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Standing Committee on Economics
Annual review of Australia's four major banks

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

KING, Mr Peter, Chief Financial Officer, Westpac Group

CHAIR: We will resume the meeting; we are technically still open from the previous session. I am going to read an abridged version of the opening statement with the particularly pertinent matters for the witnesses. Firstly, I would 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 deliberate at a future private meeting on whether or not to insist upon an answer. If the committee does consider the matter in private, it may write to the witness with the outcome of its discussion.

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. Should requests for documents arise during today's meeting, the committee will ensure that you are provided with written information related to these requests.

I note that, should any members have further questions that they would like to put to today's witnesses at the conclusion of today's hearing, they may put additional questions to the witnesses in writing, and the witnesses are then required to respond in writing to the committee. I also note that the committee has the power to conduct additional hearings with bank executives as part of this inquiry.

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. Finally, I would note that I have two savings accounts with St George, which is owned by Westpac.

We have witnesses here with us today from Westpac for today's hearing. I remind you 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 now invite you to make an opening statement.

Mr Hartzer : Thank you, Mr Chairman. I have been the CEO of Westpac for 20 months, and prior to this I worked in banking on four continents, including a period just after the GFC when I moved to the UK as part of the clean-up of one of the biggest bank failures in history. This gave me a particular insight into the role of leadership in banks and the impact on people's lives and businesses when things go wrong. I am conscious that you have already had three presentations by other banks covering many issues, so I will keep my opening remarks brief and make three quick observations.

The first is that the world economy still faces real challenges and ongoing financial market volatility, and this affects us here in Australia. Eight years on from the GFC central banks are still using emergency monetary settings to pump money into their economies and lower interest rates hoping to stimulate demand. At the same time banking regulators are increasing the amount of capital, term funding and liquidity that banks have to hold in order to build strong buffers in the event that another crisis were to occur. Combined, these factors have led to significant changes in the composition of domestic bank balance sheets. Indeed, the actions we take on pricing and how we manage both lending and deposits are all affected by these global market and regulatory conditions.

My second observation is that banks exist to support the economic growth of the nation through economic cycles. To play that role banks need to be resilient, which means they need to have both strong balance sheets and solid returns so that they can absorb losses and keep working when parts of the economy get into trouble. Everyone benefits from a healthy banking sector. It means that people can own their own home, depositors' money is safe and businesses can start or grow.

Much has been said about the profitability of banks. I would just like to add two comments on return on equity, or ROE, and net interest margin, or what we call the NIM. The ROE of Westpac has fallen significantly since the GFC. ROEs that were previously in the low 20s have declined to around 14 per cent. This level of return is not excessive but rather is necessary to ensure that we are seen as 'unquestionably strong', as recommended by the Financial System Inquiry.

Net interest margins have also fallen over the same period. The net interest margin captures the sum of all interest on lending and all money paid on deposits. If margins are rising then we are growing those returns, and if margins are falling then our customers are retaining more. Over the last 10 years the net interest margin has fallen 37 basis points, or around 15 per cent. The point is that, overall, our customers are not paying more relative to the cost of funding.

My third and most important observation is that a banking licence is a privilege, and with that privilege comes a responsibility to earn and maintain the trust of our customers and our community by dealing with people fairly and honestly. In recent years it is clear that a trust-gap has opened up, and we as an industry and as individual banks need to work harder to close that gap.

Westpac is not perfect. In recent years we have had operational errors, and we apologise for those. We have made some difficult decisions on pricing and at times we have not done a good job of communicating why we have made those decisions. We are working hard to improve. We have set the goal of becoming one of the world's great service businesses, and part of that is an ethos to fix things quickly when they go wrong.

I am proud to say that our 40,000 people are passionate about helping customers and delivering great service. Over the last four years complaints are down 65 per cent. In the last three months we have had three times as many compliments as complaints in our branch network. We are reviewing all of our products, policies and processes to make sure they are working for our customers. Where these reviews highlight problems we proactively report them to our regulators, notify our customers and put changes in place to make sure the problems cannot recur.

We have also responded to concerns about staff incentives. In 2015 we were the first bank to remove the link between product sales and base pay in our enterprise agreement. Last month we announced changes to the way Westpac tellers are paid, with incentives now based on service rather than sales. We want to remove any perception of a conflict of interest in how we serve customers. This follows changes we made to our financial advice business, prior to the launch of FoFA, to remove conflicts of interest and increase transparency of performance and remuneration. We have also embedded the principles of the banking and finance oath into our code of conduct for all employees. We did these things because they were the right thing to do to address community concerns but also because we want customers to feel confident to talk to us.

Over the next 10 years more than 2½ million Australians will turn 65, and the vast majority of them do not have adequate insurance or a well-thought-through retirement plan. While superannuation is good, at the end of the day superannuation is a product; it is not a plan. Banks like Westpac, with a long-term commitment to the market, robust compliance and strong regulatory framework, are well placed to provide this advice. We are Australia's oldest company and first bank, with a long history of giving back to the community. It is part of why we were recently selected by the Dow Jones Sustainability Index as the world's most sustainable bank for the third year in a row.

Westpac has been contacted by a number of committee members foreshadowing their interest in raising questions about two former financial planners who have now been banned by ASIC. To assist the committee, I would like to table a document summarising the circumstances of those two cases. In both of those cases Westpac was responsible for investigating their actions and reporting them to ASIC. We are pleased that ASIC took action in respect of those planners. Put simply, we do not think planners who have engaged in misconduct should remain part of our industry.

In a speech two weeks ago, I said, 'People are saying things need to change.' They do need to change, and they are changing. We are committed to closing the trust gap. We are showing results, but we know we have more to do. This hearing is a chance to increase transparency and hold banks to account for the changes that we are making. After all, your constituents are our customers, and in the long run Westpac can only do well if our customers do well. With that, Peter and I are happy to answer your questions.

CHAIR: I want to take you, Mr Hartzer, to an issue related to loan protection insurance that was charged to many of your customers, despite the fact that they did not actually have a loan with Westpac. I presume you are familiar with this matter. In October last year, ASIC required you to take various actions and to make contact with over 10,000 of your customers because these customers may have been charged loan insurance premiums when they did not actually have a loan. That related in particular to a Mortgage Secure insurance product and a home loan protection insurance product. As I say, people were charged for this product even though they did not actually have a loan. Obviously that is something that is of grave concern. What is the status of that matter in terms of compensating people who were affected? Why did it take so long to identify this issue? And how was this allowed to occur?

Mr Hartzer : The backdrop to that is that an insurance product was sold at the time that loans were taken. It was essentially a life insurance product that gave them protection not just about repaying that loan but more broadly. When those loans rolled off, in some cases the people continued to pay the premium, and they continued to be insured. So the issue became a discussion with ASIC about whether that product should continue to be in force, because there was the potential that customers might have forgotten they had that coverage and not understood that they were paying for it. We had a discussion with ASIC. We agreed that there was potential for confusion, and we have refunded the money to those people.

I guess what I would observe is that I am familiar with situations that have happened in other markets where people were sold insurance that had no value. That is not what this case was about. This was that people were sold insurance that stayed in force and that they were paying for, but there was a legitimate question about whether or not there was confusion about the fact that it continued to be in force. ASIC's view was that it was confusing and that people might link those two. We did not entirely agree, I have to say, but we resolved that with ASIC and concluded that—

CHAIR: So it was an insurance product that was sold in conjunction with another loan product, and effectively it continued to be charged for even though the other loan product was no longer being used by the consumer?

Mr Hartzer : That is right. The point I am clarifying is that the insurance was not merely to pay off that loan. It was a broader insurance policy sold in conjunction at the time, and there were customers who—

CHAIR: Yes, but it was sold in a context, presumably, of a proposition to the consumer saying, 'You are going to get this loan, so as part of that you should consider insurance product X.' Either they then did not take up the loan or the loan went away over time, and they continued to be charged for the insurance?

