and individual investors are 80 per cent of our shareholder base. So that money goes back into the economy.

Mr KEOGH: Going back to mortgages, a lot was discussed previously in this committee about the proportion of the mortgage market that is held by the big four banks. Just remind me: what proportion is that for yourselves?

Mr Hartzer : We're at about 23 per cent, from memory.

Mr KEOGH: What does that figure go up to when you consider nonbank lenders that you may be financing?

Mr Hartzer : It wouldn't have a significant impact on that.

Mr King : That's right.

Mr Hartzer : Through our institutional bank, we do warehouse lending before, which means short-term lending that they securitise.

Mr King : It's about $10 billion of warehouse lending.

Mr KEOGH: So it's not a big function of what you do as a bank?

Mr King : It's $410 billion of direct mortgages and $10 billion of wholesale funding.

Mr KEOGH: So it takes it up to $420 billion effectively that you are sitting behind, whether it is direct or through an intermediary.

Mr Hartzer : But that's a short-term loan.

Mr KEOGH: I guess they're structured in a different way.

Mr Hartzer : We're a sort of pass-through, if you like. It's a short-term financing vehicle before the loans are fundamentally financed by the capital markets. The point is that it doesn't change our market share.

Mr KEOGH: To what extent are you in those capital markets from an institutional point of view?

Mr Hartzer : We wouldn't be buying a lot of them.

Mr KEOGH: But you're buying some?

Mr Hartzer : I'd have to take that on notice—but not a lot.

Mr KEOGH: Can you? If you can take that on notice—

Mr King : Where we buy securities it is predominantly government and semi-government securities to meet the liquidity requirements—the LCR and NSFR. There's a little bit of activity that we do to support liquidity in the RMBS market.

Mr Hartzer : What I am getting, though, is that the direction of your question seems to be about whether we are financing the nonbank market significantly. It's not a significant part of our business.

Mr KEOGH: If you could give us the detail on that on notice, that would be useful. It would be interesting to get a sense of the total exposure and the extent to which you and your competitors are also sitting behind what looks like the competition in the market. That then takes me to another question, which is about Uno—which I thought was a card game but apparently it is a mortgage start-up. There has been some criticism about this organisation, which Westpac holds over 90 per cent of the shares in, and whether it should be made apparent to people who are coming to that organisation for mortgages that, effectively, they are dealing with a subsidiary of yourself?

Mr Hartzer : Uno is a fin-tech start-up that we funded. It's a pretty exciting proposition, and I encourage customers to have a look at it. Essentially, it's a modern mortgage broker. It's all online. It offers pretty much every bank's mortgages, and there is no bias to any Westpac brand mortgages in that.

Mr KEOGH: Which is fine, and that would be promoted. But should it also be made clear that you own it?

Mr Hartzer : We own a significant portion of it.

Mr KEOGH: I think everyone would regard 90-odd per cent as you own it. You are clearly the controlling entity.

Mr King : I believe it is disclosed on the website.

Mr KEOGH: Is that part of what is disclosed to customers when they are taking a product from them?

Mr King : We'll have to take it on notice, but I believe it is disclosed on the website.

Mr Hartzer : It is no different than Aussie home loans being owned by the Commonwealth Bank. It is a mortgage broker but it's a modern mortgage broker for the digital age.

Mr KEOGH: And your view is that it is not favouring any of your products over—

Mr Hartzer : No.

Mr KEOGH: I know you've had a few run-ins with Apple about contactless payment systems. What is your view about how Apple is operating in the financial markets? Is the operation of Apple effectively stifling innovation and competition in Australia?

Mr Hartzer : We were part of an action, as you are aware, around Apple Pay. We have no problem with Apple Pay existing in the market and being there. We're participating in Android Pay and Samsung Pay and we are a banker to PayPal. We support all these things. The issue that we had was that we felt it was inappropriate that the only way you could do a card transaction using Apple Pay was through the Apple Wallet on the phone. Our view was: we had no problem with that existing but we felt that a Westpac app or another bank's app on the phone should also be able to access that view. They are controlling their walled garden, if you like, and stopping us from doing that. We think that's unfortunate for consumers and stifles innovation.

Mr HOGAN: Thank you, gentlemen for appearing today. I want to follow up on the ATM fees that were just raised earlier. It is great for customers that the ATM fee, if you're with a foreign bank, has been taken away—and can I just say that my wife often comments, when I take money out of a another bank, that we have been charged a fee. I am obviously lazier than her when I look for an ATM. As a regional MP, I have a concern with this which I will take you through. As you move away from capital cities to more rural and remote communities, ATMs become less viable. What are your plans for ATMs in regional and remote communities? Will you commit to not withdrawing ATMs from regional and remote communities? I ask you to comment on the suggestion that it makes economic sense to reduce your networks in the sense that, as there is no fee for your customers, is this going to generate a race to see who can withdraw ATMs first?

Mr Hartzer : First of all, we recognise that access to ATMs is very important in regional areas, and we are committed to making sure that we support our customers in those areas to be able to access their cash. You are right in that the economics are increasingly challenging for maintaining ATM networks in regional areas. The elimination of a potential fee to help defray some of the costs is a contributor for some of the ATMs. I don't know what the right answer is, but I do know that, just as we have worked with Australia Post on over-the-counter transactions to increase services in regional areas, as an industry, a number of banks have been discussing whether there should be an opportunity to share networks more broadly in order to cover and share the fixed costs of doing that. That was one of the conversations that was underway earlier in the year—and I think it's been reported in the press. It hasn't gone anywhere yet, but I certainly wouldn't rule out that that might be a possible solution.

Mr HOGAN: I applaud that. If there are two ATMs in a small community, they can lose one but, if they lose both, that is going to cause great distress. If that discussion is going on with the banks, that's wonderful. The next issue: most people would say APRA regulation—besides maybe you—with capital requirements has created an uneven playing field with you and the next second-tier banks. Also the risk weights for housing have become particularly skewed in the sense that housing has a lower LVR. I've got a few questions on this. Are you targeting low-LVR housing assets at the expense of loans to more productive areas such as small business? What has been the change in your asset mix since gaining advanced accreditation? My understanding is that you have increased your asset allocation to housing mortgages. How do you think taking money from the small business lending area to the housing area assists the broader economy? How do you look at the impact on your remuneration when you are making decisions on capital allocation?

Mr Hartzer : I might talk about the general philosophy and some of the premises of your question, and Pete can perhaps talk about the risk weightings and how that plays out. Firstly, there is not in our mind a trade-off between lending for housing and lending for small business. We are supercommitted to supporting small business. It is one of our most—

Mr HOGAN: I ask: why has your lending to housing, in relative terms to small business, become completely skewed? Why has lending to housing taken over and dominated your lending relative to small business?

Mr Hartzer : Because the demand for housing has been rising high. We're in an economy where there's not enough house construction relative to the demand for new housing dwellings. We haven't been building enough housing and, at the same time as interest rates have been falling, the combination of that has pushed up the price of housing and therefore pushed up the demand for housing lending to meet that price. I think the important point here is: we do not constrain our growth in small business lending; we do not see it as constrained by capital. The only constraint is demand and risk quality. If we look at our SME—our small- and medium-sized enterprise—lending over the last 10 years, it's doubled. We went from about $40 billion to about $80 billion today in the last 10 years. We want to grow that business, and there is no constraint on that growth.

Mr HOGAN: So you were saying this has been grass roots led—that you have not made a decision within your executive team or at board level and said, 'You know what? We're going to wait and put more money into housing because of X, Y and Z'? You are saying that that decision has never been a conscious decision—that this has simply been demand driven?

Mr Hartzer : Correct. And if you could help us grow small-business lending more, we would love it. We would like to see more demand and more businesses looking to invest. We would very much like to see that.

Mr HOGAN: I just want to follow on from some questions that I asked last time. It was after the Sedgwick review into banks. We talked very much re the sales versus the service culture. I think you alluded to—I forget who asked the question—your divesting of some of your BT wealth creation arms. Obviously, you see a great conflict there. I think you at least admitted it—some other CEOs didn't—and said historically there had been a focus on sales and not service. You have now said that you have weighted things different and that your frontline staff do have a service component that has measured customer service. You have taken the incentive payments away from frontline tellers who, really, don't do that much selling. But, obviously, your financial planners, the ones you have—your loan staff and managers—still have a very heavy proportion of their bonus or their remuneration based on sales. Do you think you have done enough? Obviously, you are going to say 'yes'. But, obviously, there's going to be a lot of concern out there given you still have heavy financial incentives for those staff to sell. Do you think you have gone far enough? Or are we going to be talking about the same things in five years time?

Mr Hartzer : I feel comfortable with where we are, although we will continue to look at it. And this area continues to evolve. Our philosophy at Westpac—I can't speak for the others—is: we are trying to grow our business by growing the number of customers who entrust their banking and their life savings and investments with us. To do that, we need to deal with them as if we're going to bank them forever. That means that the decisions need to be free of conflicts of interest, that our people are focused very much on the quality of service they provide and that the advice and recommendations that they give them are in the best long-term interests of those customers. If you don't do that, that goes wrong.

If I can address part of your question, with respect to our financial planners they are not paid commissions based on what they sell. They are paid a flat fee for providing advice, and it's not biased by what they do. From a profitability point of our business, our goal is more and more people consolidating more and more of their business—their financial assets—onto our platforms for which we earn a small administration fee. And that fee will probably come down over time. But if more and more people find it convenient and it good quality advice to consolidate their business with us, then our business will grow. We think that is a business strategy that is totally aligned with the interests of customers.

Mr HOGAN: I take that. I certainly understand that, with your performance measurement, you've moved away from solely remuneration and sales. But I still see that with the mix that you have there were at least some service-orientated things that may still be an issue. I want touch on an issue that I have read about in the last day or so. You have changed fees on something. You have a $5 cap on transaction accounts or transaction costs for certain accounts.

Mr Hartzer : Yes. Historically, banks' product sets have evolved over many years. A number of years ago we changed our transaction accounts so that the only products you could buy were products that charged a monthly maintenance fee of $5, and you could do as many transactions as you wanted for that and there were no extra fees. So a $5 flat fee—that's it. However, we had customers who had taken out products previously—some going back 20 years—where the structure of the product was they paid a fee and they got a certain number of transactions for free and then, above that, they would pay a transaction fee for excess transactions. As part of the review that I talked about—the getting it right, putting it right—we've been going through all these historical products. We found that there were some customers who were still in those structures. We took the decision, which we announced yesterday, to eliminate all the excess transaction fees and reduce the monthly fee on those types of accounts back to $5. So all those remaining customers who were in products that we don't sell anymore but they still had have been reduced.

Mr HOGAN: Are there customers who were potentially paying nothing in really old accounts, or paying less than $5, that are now going to pay $5?

Mr Hartzer : No—well, there are some accounts where you pay nothing if your balance is above a certain amount. But—

Mr HOGAN: Will they now pay $5?

Mr Hartzer : No, we haven't changed that.

Mr HOGAN: So there is no customer that is worse off? This is obviously—

Mr Hartzer : No customer is worse off: 1.3 million customers are better off and no customers are worse off.

Mr HOGAN: Okay, great. Thank you.

Ms MADELEINE KING: Thanks for coming in today. I just want to go over a few things others have said and then get back to my original questions. Earlier, Ms Banks, the member for Chisholm, raised recommendation 7 of the first report—the majority report, I must add—of this committee. It wasn't agreed to by everyone here. This is about the review of the risk management framework. You agreed to have a look at the recommendation again, but I would have thought that there's not much motivation to do that, is there, given that the government itself didn't agree to recommendation 7?

Mr Hartzer : Well, we're happy to look at it. As I said, there's a couple of suggestions there where perhaps we can clarify the way we run our—it's in our interests to have the best control framework that we can have. We're not objecting to scrutiny. Our response to that is a pragmatic one: our view is that if people come and look at this in detail, and our regulators are very skilled at this, then there's no need for an extra review. That's really it.

Ms MADELEINE KING: Sure, thanks. And just while we're on risk: I think you said right at the start of your evidence here today—when we were talking about the intelligent deposit machines and those automatic deposits—that Westpac's risk assessment has brought to you the conclusion that $4,000 on a deposit limit is about right, whereas CBA has a limit of $20,000. Presumably, they make theirs on risk assessments, and I know you can't speak for another bank, but do you have any insight as to why Westpac's risk assessment varies so wildly from the Commonwealth Bank on this?

Mr Hartzer : You would have to ask them about where they were, and where they are—

Ms MADELEINE KING: I will.

Mr Hartzer : We did experiment with some of those machines. We have since removed them all. We did it in a different way. I think we had seven of those machines that we experimented with. We put them all inside our branches and gave extra training to our people, specifically to be on the look out for potential money laundering and so on. For operational and risk reasons, we came to the conclusion that we didn't want to use those machines and that our $4,000 limit on the existing smart machines was appropriate.