Mr Hartzer : I believe in all cases they would not have been sold the insurance had they not taken up the loan. But the point I am making is that it was not insurance purely to pay back that loan; it was an insurance policy sold at the time of the loan. Part of the reason you would have a discussion about insurance with a customer when they take out a loan is they have an obligation and, if something happens to them, you want to know that insurance is in place. In some cases, for example, those customers might have refinanced the loan elsewhere. They would still have a loan and the insurance would still protect them. All I am saying is that it was not that the pay-off of that particular insurance policy was purely linked to the loan such that if the loan was not there there was no value. There was still value to the customer. The point was it was confusing, potentially, to the customer and, in the end, we came to a resolution with ASIC that said—

CHAIR: This went on over quite a long time, didn't it, because apparently these products were sold between 2002 and 2007 and then the order from ASIC was in 2015? Did this issue only arise because of ASIC surveillance of your bank? It is not something that you voluntarily—

Mr Hartzer : On that particular one I do not recall how that originally came up. The point I am making though is that, unlike some of the other issues that have come up around the world about insurance, this was a legitimate product providing genuine protection to customers that they were paying for and that they continued to benefit from. The point there was the potential that customers might not realise that they were getting value for it—might not continue to want the value—so there is a legitimate question about whether that product should have remained in force after a loan was paid.

CHAIR: Have you changed your processes to ensure that, whenever these insurance products are sold in a way that is linked to other products, there is a checking process so that people are told, 'You might not need this anymore because you no longer have the associated loan'?

Mr Hartzer : Yes, we have. Maybe not strictly in the way you have described that, but on the basis of what you mean, which is how we change our process, yes.

CHAIR: I think we will write to you seeking a description of how you have changed that process after this matter has come to light.

Mr Hartzer : I am happy to do that.

CHAIR: Another issue I wanted to raise is in relation to credit cards, where you paid $1 million as a result of ASIC's findings that you were not making reasonable inquiries about your consumers' income and employment status prior to providing increased credit card limits. So, basically, you were giving people increased credit card limits seemingly in circumstances where that was inappropriate for those customers. Again, how did that occur and what have you done about that?

Mr Hartzer : I would not characterise the issue quite that way. What we had here was a difference in interpretation about what the regulations required us to do. The regulations required reasonable inquiries about a person's capacity to take on the debt and repay the debt before the limit increases were offered. We had a process that was based on using all the data that we had about customers from a variety of sources, including their transaction history and their repayment history, so we were absolutely, from our perspective, assessing the risk before making that offer. However, the regulator came to the view that the manner in which we were validating that income was insufficient and that, unless we were specifically writing out to customers and getting them to confirm their income, we were not conforming with the regulations. In our view, our intention all the way along had been to conform with the regulations, and we believed that we were doing so. However, we accepted the referee's judgement that, in the end, they wanted us to do it in a particular way, and we changed our process to do that.

CHAIR: What were the internal consequences for your executives involved in that?

Mr Hartzer : In this case, again, we had a view that there was a legitimate difference—

CHAIR: You had a view, but it was wrong according to the regulator that is charged with enforcing the law of Australia, so what was the consequence for your executives?

Mr Hartzer : There are a range of consequences we apply in a variety of circumstances when something goes wrong, and that can range from counselling people, giving them warnings, changing their duties, retraining them, exiting them and demoting them—there are a whole range of things. There are financial consequences, of course, as well. It depends on the circumstances. Again, in this case, we would look at any situation from the basis of whether we believe somebody has violated our code of conduct or done the wrong thing. I would have to take on notice exactly what we did in that particular matter, but I would come back to the point that there are other cases where we would make more significant interventions. Regulations are subject to interpretation. The regulation did not say you have to write out and ask their income. The regulation said you had to make reasonable inquiries. Our credit people believed they were making reasonable inquiries. The regulator interpreted it in a different way, and that is their right, so we changed it. Should we have done that sooner? Probably. We certainly have, in the last couple of years, become much more attuned to where there is a debate about the interpretation of a regulation and we make sure that it gets escalated more quickly, and I alluded in my opening statement to the proactive work we are doing to go through every product and every process. So what I would say is we have made changes to the way we review all of our pricing, policies and products, to make sure that we are responding quickly to regulators when these things come up.

CHAIR: But, to address the question, to your knowledge nothing has happened in terms of termination or other significant consequence to any executives as a result of this issue?

Mr Hartzer : On that particular matter, no, I do not believe so, but we can certainly come back to you.

CHAIR: Okay. Please do that. On car finance, your subsidiary Capital Finance Australia was recently required to pay about half a million dollars in penalties for various breaches of the Consumer Credit Protection Act in relation to effectively failing to provide customers with correct information about being in breach or potentially in breach of a loan and, as a consequence, not giving them the opportunity to respond prior to potentially having vehicles repossessed. Again, that is quite a recent incident which occurred last year. What broke down there? Was that also a disagreement with the regulator?

Mr Hartzer : No, that was purely and simply an operational error. The business you are referring to, CFAL, was one that we purchased from Lloyds when Lloyds exited the market a couple of years ago. In the course of consolidating that business with our St George auto finance business, there was a breakdown in the collections practices within the business that we acquired. It should not have happened. The result of that breakdown was as you say. Letters should have gone out to customers telling them that they were in breach and that there would be consequences if they did not respond. Those letters did not go out, and that was a real mistake. That is one where there have been consequences.

CHAIR: What were they?

Mr Hartzer : The senior executive of that business is no longer with us. It does not get any more serious than that. We have also made significant changes on the operational side of that business to move the collections under the responsibility of our existing collections team, and we have made significant changes as a result of that.

CHAIR: Again, could you please write to the committee in relation to how you have changed those processes. I want to pick up on your point about senior executives. It seems to me that a lot of these issues come back to accountability. I am not talking specifically only about the three matters but more generally in your industry. It is all well and good to put out a PowerPoint presentation talking about putting customers first and all the fluffy language that we tend to see in these sorts of documents but, ultimately, getting better behaviour in your industry comes down to the chief executives and the senior executives, doesn't it? It comes down to them basically stepping up and taking responsibility and, where things have gone wrong in an unacceptable way, taking the consequences. Unless and until that happens, isn't the problem that these issues may continue?

Mr Hartzer : I agree. The role of leadership is incredibly important. I went to the UK and found at the bank that I went to work with there I had tens of thousands of people whose jobs were at risk and who had lost their life savings as a result of poor management in banks. I and my management team take that very seriously as a responsibility. Pretty much every Australian is an investor in Westpac in some way, through their super fund or others. We have 40,000 employees who depend for their livelihood on working there. We take that very seriously. The trick is we have a big, complex business and what we have to do is proactively make sure that we have processes in place that go through all of the legacy of products, policies and processes that have been brought in over time and make sure they are still meeting community standards and are up to the standards our customers would expect. Yes, we have processes in place to hold people accountable when things go wrong.

CHAIR: What are those processes?

Mr Hartzer : We have a whole range of things. There are a lot of different kinds of issues that can go wrong. Natural justice says that in any case you would look at the merits and the context of it. There can be informal warnings or formal warnings. We can change people's duties. We can require them to go to training. We can dock their pay. We can dock their incentive payments. We can change their responsibilities. We can terminate them. We can ask ASIC to ban them from the industry. There are a whole range of consequences and we have processes around reviewing performance in each business.

Whenever we do remuneration reviews, there is a formal process of governing bodies who review all incentive payments before they are approved to make sure that we have checked the behaviour of people, that we have checked compliance outcomes. Our risk department has input. There is a very formal process around that. Where we come to the view that we need to take action, we take it.