Ms MADELEINE KING: Okay. I will just go back to the questions from my colleague the member for Burt on the ATM fees. You announced on the 24 September, as did everyone else, that you would stop charging the $2 or $2.50 fee. CBA went first on that announcement, and my understanding is that they stopped charging that fee almost immediately but that Westpac and the other banks didn't bring that cancellation fee in until 5 October. Is there any reason for that? Why one—

Mr Hartzer : That would just be technical and operational. They'd obviously been working on it for a long time. Bank systems are complex; we have multiple brands and it takes time to do these things. If you put a technical change in you've got to test it. We did it as fast as we could.

Ms MADELEINE KING: Yes, on the back of an announcement. So, you've been talking about it before, as you said, but then after—

Mr Hartzer : It was on our radar as an option.

Ms MADELEINE KING: I understand.

Mr Hartzer : We're very conscious of the reputational issues. We've been looking at lots of possible changes and that was one possible change. They announced it and we went, 'Okay, we're going to do that one; now we just figure out how we do it.'

Ms MADELEINE KING: Right, so they were a bit more ready for it and they were able to cancel it straightaway. They had it at the front of their minds for a while and so it has just taken you and the others two more weeks to make that come through because of technical issues.

Mr Hartzer : Technical and operational. We have to communicate with staff and we have to explain what it means. It just takes time.

Ms MADELEINE KING: Right, okay. I just want to go back to the contactless payment systems that the chair was asking you about earlier. I don't think I was quite clear on some of the operational parts of that. What I want to understand—and I think what we would all like to understand—is who chooses whether that underlying payment system of EFTPOS or Mastercard or Visa is applied at the contactless point-of-sale machine?

Mr Hartzer : Well, essentially, today the customer chooses, depending on which card they pull out of their wallet.

Ms MADELEINE KING: So the machines sit at my grocery store or wherever I am. I can pull out my Mastercard or I can pull out my EFTPOS card, and that's where the choice is made?

Mr Hartzer : Yes.

Ms MADELEINE KING: And both can be contactless?

Mr Hartzer : Yes. Or, if you have your cheque or savings account linked to your Visa or Mastercard credit card, you can insert the card and effectively override the contactless by choosing cheque or savings.

Ms MADELEINE KING: So the choice is not with the merchant that is using that system. It's not with the grocery store or the retailer. It's not with the bank. It's with me as a customer in that shop as to what card I pull out of my purse.

Mr Hartzer : Essentially, yes. And there's no difference in cost to the consumer. The cost to the consumer is exactly the same, which is zero.

Ms MADELEINE KING: It's the same for me buying the product, but it's not the same for the merchant selling the product. It's a bit higher for Visa and Mastercard than for EFTPOS.

Mr Hartzer : That's correct. The argument for that is that Visa and Mastercard bring extra benefits to the merchant and they pay for that in the interchange.

Ms MADELEINE KING: I wouldn't disagree. There's no presumption made by any of the banks as to what a customer wants. It's all up to the customer when and how they choose to pay.

Mr Hartzer : Yes.

Ms MADELEINE KING: When the payments happen, do Westpac and the other banks receive a higher fee from a customer—a purchaser like me—using Mastercard or Visa?

Mr Hartzer : Yes. If you're one of our customers and you go and make a purchase in a merchant, depending on which card you have, a different interchange will come back to us. The reason for that is that there are typically different benefits associated with using Visa or Mastercard versus an EFTPOS card.

Ms MADELEINE KING: Like points.

Mr Hartzer : Points, interest-free period, other reward benefits, international access, chargeback rights. When you do an EFTPOS transaction, the money's straight out of your account. If you do a credit transaction, you've got dispute rights and the like.

Ms MADELEINE KING: I do understand it's a purchaser choice. But the bank gets a bit of an extra fee and, of course, if you go into debt on your credit card, the banks are going to be better off because there's an interest payment, understandably.

Mr Hartzer : Assuming you pay it back. There's an important point that I should make in this: banks do not make profit—I don't know if we make any profit—out of interchange fees these days. The interchange rate has been brought down very, very low to essentially be a cost recovery mechanism. The convention is that, in terms of the benefits provided for loyalty points and the like for most people, that absorbs pretty much the entire interchange fee. I wouldn't want people to come to the conclusion that there's this kind of secret profit pool in interchange. The interchange is a cost recovery mechanism for the most part.

Ms MADELEINE KING: That idea is out there.

Mr Hartzer : That's because historically interchange was a lot higher. But it has been brought down dramatically. Australia has one of the lowest interchange rates in the world.

Ms MADELEINE KING: I was saying that those ideas that you might be making more fees than you need to are out there because of the reputation issues that are permeating through the community.

Mr Hartzer : That's why it's nice to have the opportunity to clarify that.

Ms MADELEINE KING: I'm grateful for it. I've got articles in front of me from financial journalists that seem to indicate otherwise.

Mr Hartzer : If that's the article I'm thinking of, it also misses the fact that the interchange fell again in July. That isn't taken into account in that.

Ms MADELEINE KING: I've got a query about your appearances before this committee, and specifically this inquiry. How many hours do you spend preparing to come here every six months to talk to us?

Mr Hartzer : A lot.

Ms MADELEINE KING: At a guess?

Mr Hartzer : A lot.

Ms MADELEINE KING: Like a week's worth, or a month?

Mr Hartzer : Collectively, for me personally and for Peter, it's probably three or four or five days of our time. But there are a lot of other people who help bring the information together. It's a significant impost, but we're happy to do it.

Ms MADELEINE KING: It's similar for us being on the committee—there's preparation and reading and compilation. I refer back to what the member for Chisholm said earlier: there are a whole lot of newspaper articles. Basically, that almost informs what we talk about here. To me, that doesn't seem like the best use of everybody's time, that we just come here and do this inquiry. The first inquiry made recommendations, the second one made those recommendations again—a little more but not much—and we're likely to do much the same again. And you'll go away and there'll get another bunch of newspaper articles in six months time. It seems to be an endless loop dealing with a banking culture and a perception in the community. I don't want to linger on this point, but do you think it's helpful or not?

Mr Hartzer : We're happy to appear.

Ms MADELEINE KING: Right. Do you think there's a better way? You know I'm an advocate for a royal commission into the banks. I think that doing it in a more thorough and a better resourced manner—

Mr KEOGH: This might be cheaper.

Ms MADELEINE KING: I think we have to address the problem here and address it more fulsomely with the resources that are required to do it. Otherwise you're going to have to keep coming back for years.

Mr Hartzer : My view on that is that the resources required for a royal commission would be many multiples of what's required for this. Our view is we're totally transparent about the issues that have been raised. We're happy to come here and answer questions you've got. We're happy to take issues on notice. We're an open book. I think we have demonstrated through our actions that the legitimate issues that have been raised by the community are being taken seriously and are being addressed. Frankly, if you think a couple of weeks a year of my time preparing for this takes up a lot my life, I can't imagine what a royal commission would do.

Ms MADELEINE KING: I've no doubt a royal commission will take up a lot of time for a lot of people.

Mr Hartzer : The point is we're getting on and taking action now to implement the reforms that we need to do. I don't think a royal commission would change that.

Ms MADELEINE KING: But do you see my point that every six months we're coming back and going through the same kinds of things. We still have this accumulation of newspaper articles, and I wonder if this is the new normal.

Mr Hartzer : There's certainly higher scrutiny on banks and we accept that. The point is we're getting on and making changes wherever we see an opportunity to fix something.

Ms MADELEINE KING: I thank you for coming here and for the work you do. I would like to see a more rigorous look into the culture of banks so that we might get past this problem of the poor reputation that has now been going on for some time, for years, and that it can end, so that Australian consumers and investors don't have to see our banks be called into question almost daily in the press. I will leave it there. Thank you very much.

Mr BUCHHOLZ: I think that is a wonderful segue into the effectiveness of this committee. My line of questioning during this inquiry has been around credit card interest rates, and I want to congratulate your bank for the nimbleness that it shown in reacting to the committee's concerns about low-rate credit cards. Congratulations on the launch of the Westpac Lite Card. It goes directly to the issues the committee raised around household costs. Not every consumer in your book has an overdraft, not every consumer has a mortgage and not every consumer has a business loan but most of them have a credit card. I think the credit card facility was launched in June. Do you have any data as to how it's been received by your clients?

Mr Hartzer : It's been well received as an option and an initiative by a number of clients. We've already had several thousand people take out the card, but the promotion of it is still in the early stages.

Mr BUCHHOLZ: In earlier hearings you said that you tailor things. If a client is not in the right product, you try to put them in the right product. Is there an intention to migrate existing clients to that, or is the early take-up from new clients migrating away from other banks, where the interest rates may start with a 20 rather than single digits?

Mr Hartzer : It's a good question. It's a bit early to say where the flow of new customers is coming from, but I certainly agree with the point that we think that one of the ways that we can do the right long-term thing for our customers—and this has been a learning over the last couple of years—is the reasonable expectation that banks, using our data, look at how customers are using products and, on a relatively frequent basis, where we see a customer who isn't in the right product, seemingly, from the way they're using it, make suggestions to them that they might want to consider a different product and make it easy for them to switch among those products over time. I see no reason why Westpac Lite wouldn't be part of that discussion for some customers.

Mr BUCHHOLZ: Attached to Westpac Lite, what's the SmartPlan?

Mr Hartzer : The SmartPlan is another example of something we've developed which I'm really proud of. As we've discussed before, a credit card is designed as a revolving facility. It's not meant to be a long-term interest rate that you pay to pay off a big purchase over a long period of time, but, of course, we do know that some customers in effect have used it like that. So what SmartPlan does is say that you can allocate a particular purchase or a particular amount and put it onto an instalment line that then is paid out of your limit on a regular basis at a lower rate of interest over time. Essentially, it combines an instalment loan with a credit card, and we think that's a more responsible way for customers to finance larger purchases.

Mr BUCHHOLZ: I want to pick up on some of the issues raised before, particularly by Mr Keogh. When you sign up to Westpac Lite, do you have the option of Visa, Mastercard or EFTPOS?

Mr Hartzer : No, Westpac Lite is by definition a credit card, so it would run on the scheme rules.

Mr BUCHHOLZ: Visa or Mastercard. Does it also have a debit facility?

Mr Hartzer : No, but a customer who separately has a cheque account and links it to that card would be able to use that same piece of plastic to access their cheque or savings account.

Mr BUCHHOLZ: I think the product hits a certain spot in the market, and I'm going to close by complimenting the nimbleness that your bank showed. I can only assume that you wouldn't be making these decisions on the prospect of a royal commission. My colleagues will scoff, but I do want to congratulate you. My consumers in my electorate are not that well off and any saving that they can get passed on through a bank to them will be appreciated. I will do my bit in getting out in front of the shock jocks around Australia to let them know that I think you've done the right thing in that space. Thank you.

Mr Hartzer : Thank you.

Mr BANDT: Mr Hartzer, last time we were here we had a discussion about Westpac's commitment to two degrees with respect to climate change and also about coalmining. Since that time, Westpac's issued a comprehensive climate statement. I want to draw your attention in particular to that part of it that deals with the energy system, including coalmining, and sets out the new rules that Westpac's going to apply for future lending. Could you please perhaps start with a bit of background and give the committee an explanation as to your thinking behind coming up with that decision and that new set of rules.

Mr Hartzer : Sure. The climate change policy that we launched in late April or early May was something we'd been working on for about 18 months prior to the announcement. We regularly update our climate statement every three years. One of the main issues that we've been grappling with—and I think the community at large has been considering—is: how do we move toward a two-degree economy, by which we mean moving to zero net emissions by 2050? In our mind, we're very conscious of our responsibility in supporting economic growth in the economy as well and that there is a reality of life at the moment that there's a need for base-load power to support the economy and keep costs down for businesses. But we need to start that transition. So the question we asked ourselves was: how best to make positive steps toward the transition so that we put ourselves on a path toward two degrees without knee-jerking too far one way or the other?

The conclusion we came to was that we would limit the finance of coalmining to the highest quality of coal, where the calorific value of the coal being produced was in the top 15 per cent and, similarly, we would not support the development of new coal basins but we would—subject to the quality of the coal being okay—support expansion in existing basins. Behind that thinking was, if you're going to move to transition, given the long life a new basin would have, we weren't convinced that would be environmental or economically sustainable, but it gave us some ability to support the current position while we shifted towards renewables. At the same time, we announced a commitment to further increase our investment in renewable energy sources, dramatically, over the next few years.