CHAIR: We will write to you in relation to that issue as well, particularly with respect to your internal processes for disciplining senior executives who are involved in malfeasance. I want to come to a number of policy issues, and a number of these I have discussed with chief executives earlier in the week. This issue about opening up data is something that the committee may well take an interest in. As you know, the UK regulator has recently announced that it will require banks to open up APIs to enable consumer data to be more freely accessed, of course, with the consent of that consumer, which will benefit consumers in an enabling them to access other products and services from other financial service providers.

During the testimony of this week, I think it is fair to say that your industry has expressed a distinct openness, apparently, to doing this and yet I think it is also fair to say that it historically has strongly opposed these sorts of measures. Do you agree—with the important caveat of protecting privacy—that data should be opened up to enable a more competitive market, that it should be possible for consumers to have portability of their accounts and to switch more easily and that it would potentially be an appropriate recommendation of this committee to seek to mandate ASIC to make all that happen?

Mr Hartzer : There are a couple of different questions in there that are all related. I might talk about them in different areas. I have had experience with this both here and overseas in some of these discussions. On the issue of opening data up, we are supportive of a well-governed process of opening data up more. We are supportive of more competition; we think that it is healthy for customers and healthy for our industry as well. Westpac is on the record: we made a submission to the Productivity Commission saying that we supported an open data architecture.

CHAIR: Sorry to interrupt, but as I understand it your competitors did not do that and they did the opposite. Do you think that is noteworthy?

Mr Hartzer : I could not speculate on what their motivations are. We are clear that changes in technology are very substantial in our industry. It is having a massive effect. It is changing the way customers deal with us and it is changing the way we run our business. Data is a really important part of what we do. At Westpac, we are embracing that. We believe that it is appropriate that more access to data is made available to enhance competition. The point I would make, though, is that you cannot just pass off without serious consideration the governance framework around data, because some of the suggestions about wide-open APIs that just let people get access to anyone's personal information are potentially quite risky. Banks like Westpac have very strict controls, regulations and governance—even within the company—around who can access what data. All we would be saying is that we are very supportive, but do not underplay how important it is to put that control around.

Just to move on from that a little bit or to extend from that, data is already available. As a Westpac customer, you can go online and you can download all your transaction data right now into an excel spreadsheet, if you like, and take it to anyone you like. The point is that it is your data and you have logged in through our security protocols so that we know it is you. Therefore, we give you the access. You can do that right now. All we are saying is that before you just make it really easy so that anyone can put a little software code in and get anyone's financial data, you want to be a little careful. Some of the people who are advocating for this, I have to say, do not necessarily have the same security or governance standards around their data. You just want to be a little careful. That is all we have said.

CHAIR: Sure, of course. That is why, obviously, ASIC—as the regulator—would be the appropriate body to govern such a process and to make sure those protections in place. But you are obviously expressing a great openness to the idea. Just to put a question that I put to Mr Thorburn this morning: would you be open to providing financial incentives to your senior executives based on the openness of data and the capacity for consumers to easily and quickly switch bank accounts and to make portable their accounts? That is clearly in the interests of consumers and, as I understand it, the centrality of the consumer is part of your values.

Mr Hartzer : Anything that the regulators change in terms of the rules we will obviously comply with, and that—

CHAIR: I meant it being distinctly promoted as something you want to happen because it is good for consumers.

Mr Hartzer : We put a submission into the Productivity Commission saying that Westpac's position is that this should happen under an appropriate governance framework. On the switching point, we also promote that. The fact is that, again, you can do that now. A customer can open an account with Westpac, online, in less than three minutes, and in less than 10 minutes they can switch all their payments from another provider—and I encourage you all to give it a try. You can do it right now. We do that today. Therefore, we are quite happy for that to become a standard.

You did mention the point about account number portability. Here I think it is important that I put a little more detail around that. The issue of making it easy to switch is an important issue to discuss. I would say, by the way, it already is easy to switch. I know there is a perception that it is incredibly hard, but previous governments—and I have been involved in this—have put regulations in place requiring the creation of a switching service; so that was put there.

CHAIR: We observed during the week that that has been a woeful failure.

Mr Hartzer : I guess my point is that that has happened around the world as well. That is because the problem is not actually that it is hard to switch. The problem is around education about that and incentives for people to do it. I come back to what I said before: you can switch your bank to Westpac in less than 10 minutes online. We switch all your payments for you. It is easy. You can do it today. I know that the perception out there is that it is hard; it is actually not that hard. So the issue is more about the communication of how you do it and people promoting you to do that.

On the account number portability, the point I want to make there is that I know it is superficially very appealing, because the analogy is to mobile phones, but there are some important differences practically. Again, by all means let's examine how to solve the core problem of making sure that it genuinely is easy to switch—and we support that—but the practical solution that has been mooted around account number portability has more complexity to it than mobile phones. First of all, different banks have different length of account numbers. So it is not all standard. Second, some accounts are loan accounts and some accounts are deposit accounts. You cannot necessarily just move a loan, because that requires a credit approval. So that is complicated. We have the BSB framework, which is embedded all through both commercial and consumer account systems throughout banks. That is not easy to change. So there are a whole bunch of practical things, which means we do not object to the issue. We are just saying that it might sound like an easy solution; it is a lot harder than you think.

CHAIR: I think members of the committee would acknowledge that it is a significant process, but the key question, though, is: when you say you are open to it, there is a difference between being open to something and actually working hard to make it happen. Your industry has, I think it is fair to say, not worked hard to make that happen, arguably because some would say it is not in your commercial interest to make it happen because a very high degree of portability and switchability could have a negative impact on your earnings. As opposed to being open to it, would you commit to putting the intellectual capital of your bank and your senior teams to working on these problems with the regulator, with the sole goal of producing a better outcome for consumers?

Mr Hartzer : We are happy to engage in a process and put resources to bear to assist in examining thoroughly what barriers there are to switching and where there might be improvements to make it easier. We absolutely support that. What I am saying is that the banking systems, the payment systems, are very complicated. Changing something so profoundly embedded as the BSB and account number system would be unbelievably expensive and technically complicated. By the way, that burden would fall very heavily on small banks as well as big banks. So all we are saying is that rather than just assume that this is a simple solution, we are very happy to engage in examining that. Once a determination is made, of course we will support it, as we do any other regulatory change.

CHAIR: I have one final question and then I will come to Mr Thistlethwaite. I have raised this issue previously about tracker rate mortgages that basically track the RBA cash rate. Your peers from the other banks have made the point that the Reserve Bank cash rate is not the sole determinant of your costed funds and so on. However, the fact is that in other markets, as you know, this product is available. Clearly, not every consumer in those markets uses that product, but substantial numbers do. The availability of that product would enable people who are particularly concerned about ensuring that they do get the change, when the Reserve Bank cash rate changes, reflected precisely in the rate of interest they pay, to have that certainty. People would not be, of course, forced to use that product; they could choose another product if they wanted to. But for some reason your industry—all of you—has decided not to offer that product, which I find curious. I am interested to know why you think it is not provided in this market. Do you have any plans to introduce it? And would you have any problem with a regulatory change to require you to do so?

Mr Hartzer : Tracker mortgages are appealing, on the face of it, for customers and, frankly, for banks as well. It might not be a surprise to know that the attention that is paid around the time of a cash rate move to mortgage repricing is not something that we relish. As a result, over the years—and I have seen this at both Westpac and another bank in this market that I worked at—we have looked at the possibility of tractors, we have looked at what has happened overseas. At one level there is a lot of appeal about it, and there is no impediment to us doing it today if we wanted to. The impediment—and the reason, in my opinion, it has not happened—is that tracker mortgages are really quite fraught from a risk point of view. We saw this in the GFC in particular. I worked in the UK where tracker mortgages were a significant feature for a while and, frankly, they were a big part of the problems that banks, like Northern Rock, ran into. Particularly smaller banks that thought this was very appealing and promoted it very heavily suddenly found that their actual cost of funds was dramatically higher than what they were allowed to charge because of the tracker, and that was one of the contributions to why those banks went bust.