That was our attempt, recognising it's a complex issue, that we need to support the existing economy and take steps to shift to a more renewable future—to try to strike that balance and take a constructive and thoughtful step in that direction.

Mr BANDT: I appreciate that statement. Obviously, a lot of this came in the context of, amongst other contexts, a public debate about the Adani Carmichael coalmine. I understand you've been at pains to say publicly and to the committee that you're not going to comment on individual customers and what decisions you might make about individual customers. But it's relevant, in the context, in that you've made a decision that's drawing a line in the sand with respect to new coalmines, even where they might be with existing customers, as I understand it. So this will affect the decisions that you make, in the future, about what projects you might or might not support.

I want to better understand those rules and how you're going to apply this, particularly in a context where the policy says that you're including, within this thermal coal sector, not just mines but terminals, coal-handling terminals themselves, you say. In a general sense, if a coal-handling terminal is going to exist predominantly to support the creation of a new coalmine that you otherwise wouldn't fund, will you then fund or support that coal-handling terminal?

Mr Hartzer : The general approach is as you described, which is that we are focused on existing basins and existing resources that meet the highest quality of coal and that we include, in our thinking around that, the infrastructure related to that. Without commenting on any particular situation, if, in the end, you had a piece of infrastructure that only related to financing of a new basin, that would most likely not meet our criteria.

Mr BANDT: Effectively, if someone came to you and said, 'We want you to help us support a new coal basin,' you would apply a certain set of rules, the rules that you set out here. And if someone came to you and said, 'We've got an existing terminal but we want you to help finance it or refinance it so that we can go and construct a new coal basin and make it viable,' you'd apply the same set of rules to that terminal as you'd apply to the coal basin.

Mr Hartzer : I suppose it would depend on the situation, but the general principle of what you're describing is correct.

Mr BANDT: A couple of other banks have said to us that they're starting to look at, in a bit more-fine grain detail, how climate risks might affect lending practices in the household sector, and, in particular, whether or not properties on the coast or in low-lying areas might now be worth less because they're subject to flooding from sea level rises or riverine flooding and that, in the future, they might require a higher or lower LVR or that they don't lend at all. Has Westpac started looking at that?

Mr Hartzer : It's certainly been a topic that we've begun to consider. As you can imagine, it's an easy thing to talk about at a high level. When you start to get into specific situations it gets a lot more complex. But it's definitely an issue that's on our radar.

Mr King : We also require that people have insurance for their houses. So, at the moment, we're seeing people being able to get insurance. That would be a first sign—if something's moving in the insurance market, there could be an interplay between insurance and banking.

Mr BANDT: Have you noticed any changes on that front yet in the insurance market? Do you ultimately see this as an insurance issue rather than a banking issue?

Mr King : It's both.

Mr BANDT: Might you be in a position, similar to some of the other banks, where you say, 'We're not going to write you that mortgage, because there's a chance the value of your house could collapse if sea level rises are as predicted'?

Mr King : It's not a major consideration at the moment, but we think about it. Whether it's in the corporate book, the business book or the consumer book, we think about climate lending.

Mr BANDT: Coming back to power and power generation in particular, I notice you've set a new target for the profile of your generation portfolio. You want to get it down to 0.3 tonnes per megawatt hour, and it's currently at 0.88 compared with a national average within the electricity network of 0.9. What's going to be required for Westpac to do that? It's a substantial drop and a good drop. How are you going to make it happen? That 0.3 might be less than some gas fired power, for example, that's currently out there.

Mr Hartzer : We're continuing to work on that subject. Our view on those things is we found it effective over time to set aspirational goals for ourselves and work back to figure out how to do it. In that example, that's something we continue to talk about with our providers, our broad range of suppliers and our customers involved in the sector. We continue to look for places where we can be innovative in this.

Mr BANDT: It's obviously a goal, though, that you've set, informed by a fair amount of research. It's not a goal that one would come to lightly, and it requires a significant change. Do you have a sense of what that is going to mean in terms of the proportion of your exposure to power generation? That might mean you end up having to fund 70 per cent renewables, 20 per cent gas and no coal, or 10 per cent coal. What is it?

Mr King : The big uses of power in the company are property, lights and the data centres. How we improve our use of electricity will play a big part in it, and then where we get it from. We'll look at the best ways in the mix to do that. We haven't set a percentage target for exactly where you get it from. You have to work both ends.

Mr Hartzer : Suggestions are welcome, though.

Mr EVANS: I'm going to focus my questions today on small business lending, specifically non-monetary default clauses and the unfair contracts legislation, but I might ask one follow-up to those questions that Ms King and the chair asked in relation to bank cards that both have EFTPOS and Visa or Mastercard capabilities. If the customer doesn't insert their card and manually choose an option, there must be a default rule, a default setting, as to which one of those systems wins out. Who sets that default setting?

Mr Hartzer : It's very simple. If it's a Visa or Mastercard branded card, it goes to their systems.

Mr King : It's what the card is.

Mr EVANS: And you can confirm, can't you, that there is a cost difference for a transaction of a consistent amount, depending on whether it goes down the EFTPOS road or the Visa or Mastercard road?

Mr Hartzer : Yes.

Mr King : The RBA has published a lot of data on that.

Mr Hartzer : I will use this opportunity to emphasise again: the rate is set by the RBA.

Mr EVANS: Understood. On unfair contracts, I noted in your opening remarks you mentioned that later this year you'll be launching a new small business finance agreement. I think you said shorter, plain English, electronic. That's great, and I congratulate for you for that. That's for new loans for small businesses. Obviously there are a significant number of existing small business loans out there to consider as well. I think it was in late August that Westpac and the other banks reached an agreement with ASIC and the Small Business and Family Enterprise Ombudsman to remove certain unfair provisions from your small business lending contracts. Can you in passing confirm that that's for that existing pool of small business loans and, maybe as part of the broader answer, do you want to tell us a little more about exactly what it is that you committed to as part of that agreement?

Mr Hartzer : Sure. I think we should separate this around the size of loans and, just as a backdrop, we are happy that these issues have been raised. It's been a useful exercise to look at them and go back and look at our contracts to make sure that they're working well for the customers and the bank. In any contractual issues around loan documentation, there is a risk and a reward, or a risk and cost trade-off so that, if you have more protections, the cost of credit can be lower; if you have fewer protections, there's potentially a cost implication. So we've been keen to make sure that we get the balance right while preserving the protections that matter.