We do not fund off the cash rate, as has been pointed out to this committee, and our funding is dependent, particularly in Australia, significantly on access to international markets, and those markets can be very volatile. Basically, they are fine when everything is fine, but when things are not fine they become a real problem. You can suddenly find that your cost of funds has spiked dramatically and yet you are unable to reprice your loan book, and that is a recipe for a serious problem for the bank and for the banking industry.

The answer, in a sense, is that we could put that product out there, but the premium we would have to charge to manage all the risks inherent in doing that, I believe—every time we have looked at it in the past—makes that product really unattractive for a customer. We think that customers who want certainty are much better served by a fixed rate loan, of which there is a lot of competition and lots of low rates. The rates on those fixed rate loans would be lower than they would be on a tracker rate.

CHAIR: Why have the banking industries in other countries reached a different conclusion on this issue and all of the Australian banks have reached the same conclusion?

Mr Hartzer : Our funding markets and our exposure to funding are quite different. In the UK, for example, where I worked—and I ran a business that had tracker mortgages—our funding was largely domestic. In the UK they have very large, deep capital markets that you can fund your mortgages from, and therefore managing the risk is a lot easier. In Australia, a big portion of our funding comes from offshore investors who are fickle and from time to time their appetite for funding disappears, and, as we saw in the GFC, our cost of funding can spike dramatically. That is the answer. In terms of regulation around the product, all I would say is: of course, if there were a change to require the banks to create that product—as I said, there is nothing stopping us; we could do it—I merely observe that it seems a bit of an interesting path to go down to essentially get government in the business of regulating what products should be offered in a competitive market. I would caution a little bit about going down that path. As I say, we have looked at it and it is appealing for us. From a market point of view, it is appealing. The issue is the risk management associated with it.

CHAIR: Thank you.

Mr THISTLETHWAITE: I disclose that my wife and I have a savings account with St George. Mr Hartzer, could you tell the committee how many advisers have left your organisation over the past five years for serious compliance concerns?

Mr Hartzer : Could I just check that you are talking about financial planners?


Mr Hartzer : When we were in front of the Senate Economics Committee last year we noted that over the previous five-year period, and a review done by ASIC, 11 advisers had left. Since that time we have put another 11 advisers to ASIC.

Mr THISTLETHWAITE: So, 22 in total?

Mr Hartzer : Yes.

Mr THISTLETHWAITE: How many of those were sacked?

Mr Hartzer : I do not know the exact number of them. None of them are still with us. What happens in some of those cases is that when an investigation is kicked off they quickly resign, and that has happened in a number of cases.

Mr THISTLETHWAITE: In all of them or just a few?

Mr Hartzer : I do not believe it is all of them. I believe some of them have definitely been sacked but I will have to come back to you with a number. I would say the nature of it is that, because of the nature of the investigations—and we usually pick this up through our own investigations—when we raise suspicions about someone and we start looking into their details, very quickly they resign. And, of course, you cannot sack someone until you have completed your investigation. So, that does happen frequently.

Mr THISTLETHWAITE: Do you still report them to ASIC, even though they resign?

Mr Hartzer : Every single one of those has been reported to ASIC. In our view none of them should be in the industry.

Mr THISTLETHWAITE: Do you review all of their client files?

Mr Hartzer : We do.

Mr THISTLETHWAITE: Do you write to all of their clients?

Mr Hartzer : We contact all of the clients. We write to all of the clients. We offer them a thorough review. Depending on the nature of the concern we have, in some cases we immediately go through it all electronically. One of the advantages we have—and this speaks to the advantage an organisation like Westpac can bring—is that we have invested in digitising all financial planners' files. So, every single file that one of our planners does for a customer is available to us electronically and we can and do audit those files independently any time we want. One of the issues that I know has happened previously in the industry is that a lot of financial planner files were on paper and you would have people move around and the files would get lost, so it became very tricky to know what had actually happened. We felt this was a really important investment we have made. So, in answer to your question, yes, we go through all the files and write to the customers and if there is redress appropriate then we make that adjustment.

Mr THISTLETHWAITE: In the wake of discoveries like this and actions such as that—and this is not peculiar to your bank as it unfortunately has happened with all of the four big banks that have appeared before us—do you conduct an internal review of your compliance mechanisms in a particular risk mitigation measure to ensure that you do not have financial planners who are taking unnecessary risks and doing the wrong thing and getting away with it?

Mr Hartzer : Yes we do. We have a very thorough risk management process. We refer to it as the three lines of defence, although I think I would give you that there are 4 or 5 lines by the time you are done with it. We have front line compliance people, the risk management department, our internal auditors and then, of course, there are external audits and regulatory review, as well. Those procedures are constantly being reviewed. We have, very importantly, quite a lot of detective controls that we put in place, where we analyse data and look for anomalies. We do investigate and when we find things we report it to ASIC.

Mr THISTLETHWAITE: Can you supply to the committee the details of that compliance process you go through?

Mr Hartzer : Obviously, if there is a request to us for particular information we will endeavour to supply it.

Mr THISTLETHWAITE: In September, ASIC announced that Westpac have refunded $9.2 million in bank fees that should have been waived, in one case, and $20 million in credit card fine transaction fees in another. How do these errors first come to light in your organisation?

Mr Hartzer : Both of those were examples of what I referred to in my opening statement—where we are reviewing all of our policies, practices and products. We identified both of those through those reviews. We reported them to ASIC and we took action to set customers right and to fix the processes that had led to those breakdowns in the first place.

Mr THISTLETHWAITE: How many customers are involved?

Mr Hartzer : I do not know the exact number of customers off the top of my head. It was certainly a substantial number. One of them was about fee waivers for students that should have been applied but were not. From memory, that was about 150,000 accounts. Then there were the foreign transaction fee items, which, from memory, applied to about 800,000 people who had shopped online. I am happy to explain what happened in each of those cases if you like.


Mr Hartzer : The first one was that for a long time we had had a couple of products where students under the age of 18, or 21 in the case of Westpac, were eligible to have their monthly fees waived. What we discovered—and this is something we put in place a number of years ago, again under the notion of proactive work, looking carefully at complaints, and not just resolving complaints but looking at whether there was anything coming up as a common theme—was that one of the common themes was people saying, 'I was due this waiver and I didn't get it.' So we did an investigation and found that some of our staff had not been remembering to load the waiver; it was a manual waiver. So we went back through the customer base, found all the customers who should have had that waiver, calculated how much they had paid in fees that they should not have paid, and paid them back. We also then made a system change so that from now on, when a customer comes in for one of those products, the waiver happens automatically as a function of their birth date. So, we fixed it. We reported it to ASIC when we discovered it, so all the publicity around that has been subsequent to us raising it with ASIC.

The second one was an example of some of the complexities in the way the international credit card schemes work, which is that as online shopping has grown customers are shopping at overseas websites, so they are effectively making an international transaction. But in some of those cases the website is billing them in Australian dollars. Even though through the system it is an international transaction and they were getting the international transaction fees, the customer was, understandably, saying, 'Hang on—I don't understand; it's been charged in Australian dollars.' We had disclosed it, but when we looked at it we came to the view that our disclosure was not as clear as it should have been, so for an avoidance of doubt we said, 'We're going to redo the disclosure; we're going to refund all those fees to the customers over that period and make it clear what is actually going on.' Again, we reported that to ASIC, we paid the redress, we fixed the system.

Mr THISTLETHWAITE: So there is now a disclosure on the website when people use that process, is there?

Mr Hartzer : I cannot remember exactly what the process is. It would depend. If they are going to a foreign company's website, you cannot guarantee what the process would be there, but certainly we have a number of things we have done to improve disclosure around how it works.

Mr THISTLETHWAITE: And you mentioned earlier in your opening about removing the link between selling products and the remuneration that your staff get through your enterprise bargaining agreement. Does that apply across the Westpac group? Or is it just the Westpac bank? So, does it also apply at St George bank, South Australia, Bank of Melbourne and other organisations?

Mr Hartzer : Not yet, but that is the direction we are heading. Because we run different brands and different banks, each of them have slightly different systems for how they manage their people and the like. We felt that the place to start was with Westpac. Any time we make a change to the way we pay our people, as you would understand, we have to negotiate that with the union, we have to work through the details of that, and we have worked very collaboratively with the union on that for Westpac. We want to see how that goes and work out what the kinks are. But certainly our intention would be the point that I made in my opening remarks, which is that we want to remove any perception of a conflict of interest, and that would apply ultimately across all of our brands.

Mr THISTLETHWAITE: How many staff does that affect?

Mr Hartzer : There are about 12,000 people in our consumer bank. I think initially it is about 2,000 Westpac tellers.

Mr THISTLETHWAITE: What about the remaining 10,000?

Mr Hartzer : Well, not all of those people are frontline people. We have been making, at the same time, changes to the way we do the scorecards for our personal bankers and other employees, which are moving in the same general direction. So we made a bunch of changes to the personal bankers' scorecards as well—for example, removing any difference between the value attributed to different products. So the whole notion of how we think about incentives is to try to line it up with our strategy around service. And by 'service' what we are really talking about is that we want our people to build long-term relationships with customers, because that is how we grow value over time.

Banks do not really make a lot of money on a sale; we make money over time through relationship. And all the aspects and systems of the bank need to line up to that, and incentives are part of it. Over the last couple of years we have progressively been making changes in our scorecards, with the general notion that we want to reward people for having high-quality conversations with customers that result in serving their needs across a range of what their requirements are, and we progressively have made changes like that.

Mr THISTLETHWAITE: For those non-teller staff, sales elements are still present in their remuneration structures in that 'balanced scorecard' approach, aren't they?

Mr Hartzer : None of the balanced scorecards are around paying people for a number of products sold.

Mr THISTLETHWAITE: But there is a bonus associated with the sale of a certain product, or there are targets associated with referrals—

Mr Hartzer : Not exactly. The way it works is there are scorecards that assess people for the service quality in the branch, growth in customer numbers, growth in deposit balances, growth in mortgage balances and the like, and we have a measure we call MyBank, which is about what percentage of our customers consider us their main bank. Personal bankers are measured around their contribution to those different things, and, on a weighted average as a result of that, if they pass a series of compliance hurdles, if their branches pass the satisfaction hurdles and if their personal behaviour is appropriate then they can become eligible to participate in an incentive system. But it would not be right to call it a commission; there is a reward for people if they perform across a range of measures. I think it is also important to remember that, even after all that, it is a relatively small part of their pay.

Mr THISTLETHWAITE: So it is a financial reward, is it?

Mr Hartzer : Yes.

Mr THISTLETHWAITE: In the form of a bonus?

Mr Hartzer : It is a quarterly incentive payment.

Mr THISTLETHWAITE: Roughly how much is it?

Mr Hartzer : It is less than five per cent of their pay for a personal banker. For a teller, it is less than two per cent. It is there. With the teller one, again, I make the point that we already had a scorecard. From our standpoint there was no issue about customers' interests, but we knew there was a perception around that and we wanted to address the perception, which is why we made the further change.

Mr THISTLETHWAITE: When will the other banks that are part of your organisation also move in this direction?

Mr Hartzer : Do you mean our other brands?


Mr Hartzer : As you can imagine, it takes a fair amount of time to work this through with the union and the like. This is live now from October. I do not know the logistics yet of when we are going to do it, but our intention would be to do it in a sensible time frame. My hypothesis would be maybe the second half of our financial year, so six months time. But I just need to put in a caveat that I am really not sure what all the logistics are through that. We want to see how this goes, we want to understand what issues it raises and we want to work with the union to think through the implications for the other brands, but the direction is clear on this.

Mr THISTLETHWAITE: You said that the reason you did it was the perception of conflict with commissions. Do you think that that was driving poor customer outcomes?

Mr Hartzer : Can you be more specific?

Mr THISTLETHWAITE: Do you think that that was driving your staff to push customers into products that might not be in their best interest? For instance, say one referral per week on a credit card is part of an individual's targets or their performance that you monitor. If someone comes in seeking a $10,000 personal loan and the individual is toward the end of the week and has not had a referral on a credit card yet, they might think, 'I can encourage this person to take up a credit card rather than a personal loan,' despite the fact that the credit card might not be in that person's best interest. Is that the reason why you moved away from these sorts of payments?

Mr Hartzer : No, it is not.

Mr THISTLETHWAITE: Then why did you?

Mr Hartzer : As I said, there is a perception created broadly among customers—and we did a lot of research about this—

Mr THISTLETHWAITE: Do you think the perception is a reality?

Mr Hartzer : No, I do not. I cannot say that there has never been a case where a staff member has done the wrong thing around an incentive, but that was certainly not the driver of what was happening. The important point is that we are trying to align everything we do with the strategy around service, and this was a logical thing for us to implement.

Mr THISTLETHWAITE: Do you think that other banks should move in the same direction as you?

Mr Hartzer : I think it is a matter for them, but I would say that the banks are working together through the ABA to review all product based sales incentives, and I think that is an appropriate thing. I think that it is in the interest of everybody in the industry to address this perception of a conflict of interest. We were very actively involved in recommending that the ABA do this.

Mr THISTLETHWAITE: Thanks. Does your organisation access customers' credit histories through external organisations such as Veda and others?

Mr Hartzer : When a customer applies for a loan, we look at a variety of data, both internal and external, and Veda is one of the services that we do use, yes.

Mr THISTLETHWAITE: And do you use that information to target customers for particular products that you think, based on those transaction histories, they might be susceptible to purchasing?

Mr Hartzer : I do not believe we use Veda data in that way, no.

Mr THISTLETHWAITE: Do you use any other external data in that way?

Mr Hartzer : I could not say exactly what other data. But we certainly do use data to try and understand customers needs and think about what is an appropriate thing to talk to them about. So we probably do source some external data sources, but I cannot tell you off the top of my head exactly what they would be. What I can say—and I have some personal background in database marketing type activities—is that the data that is most valuable is the stuff we already know about customers rather than the external data.

Mr THISTLETHWAITE: This would be their transaction histories?

Mr Hartzer : Among other things.

Mr THISTLETHWAITE: Can you enlighten us on what the other things are?

Mr Hartzer : What products they hold, histories of conversations with our bankers—those sorts of things.

Mr THISTLETHWAITE: Does it include transactions they may have incurred with other banks? If you are alerted when a customer makes a payment to perhaps an ANZA credit card using one of your cheques, or a direct transfer from one of your accounts, would that be an opportunity for one of your personal bankers to get in touch with that person and say, 'Come in and we can talk to you about one of our credit cards'?

Mr Hartzer : Possibly, and I would say that would probably be the functioning of a good, competitive market.

Mr THISTLETHWAITE: But if you are using people's transaction histories and their credit records from external organisations, don't you think they would be quite horrified that you are accessing that information—some would say it was their private information—to target them for certain products?

Mr Hartzer : Again, as a said, I do not believe we use the Veda data in that way, if that is what you are referring to.

Mr THISTLETHWAITE: But you have admitted that you use other data in that manner and it includes their transaction histories.

Mr Hartzer : In some cases, yes; and that is common in the industry. And you can look at that in two ways. You can look at that as a dark side. I think it is important to remember that we do give people the opportunity to opt out of marketing contacts. A customer can say to us that they do not want to be contacted by the bank for other things. So if a customer does not want that, all they have to do is tick a box and we do not contact them—and people do that. So there are protections for people who do not want to be contacted in that way.