When we looked at it, one of the—sorry, one more background statement—challenges with small business is that the term 'small business' covers a vast array of companies of different sophistication and size. There is no standard common definition that everybody uses for the same purpose. There is a reason for that which is, depending on what your question is, that business is grouped together in different ways, whether it's their borrowing requirements, their turnover, the number of staff they have, the sophistication of their corporate structures—there's quite a lot of variation. What we did was, when this issue was raised, go back and look at, in the first instance, small business customers who had loans under a million dollars. What we found historically was—for Westpac, anyway—we had never, to our investigation, found an example where we had relied on a non-monetary default clause in a situation. They were there for historical reasons, but we'd never used it. Given that we'd never used it, we said, 'We're happy to let those go.' What we are doing on those loans is writing to all of our customers—I think by the end of the year it'll be complete—formalising a waiver that says: 'We will not apply these clauses.' That will cover all existing customers of loans under $1 million and, when we bring in the new loan contract, that will be clear for new loans.

If I then think about customers between $1 million and $3 million in lending—the second tier—for the most part, the vast majority of the time, again, we don't even need those clauses. Again, we have almost no examples of where they've ever been used and, in fact, we can't find any examples since the GFC where, for those customers, we've used a non-monetary default clause exclusively. It's always been a monetary issue with those customers.

Mr EVANS: Other than non-monetary default clauses, were there any other major areas of provisions or groupings of clauses that you reached agreement with the ombudsman to remove?

Mr Hartzer : I'd have to take that on notice. Where the debate has continued to be is around: where do you draw the line on the exclusion of these clauses? The backdrop here is we have no desire and it is not in our interests to push people out of their business. When customers get into trouble, we want to help them get back on their feet. That is actually in our commercial interests as well as in the customer's interest. However, there are certain businesses and certain kinds of businesses where we need protections—if the business is dependent on a certain business licence and they lose that licence, then we need an ability to take some steps to intervene; where there are property developers and you're building a property and there are no payments until the property is completed, if the development falls over, you need an ability to deal with that. There is a series of examples like that which are all, when you talk through them, perfectly reasonable where they apply.

What we have found from our own analysis is: 99 per cent of what people consider to be small businesses have loans under $3 million. If you deal up to $3 million, you have essentially, in our view, dealt with the issue,. On average, when you get above $3 million, you start having more and more complexity of business than corporate structures and the like where the needs of what you have to have as protections from a risk point of view become more significant. So we're trying to have a reasonable and fact based debate. We accept the principle of where we are trying to get to, which is that customers feel the contracts are fair and that banks behave reasonably when a customer is in trouble. There are some details that need to be worked through.

Mr EVANS: You actually answered a lot of my follow-up questions, so I promise my fellow committee members that we did actually save time. Just to confirm you're on track for end of this year for under $1 million—

Mr Hartzer : Correct.

Mr EVANS: And you are committed to under $3 million by some stage next year.

Mr Hartzer : Early next year.

Mr EVANS: And you still broadly disagreeing with the ombudsman's recommendation that that be extended to $5 million, for the reasons you just outlined?

Mr Hartzer : We disagree with a simplistic definition of $3 million. We are comfortable to go up to $5 million with noted exceptions where we believe they are appropriate.

Mr EVANS: In relation to the new code of banking practice, that is to be finalised by the end of this year, is it?

Mr Hartzer : Yes.

Mr EVANS: Can you tell us the main ways that the revised code will deal with small business lending practices?

Mr Hartzer : I'd have to take the details of that on notice, but the general point is to make it simpler, plain English and provide more protections for customers.

Mr EVANS: Happy to ask you that on notice.

Mr CRAIG KELLY: Earlier this year, you had your 200th birthday celebrations and there were pictures in the paper of those celebrations being interrupted by anti-Adani coalmining protesters.

Mr Hartzer : Yes.

Mr CRAIG KELLY: At that particular time had Adani actually approached you for a loan for their coalmining—

Mr Hartzer : No.

Mr CRAIG KELLY: Had they had any preliminary discussions about getting a loan from you? Was there any informal application?

Mr Hartzer : I don't want to go into the details of our client relationships, but we said on record many times that we had not been approached to fund that mine.

Mr CRAIG KELLY: Did you think that it was a surprise that such a protest occurred asking you to not fund a project you had never been asked to fund?

Mr Hartzer : We made the point at the time that we thought that was slightly odd.

Mr CRAIG KELLY: Several weeks after that you changed your climate investment policies to increase the threshold of the calorific value of what coal should be before you would loan money for a development. Is that correct?

Mr Hartzer : Yes.

Mr CRAIG KELLY: Is it 6,300 kilo calories per—

Mr Hartzer : I forget the exact number, but it is set on the basis of the top 15 per cent of coal production.

Mr CRAIG KELLY: Is that coal production worldwide?

Mr Hartzer : I believe so.

Mr CRAIG KELLY: Of Australia's $19 billion worth of coal that we exported last year, how much of that would fall below that 6,300 level?

Mr Hartzer : I'd have to take that on notice.

Mr CRAIG KELLY: Okay. Going forward, can you give us some background on the reason that you selected the 6,300 figure?

Mr Hartzer : Yes. As I explained to Mr Bandt previously, our climate change policy is something that we update every three years. This time around we have been working on that policy for around 18 months. Clearly, the position around coal and coal production was a significant issue for us to think through. Where we landed was that the existing basins and the quality of coal being produced there would meet that top 15 per cent benchmark. It was actually set based on—you probably know better than I do what the definition is—a worldwide standard for coal produced.

Mr CRAIG KELLY: So you still have current investments with coalminers in Australia?

Mr Hartzer : We currently lend to coalminers in Australia, yes.

Mr CRAIG KELLY: Are they all above that 6,300?

Mr Hartzer : I think the answer to that is yes, but certainly the majority are.

Mr CRAIG KELLY: You also have a banking licence in India as well.

Mr Hartzer : We have a limited licence and a branch in India, yes.

Mr CRAIG KELLY: Does that enable you to loan money in India to Indian customers?

Mr Hartzer : Yes, in some circumstances, but I'd have to take on notice the exact details of what we can and can't do.

Mr CRAIG KELLY: Okay. Does that policy that you have for that threshold of coal apply in India as well?

Mr Hartzer : Yes.

Mr CRAIG KELLY: Are you aware of what the threshold is in India for their coal—what their average production and calorific values for their coal stands?

Mr Hartzer : No.