Mr THISTLETHWAITE: Does your bank employ league tables to rank the branches in terms of how they are performing, particularly on sales of products and referrals of products?

Mr Hartzer : We do use league tables in a variety of ways across lots of different things. Depending on the role and what part of the bank it is, it might include product sales success. But we use league table for service quality and many other things as well.

Mr THISTLETHWAITE: Obviously those league tables rank branches. Is that by district? By area? How many branches are typically involved in the league table?

Mr Hartzer : We have around 1,000 branches across the country. It would happen at different levels. The person running the branch network would want to know how their different states and regions were performing. A state manager would want to know how their districts were performing. A regional manager might want to know the performance of different branches and how they compare against each other. General performance management is often a matter of comparing and contrasting and trying to understand what someone doing really well is doing differently from the people who are struggling and how we help them.

Mr THISTLETHWAITE: Does that include the branch manager knowing how the tellers and staff in the branch are performing and ranking them?

Mr Hartzer : In some cases, yes.

Mr THISTLETHWAITE: If a person is not performing well in terms of their ranking on targets for products and the like, is that an opportunity for a manager to counsel that employee and perhaps put them on a performance improvement program?

Mr Hartzer : We have expectations for people in all roles. For every role in the bank, people have performance goals that they are expected to hit. If someone is struggling to hit those goals then you would expect that the manager would want to know about it and have a conversation with that person. From some of the other conversations you have had with other banks, I suspect that what you are getting at is that those league tables are being used in a local area to intimidate people. What I would say is that, if that is a concern, it is not how they should be used. We would not support that. We would encourage a staff member who felt they were being unfairly singled out in that manner to raise a concern—and we have a variety of ways for them to do that—and we would take action on that.

Mr THISTLETHWAITE: The league tables are used to measure the performance of individuals and that can lead to them being put on a performance improvement program.

Mr Hartzer : If someone is underperforming against the goals of their role then, yes, they can end up on an improvement program. But it is not necessarily a function of where they are on a league table; it is a function of whether or not they are hitting their goals. We would like everyone to hit the goals; we want everyone to do well. We have been evolving the way we manage our people. We have been running a number of programs. One particular program, which we called Motivate, has been running over the last year. I come back to the point about aligning with our strategy. We are trying to become more advanced in working with individuals to help them achieve their full potential, and that means differential goals for different people based on their level of experience and the like. It would not be fair to characterise our performance management approach as purely being about the relative ranking of individuals. It gives us an insight, but it is not the primary method by which we manage our people.

Mr THISTLETHWAITE: You say 'meeting personal goals'. I am advised that, for a personal banker working at an inquiries counter at a Westpac branch, these personal goals—let's call them targets—would include two insurance sales a week, two home loan referrals, two wealth referrals, one BT life or income protection insurance sale, one wealth referral via Connect Now video conferencing and one home loan referral via Connect Now videoconferencing. Does that sound right as a target for the average personal banker in one of your branches?

Mr Hartzer : It sounds possible.

Mr THISTLETHWAITE: And if a person is not meeting that target every week on a regular basis, you would identify that through the league table and they would be eligible for counselling?

Mr Hartzer : I am not sure it would be a league table per se. Anything we would be expecting of our people we would be measuring, and we provide feedback to the manager about how different people are performing. The starting point if someone is falling short against an expectation is a conversation about why and trying to understand what is going on in that. The goals we set for people are based on what our experience tells us is achievable for someone who is performing well. All of those are outcomes. Essentially what we are trying to do is get our people to have lots of high-quality conversations with customers. You are referring there to a personal banker, whose job is to have conversations with customers all day. Our experience is that, if you are having a high-quality conversation with a customer that starts with 'What are your needs? Where are you in life? What is your risk appetite? What are your ambitions and goals?' then out of that we expect that we would find opportunities for mortgages and insurance. We know for a fact that most Australians are under-insured. You notice, in the way you have described them, that they cover a range of needs. The point about that is that, if you are having lots of high-quality conversations, our experience is that you will identify those needs. So those measures are an indicator for us of whether someone is having enough conversations and the quality of those conversations is sufficient. If they are falling short in an area, maybe they are not spending the time to explore whether someone has properly insured their family or thought about retirement. It is not saying you have to sell this; if you are not getting any, that raises a question for us about the quality of conversations that are going on.

Mr THISTLETHWAITE: But is this setting a clear target for your products that you want your staff to either refer or sell even though they might not be in the customer's best interests on occasion?

Mr Hartzer : Our goal is that all of our products should be competitive. There is a difference between talking to people about their retirement and insurance needs and talking to them about their banking needs. Unashamedly, our bankers sell our products; they are banking products; if you walk into a Westpac branch, you are pretty sure you are going to get a Westpac cheque account. But the referrals are about going to a financial adviser, and our financial advisers business system is based on open architecture. Our clients' best interest is embedded in those conversations because of FoFA, so all we are saying is we want you to have a conversation. The goal around referrals is that we would like the customer to go have a conversation to make sure that they are looked after. We do not believe that we are doing the right thing by customers if we are not making sure that they are at least having a conversation.

Mr THISTLETHWAITE: But why do you need to specify a number of conversations? Why can't it be enough that those are the services that you offer and those are the products that are available for people? You train your staff up on the ins and outs of those products and how to market them to people. Why do you have to put a number on it that they have to crack per week to be eligible for performance pay or, in the past, for bonuses? Why does there need to be a number placed on it? And it is not just you that does this—all of you do it.

Mr Hartzer : Again, what we are talking about there is a measurement of an expectation based on what we have seen fall out of a well performing staff member who is having lots of high quality conversations, and you will notice that the numbers you mentioned are one of this or two of that. It is not saying, 'Go sell eight personal loans,' and they have to sell eight personal loans. It is saying that those are indicators that give us a sense of the quality of the conversations that are going on and if someone over an extended period of time is unable to demonstrate that that outcome is happening, that is an indicator to us that the quality of the conversation is not there because we know, from our experience, that customers have these needs, and it is our obligation to make sure that we are uncovering those needs.

Mr THISTLETHWAITE: If a customer has those needs, wouldn't they go into the branch and tell you?

Mr Hartzer : Not necessarily. The fact is that most Australians do not have enough insurance. Most Australians think superannuation is a retirement plan. That is the reality, and it is not true. There is plenty of evidence about the way consumers think about financial services. In many cases they are in denial, they are confused and they do not understand. We have an obligation. That is why the government is investing in financial literacy and it is why we invest in financial literacy through the Davidson Institute. We have an obligation to make sure that customers are looked after and that those conversations are had. I am not saying you have to buy the product, but we do feel like we have a duty of care to have the conversation.

Mr THISTLETHWAITE: I think there is a big difference between financial literacy and someone going into the bank to do some basic banking and then being asked if they would like to purchase a credit card, if they want to purchase additional life insurance or if they have thought about switching their mortgage over. I mean, it is happened to all of us. Why do you persist with it and why have there been these targets that they have to meet in doing that when I believe that that has been the root cause of some of these problems that we have seen as a cultural issue across the industry over many, many years that have led to these bad outcomes? You have had people banned by ASIC and you have had people sacked. Every single bank that has appeared before us over the course of this week has been involved in this bad behaviour, and it stems from the culture that begins when you walk into the bank and stuff is pushed on you that might not be in your best interest.

Mr Hartzer : We do not condone trying to sell products to people that they do not need, and we have demonstrated that we are making changes to try to make sure that customers understand that that is not what we are asking our people to do. On the other hand, we are unashamed about the fact that it is a competitive market and, yes, if somebody has their mortgage somewhere else, we would like to see if we could offer them a better deal and get them to switch it to us, and we make no apology for that. At the same time though, we also have an obligation to make sure that a customer's financial situation is well looked after. That includes making sure they are managing their money well, that they are not incurring excessive fees, that they have access to good financial advice, that they have good insurance and that they have a retirement plan. That requires our people to have conversations, and the opportunity when a customer walks into a branch is an important opportunity. They build great relationships with the people that they know in their local branch. I constantly hear people raving about Sally in this branch or Jim in that branch. They know these people. They get to know them over many years and they trust them, and we want these people to have conversations that are more than just, 'How are you?' because if we do not look after customers and something goes wrong for them then we have not done our job.

Mr THISTLETHWAITE: Do you believe that the FoFA reforms have led to, in your words, better quality conversations and better outcomes for customers when they do their banking with your organisation?

Mr Hartzer : Yes. We think the FoFA reforms have been good. In fact, one of the most important elements is the move to fee for advice. We believe in that so much we moved to it 18 months before the FoFA regulations came into effect. We are very supportive of those changes.

Mr THISTLETHWAITE: Do you believe that the government should look at extending FoFA to credit and loan products?

Mr Hartzer : We are supportive of improvements in the rules around responsible lending that give people confidence in that thing. When you get into the technicalities of what FoFA does and whether that would read across cleanly to lending products, I think it is probably a bit more tricky, but we are certainly open to advances that would provide more comfort and confidence to consumers.

Mr THISTLETHWAITE: I will move to one more topic before my time runs out. I want to talk about rockets and feathers. Are you aware of this hypothesis that whenever the RBA passes on a rates increase—if they increase the cash rate—surprise, surprise, mortgage rates on bank mortgages shoot up like rockets almost immediately and when the RBA cash rate is dropped they drop like feathers and they take a little bit longer to be reduced. I questioned one of the other banks about it the other day. You all do it, but unfortunately your bank seems to be the worst at the delay in passing on a rate cut. For the August 2016 cash rate cut your bank took 20 days. Professor Abbas Valadkhani estimates that in delaying that rate cut by 20 days your bank makes $28.2 million in profit just from the delay. What is your response to that?

Mr Hartzer : Each bank has a different funding situation. As has been noted in the discussions with the other banks, we do not fund off the cash rate.

Mr THISTLETHWAITE: But it is surely a major determinant?

Mr Hartzer : Actually, no. The cash rate is an important part of what sets the yield curve for interest rates in the economy, but our funding is a mix of mostly longer-term dated deposits, wholesale borrowings, offshore borrowings and the like. Effectively, we have a big pool of funding that has lots of different securities that are going into that funding at different times. It can be affected by when we have actually issued bonds and what the prevailing rates were at the time. So we look at our position from a funding point of view and try to manage the overall margin. What I would say to the general point is: if this were causing a significant distortion in our margins you would see it in the net interest margin of the bank. As I said in my opening statement, our net interest margin has been coming down over time.

Mr THISTLETHWAITE: Why does it take so long to pass on a rate cut in the wake of an RBA decision, but when there is an increase it is done almost immediately?

Mr Hartzer : We have not had an increase for a while. I come back to the point that the nomenclature about passing on a Reserve Bank cash rate is essentially an inaccurate statement because we do not pass it on; that is not what is driving our funding.

Mr THISTLETHWAITE: I will rephrase it then: why do you move your mortgage rate almost immediately when the cash rate is increased by the RBA, and why do you delay in moving your mortgage rate downwards when the RBA moves the cash rate downwards?

Mr Hartzer : I come back to the same point, which is that we have a pool of funding. At any point in time we look at what the trends are in our margins and we make a determination at that time. We might have issued term deposits earlier that are embedded in our funding costs. There can be lots of variations in those things, and each decision is one that we make independently at the time.

Mr THISTLETHWAITE: I have a final question on this notion of that user pays for the funding of ASIC. In the past, when this was floated in early 2014, it was rejected by the banks. What was your bank's view back in 2014 and has it changed?

Mr Hartzer : To be honest, I cannot remember what our stated position might have been in 2014. What I can say is that we supported increased funding for ASIC and we supported a user pays approach. It is in everybody's interests that the regulators are well funded, well staffed and able to earn and maintain the trust of the community. We think a really important feature of the financial system in Australia, as demonstrated by the strength that we have maintained over many years, is that we have very good regulators and very good regulation. If that is called into question, then the regulators should have the funding that they need. From our standpoint, we think a fair approach is that those organisations that are causing the issues and leading to regulatory intervention should be the ones that are bearing the burden of the cost of that regulation.

Mr THISTLETHWAITE: Do you think that ASIC is currently ill-equipped to adequately regulate your industry?

Mr Hartzer : We take that ASIC is a very vigorous and capable regulator, as has been seen by the fact that we have quite a lot of interaction with them. It is a high-quality organisation, but clearly the financial world is complicated, sophisticated and growing. ASIC deserves to have the resources they need to give confidence to the community that their interests are being looked after.

Mr THISTLETHWAITE: Despite the fact that in the CBA case of their financial planners and the whistleblowers, they had written to ASIC three or four times, got no response; they had rung, got no response; and in the end I think they had to walk into ASIC offices and alert them to what was going on in the Commonwealth Bank. That was the catalyst. That was the first instance of the dam wall opening, if you like, with all of these instances of reviews of financial planning and financial planners being sacked. Do you still think that ASIC was doing a good job?

Mr Hartzer : I am not close to that situation. I think it is better for other people to judge what when on there. All I can say is that we find that ASIC are very a vigorous and capable regulator in our dealings with them.

Ms BANKS: Mr Hartzer and Mr King, thanks for joining us. Mr Hartzer, firstly, thank you for your clear answers. We appreciate that at the end of the day you have got a business to run, you employ a lot of Australians and we need banks to support the economic health of our nation. I thank you for your answers to the questions to date. You have also said that yours is a service-led strategy in the bank. Is that correct?

Mr Hartzer : That is right.

Ms BANKS: And you have been very open in recent speeches, et cetera, that you need to address the trust gap between being a service-led strategy and the trust gap in the banking world. Is that true to say?

Mr Hartzer : Yes.

Ms BANKS: My question is: does that same service-led strategy apply in your other brands, like in the St. George brand and Bank of Melbourne, et cetera?

Mr Hartzer : It does. Each of the brands has their own personality. They serve slightly different segments of the market. They have a sensitivity to the local conditions. BankSA is the main bank in South Australia. They each have local variations, but the core service promise is across the group and through all brands.

Ms BANKS: As you might be aware, I hail from the FMCG industry, which has more brand-led strategies. As you would appreciate, there has been a number of big companies, including your bank, that own brands or businesses where the average Joe consumer on the street would not know that that brand is necessarily associated with the bigger entity or the bigger brand. One that comes to mind is that—I used to work for Kraft Foods—not many people knew that Toblerone was owned by Kraft.

My question is going to the sales incentives question, which I just wanted to delve into a little bit and do a bit more of a deep dive in relation to sales incentives. I have gone through this in terms of managing it from the pharmaceutical industry and, indeed, from an overall perspective in big pharma. They too faced issues about sales incentives, as we know, and they have been moderated in relation to sales incentives and self moderated, based on input from third-party tribunals—such as Medicines Australia or the ACCC, et cetera—in terms of how they manage those incentives. With that context, would you say the trust gap is bigger for Westpac than it is for St. George or the Bank of Melbourne? You yourself said they have their own personalities. Would you say that the average banking consumer would know whether the Bank of Melbourne, St. George or BankSA is affiliated with Westpac? Is the trust gap bigger for Westpac, being one of the big four?

Mr Hartzer : There are two different questions in that. In terms of customers' understanding of the brands, I think most people do know that Bank of Melbourne is owned by the Westpac Group, and BankSA and the like. I know that it has been occasionally asserted that that is not true or that somehow we hide it. We do not hide it. We have owned St George now for eight years. We are very open about that. We are very proud of that. We are incredibly proud of the people at St George. We are incredibly proud of what Bank of Melbourne has done to build an alternative offering in Melbourne. It has been incredibly successful and has brought tremendous competition to the Victorian market. We are really proud of our position in South Australia. We talk about that openly.