Mr CRAIG KELLY: If it was the case that the average calorific value of Indian coal was substantially below that 6,300 level and production in the Galilee Basin was around, let's say, 5,000 kilo calories per kilogram, if that was to offset production of Indian coal, which was, say, around 3,000 kilo calories per kilogram, wouldn't that actually be a better outcome for the climate?

Mr Hartzer : I understand the question that you're raising and the hypothetical point. What we can focus on is the loans that we do here in Australia and the contribution we can make. Our conclusion was that, for the Westpac group, setting a benchmark like that for the projects we would support was appropriate.

Mr CRAIG KELLY: But you said you did that for reasons of climate policy rather than economic policy?

Mr Hartzer : It is a combination.

Mr CRAIG KELLY: If that export of Australian coal, if it was at a value of 5,000 kilocalories per kilogram, offsets production in India, surely that has to be better for the climate; and therefore the policy you are actually implementing has perverse outcomes in relation to what the goal is?

Mr Hartzer : There are two points in that. One point is that we don't lend to coal mines in India, as far as I know. It is purely hypothetical about what any offset would be in India.

Mr CRAIG KELLY: Surely the project in the Galilee Basin is to export coal to India, which would therefore decrease the local demand for lower grade Indian coal?

Mr Hartzer : I'm not going to comment on the specific project. I'm saying that the other component of our decision making was around the time frame and the need for transition. Part of our conclusion was that the time frame around creating and opening and funding a new basin—our concern was that that wouldn't stack up.

Mr CRAIG KELLY: Do you expect the anti-coal protesters to go away at your next 201st birthday celebration? Do you expect them to be back, or do you think you've pacified them?

Mr Hartzer : 2017 was a one off.

Mr THISTLETHWAITE: According to Adam Creighton, a writer for The Australian newspaper, Australian banks are 'world champions at foreign exchange gouging'. He wrote a story on 2 October which points out, in his view, that Westpac and the Commonwealth Bank would charge a customer $610 to transfer $10,000 to a British bank account. That is 6.1 per cent. Is that figure true?

Mr Hartzer : I am not aware of exactly what that figure is or how it is calculated. We are conscious of trying to bring down the cost of foreign exchange transactions for small transactions. We recently introduced something called LitePay. It's an online facility that allows people to transfer money to something like 35 countries around the world very, very cheaply. I think it is under $10 for a transaction. That has been live for a couple of months.

Mr THISTLETHWAITE: According to this article, this figure of $610—which, if it's true, is basically highway robbery—is made in what is called a mark-up. You charge an inferior exchange rate to the customer than the exchange rate that you pay for transferring the money. Why don't you disclose that you're charging the customer an inferior exchange rate compared to the exchange rate that you pay for the transaction?

Mr Hartzer : I believe that we fully disclose what we do. This is subject to lots of regulations around disclosure and foreign exchange. We continue to update those over time. What you have to look at—which we are happy to look at offline—is what kind of transaction it is and what sort of operational controls are involved. The rates in the wholesale markets in large volume are different to the rates that are going to happen at a retail level when there's physical cash involved or lots of operational intensity. What I think I can show with LitePay is that we have been conscious that it is fairly expensive at a retail level for people to transfer money and we're trying to develop new ways to do it that are more efficient and cheaper for customers. LitePay is available now. It's a very low cost and efficient way to make a foreign exchange transaction.

Mr THISTLETHWAITE: Why has it been more expensive with Australian banks compared to other international banks? In this article they compare that $10,000 transaction. They say you and Commonwealth charge $610, while German banks like Deutsche Bank charge 50 euros to convert 10,000 euros, which is a 0.3 per cent mark up, and a US bank would charge about 3 per cent. Our banks are charging 6.1 per cent.

Mr Hartzer : I'd have to take that on notice to understand—

Mr THISTLETHWAITE: It's double what the rest of the world is doing.

Mr Hartzer : I don't know whether that is an apples-to-apples comparison. We are happy to take that on notice and have a look at it.

Mr THISTLETHWAITE: According to this article it is. You talked about disclosure, and you do disclose. Your web site says, 'When transferring money overseas by internet, the fee is $20.' If you were to look that up on the website as an account holder you'd think: 'You beauty! They only charge $20, I'm going to transfer $5,000 to an overseas bank account.' Then the bill comes back and it's $310 or something like that. The customer has the right to be pretty aggrieved by that when you you're not disclosing that on your web site, don't they?

Mr Hartzer : I don't know the details of the transactions that you are referring to. We'd have to go back and see how those calculations are being done.

Mr THISTLETHWAITE: Why don't you provide a total rate figure or a total cost figure for the transaction which includes the discount on the exchange rate plus that $20 transaction fee?

Mr Hartzer : Again, there are different exchange rates that are available to different customers at different times, as a function of what's happening in markets and the size of the transactions. I take your point, and I am happy to have a look at it, but it may not be as simple as that.

Mr THISTLETHWAITE: This is done in other industries and in other financial products—particularly, car loans and even home loans and credit cards. You are required to disclose the total cost to the customer. Why should it be any different for foreign exchange transactions?

Mr King : Let us come back to you with the LitePay details. It is a new initiative. It is 19 countries online at a flat fee. We're just not around the detail of that particular article, unfortunately, so it is very hard—

Mr THISTLETHWAITE: Is LitePay a separate account?

Mr King : It's an online capability for FX transfers.

Mr THISTLETHWAITE: So anyone who is an account holder with you can access this?

Mr King : I am pretty sure that's right.

Mr Hartzer : It is relatively new, but if that isn't true, it will soon be true. I think the answer to that is yes.

Mr THISTLETHWAITE: Do you recall when you brought this in?

Mr King : In the last year.

Mr Hartzer : Yes, within the last year.

Mr THISTLETHWAITE: If you can take that on notice, that would be good. The final question that I have relates to the front page of the Financial Review today and the story about the banking accountability regime. It's reported that it's been negotiated with the government that there will be an appeal mechanism for executives to the Administrative Appeals Tribunal and then to the Federal Court. How far down does that system go in terms of accountability? Who is caught by that? How far down in your ranks of senior management do you understand that the regime applies to? Which executives and managers does it apply to?

Mr Hartzer : I think that's still being determined. Our expectation is it would be the top executive team and certain people who manage large and significant portions of our business. It's probably a couple of dozen people, plus the board.

Mr THISTLETHWAITE: If it is true that this appeal mechanism is being negotiated, that would apply to all that are caught by this and not just a few, wouldn't it?

Mr Hartzer : It would apply to people who are within the BEAR regime, to my understanding. I have to say I am not familiar with any agreement that has been made about an appeal mechanism; I just know what I read in the paper as well.

CHAIR: I wanted to pick up on the issue of comprehensive credit reporting. By way of background, as you know, this is the idea of consumers' credit history—positive history as well as negative history—being available so that when a consumer goes to get a product, the information is there about their conduct and the fact that they have paid their mortgages or credit cards or whatever on time. This is something that has been talked about in the industry for a very long time, and it is something that is seen as a good thing for competition because it would mean that the incumbency advantages that the banks have in terms of having that information would be dispersed amongst a larger number of players who could then use that information to make offers and so on to consumers. In some ways, it is a similar concept to the open data regime, but a more specific application of it. The reality is that this has been talked about for a long time, but not much has happened. Back in August 2014, Westpac said in a submission:

Westpac believes that natural competitive forces, rather than mandating, should shape comprehensive credit reporting … in Australia. This is consistent with overseas experience—

in other words, let the market put in place comprehensive credit reporting. That was more than three years ago. We still have a situation where comprehensive credit reporting in Australia is minimal, and people are asking, reasonably: what do we need to do to make this happen? Do you have a specific plan to make this data available by a particular date; and, if not, would you object to regulatory action to make it happen?

Mr Hartzer : We do support the move in that direction, and it is our intent to join that regime and for it to probably be live mid next year. So we have been working on it. The simple answer—well, there are two parts to the answer. One has been about technology and operations. The reality is we've had an enormous number of requests to us for data and improvements in technology and systems that, quite frankly, have been prioritised higher than this. It's a pretty complex technology and operational request. Peter can elaborate, if need be, on the other requests we have had about doing things with our data. It has just been a prioritisation question for us.

The second point has been more of a policy point, which is about protection of customers' data and protection from fraud. This is a real live, visceral issue for me because, a couple of weeks ago, I had a long conversation with my mother, in the US, who is 75 years old, because her personal details were compromised in the Equifax breach. I was on the phone with her for a very long time, trying to explain to her what the consequences of having her data stolen in that way were, and whether she should sign up for credit blocks, whether she should sign up for other fraud protection and what it would all mean. I can tell you this is a very real issue. This is a genie that is very hard to put back in the bottle once it gets out.

So our view is that these are not hypothetical concerns. These are concerns that every single Australian should worry about. If you go back in history, when I started in the credit card industry in Australia 27 years ago, there was vehement opposition to sharing data, on the basis of privacy. In fact, the banks at the time were advocating that it should happen. Society has moved on and the view is that we should do it, and we're now supportive of doing that and moving down that path. The reality of the digital world that we live in and the very real fraud risks and cyber-risks that are out there mean that we need to be careful about this, and it can go very wrong very quickly.

CHAIR: Sure. Mr King, has Westpac done any financial analysis of the potential impact of comprehensive credit reporting on the bank?

Mr King : I think in terms of the outcome—

CHAIR: The profitability impact—is it good or bad?

Mr King : Not specifically. The thing by customer is interesting, because I think, for this concept to work, you need all credit providers to provide information so that we can get a full view of debt across individual customers across all providers, because that's one of the responsible lending requirements. There'll be good competition for high-quality people; it could be a challenge for other people to access credit. There will be people that will benefit and, unfortunately, others that may not.

CHAIR: So you don't have a view on whether, commercially, it is a net positive or negative for Westpac?

Mr King : No.

Mr Hartzer : We don't, but my personal opinion is there will be a slight net positive for us.

CHAIR: Okay. A final matter, just for clarification, is in relation to this issue about payWave that we have been discussing today. Mr Hartzer, in response to Ms King's question, your argument was effectively that the consumer chooses by the method of the card they choose to present. Now, I'm not sure that I agree with that characterisation. As I understand it, what very often occurs is that a Visa card or a Mastercard is linked to a typical bank account, a debit account. When you set up that account, it says you have visa access through this account as well, if you want. I don't think it's the case, is it, that people are issued with two separate bank cards?

Mr Hartzer : They can be.

CHAIR: But does that happen often? Do people often ask for—

Mr Hartzer : It's their choice. This is an unintended consequence of a real positive in the Australian market, which is that, in Australia—and, by the way, this is not true in the US, for example—you can have multiple accounts linked to your one card. That's a great and convenient advantage. It's something we've had for decades that customers love. It's an unintended consequence. Then Visa and Mastercard roll out contactless, so of course it defaults to Visa and Mastercard, and now we go, 'Well, how do we deal with this other issue that you've got other linked accounts?'

CHAIR: Within your bank, if someone sets up a debit account and then it's linked to Visa or Mastercard, is the default position that you give them two cards?

Mr Hartzer : No, it's a choice.

Mr King : But, if you have a transaction card, you'll get an EFTPOS card.

CHAIR: I understand you could get two cards; I'm just wondering how often that actually happens.

Mr King : Yes, if you are overseas and you need to get cash in an ATM network, you need to use your transaction account, which has cirrus capacity.

CHAIR: Okay. So your argument is that people could have two cards and, if they present the Visa card, they're effectively electing the Visa card. What about those customers that just take the one card? In a sense, you're saying they've made that election at the point of choosing just to have one card?

Mr King : Looking forward, if we had digital wallets, say, on Apple phones, then you could choose which cards—the consumer can flick between the cards easily. We're here in our technology development. When wallets come in and you store multiple cards, we'll move to another place.

CHAIR: But today, if I just have a Visa card linked to my debit card, your argument is I've effectively made that election at the point of choosing just to have a Visa card?

Mr King : It's a credit card.

CHAIR: Okay. You were saying before, Mr Hartzer, that you don't effectively make any money off the credit card transaction. So is your position that you're economically completely ambivalent about whether it goes through the credit card route or the EFTPOS route?

Mr Hartzer : Broadly.

CHAIR: What do you mean?

Mr Hartzer : Well, we certainly like credit cards because they give us other opportunities to add value to customers and they give more functionality to customers. If a customer does choose to revolve their balance, we can make interest on that. My point is that, at a transaction level, most of the interchange revenue that we get from credit cards is absorbed by cost associated with providing that facility.

CHAIR: Okay. Thank you for your attendance. That brings us to the end of our hearing. The committee secretariat will be in touch with you in relation to any matters arising out of today's hearing. You'll be sent a copy of the transcript of your evidence to which you can make corrections of grammar and fact. Thank you.

Proceedings suspended from 12:27 to 13:16