I have attended customer functions where we have had people from both brands, but the brands are distinct in terms of what they offer, the kind of service they deliver, the sort of personality that they have—and we love that. So the way that we think about it is that it is not that these brands are there to compete with each other within the Westpac Group; they are there to complement each other. There are people who, for whatever reason, do not want to bank with a big bank and like the idea of that local regional feel, and so we try to create that for them in South Australia, in Melbourne and in St George. It works really well.

Ms BANKS: I am sorry to interrupt, but I guess the point I am getting to is that on 22 August, some 18 days after the Turnbull government announced this inquiry, you announced that you had removed all product related incentives for tellers in Westpac, but you did not do the same for St George and Bank of Melbourne. Is there any correlation between the trust gap? It is like, 'Well, we don't have to worry about that, because the consumer or the bank customer is not really aware that St George or Bank of Melbourne are part of the big four, so we will just deal with it in this area.' What is the reason or reasons that you didn't apply that same rule to the other banks?

Mr Hartzer : I understand the question now and I understand where you are coming from. That did not feature in our decision at all. The way we thought about it was, quite honestly, that we have to start somewhere. When we are making changes, as I mentioned in an earlier question, to incentive schemes it is pretty complicated. We have to consult with the union. Each system works a little bit differently lined up with that brand. It is certainly true that the big bank brands have attracted more attention and negative publicity than the smaller banks have. The fact that there are four banks appearing before this committee is evidence of that. Certainly, when we thought about 'Where is the best place to start to make an impact?' that was part of our decision about why we start with Westpac, but it does not change——

Ms BANKS: You started there and you have answered—

Mr Hartzer : Our intention would be to extend this through all of our brands. All I have said is that I do not want to make a blanket immediate statement, because we have not had time to really think it through and the implications of that. But there is absolutely difference in terms of the service orientation and the principles that are at a play, and therefore I think a reasonable expectation is that those changes would apply to the other banks but each of them has their own local challenges, issues and priorities, and I just don't want to force that on them yet. I want us to think it through in a deliberate way, like we do most decisions.

Ms BANKS: In terms of the reporting line structure, I assume that St George Bank and Bank of Melbourne report to you, ultimately. You have ultimate accountability for those banks.

Mr Hartzer : I do.

Ms BANKS: Have you made the decision for them to also remove sales incentives?

Mr Hartzer : What I would say is that I have a working hypothesis that we would extend the changes that we have made in the Westpac brand into the other banks.

Ms BANKS: A working hypothesis is very different to 'Have you made a decision to extend that?'

Mr Hartzer : I do not like to make decisions without thinking them through. We just want to think it through, and we are required to consult with the union on this, I might add.

Ms BANKS: Yes, but surely it is easy to think it through in terms of a strategy and plan. I appreciate that they have different EBAs, and I appreciate the timing of the EBAs and the timing of those negotiations. But once you have made the decision you can draw up the flowchart in terms of implementing that decision. Have you made that decision or not?

Mr Hartzer : Again, I have made a decision that, in principle, that is the direction we are heading in, but I do not like to mandate something until we have had time to really think it through. I really do not think this is a big issue. As I have said, our intention is that that will almost certainly apply. But we need to respect the process we go through on anything to do with pay, which is that we have to consult with the union and we have to consult, very importantly, with our employees. We need to understand how it affects them and we need to understand what other programs or plans are in place and how they might be affected by that. I am just saying that we have to think it through. Our intention would be to go in that direction.

Ms BANKS: Mr Hartzer, you have a very clear consumer complaints process, and I notice the overriding umbrella is, 'Let's get things fixed.' To me, getting things fixed is after something is broken, so that is obviously referring to broken promises, if you like, of your service led strategy or broken promises in relation to what your customer's expectations are. To me, that is very much an after-the-event philosophy or risk management framework. My question goes to the proactive risk management. No doubt you have learnt a lot, and we all take learnings from crises and issues management, as I have in my business experience and I am sure you have from your UK experience. But have you built into Westpac's risk management framework a proactive approach in terms of mandatorily requiring yourself and your senior leadership team to have a risk management workshop on identifying risks and how to manage them, and do you have that regularly and do you all have mandatory training in relation to ethics and conduct?

Mr Hartzer : We do on all of those counts, yes, and I would say that your point is absolutely spot-on about the importance of a proactive approach to risk and regulation. You mentioned your own experience and my time in the UK. Certainly, having seen how things played out in the UK and having had a number of years to reflect on what we would do differently, one of the big things we have learnt is that ultimately, even if they have not quite asked for it yet, what the regulators really want is that proactive approach. We cannot just wait for the regulator to come and knock on the door and say, 'What about this?' We have to be looking at our business in a systematic way and saying, 'Where are we letting ourselves down?' We have implemented a framework like that which will apply across all of our products, all of our processes. We have created new roles for people who specifically focus on this issue. As a bank, we already have very robust risk management processes, and those have been enhanced to include a focus on conduct risk, in particular.

One of the things we are absolutely committed to—and you referred to our complaints handling, which is something we are actually very proud of. We have brought complaints down by 65 per cent in the last four years, and has been through deliberate action, not just to fix complaints when they happen but to step back from it on a regular basis. I get a report every single month that goes through the categories of complaints we are getting, what the root causes are, who is accountable for fixing the root causes and how we are going against that, and that has been a really important part of the service culture that we are building.

Ms BANKS: You mentioned regulatory authorities, which obviously come into any sorts of issues or crisis or dispute management. There has been much discussion here, from the Turnbull government's perspective, in relation to a banking tribunal. What we are about is finding a solution to these complaints for bank customers, which may be the second avenue or an alternative avenue. Indeed, you do an excellent job of your complaints management process. However, quite often a consumer will reach a point in a dispute where the concept of taking on the big bank is unpalatable, which could happen very often. That consumer would have another avenue, in terms of a banking tribunal, which would also serve a purpose, potentially, under the auspices of ASIC, of having strong interventionist powers and would mandatorily require things such as reducing sales incentives or setting benchmarks for product related incentives and other things that impact the consumer directly. What would your view be in relation to a tribunal in that regard?

Mr Hartzer : There are a couple of different points in that. I just say for the record, the starting point should be that we should not have customers complaining. We should fix what it is that is leading them to complain, and some of that is about process and policy and product, and some of that is about attitude and quality of our people and how they are trained, and some of that is about how they are compensated. We are looking at all those things. Our first goal would be: let's actually reduce reasons why people complain. We would rather have people being advocates than complainants. There is that. We want to make sure that, when something does go wrong, they have a very easy avenue to raise a complaint or raise an issue. We have, I believe, a very robust process for dealing with that now. We are building on that as part of the ABA initiatives. We will shortly appoint a customer advocate who will be an independent person within the bank. So, if you are not happy with our internal complaint process, 'Here is someone else you can go to who will give it a fresh look and is empowered by me to make a decision that overrules previous decisions internally, if that is appropriate.' So hopefully we can handle most of those things ourselves, but there may be, as you say, occasions when people say, 'Well, I'm still not happy,' and all we would say is that it is entirely appropriate to have a look at that appeal framework.

I do not have a strong view on whether the right answer is a tribunal per se or something else. I certainly support the idea that we should take a look at the architecture of appeal. At the moment there are a couple of different bodies: FOS, and for superannuation, insurance and that like. If there are places where people are falling through the cracks or if there is lack of clarity as to where the right place to go is or if the limits are not high enough, we would say, 'By all means, let's look at all that.' If the answer is a tribunal, so be it, but we would simply say, 'Let's just not add another layer.' Let's say, 'There's a place for appeal. What is that right place? What are the right scopes and definitions in terms of reference for that? And, by all means, let's simplify it and make it clearer so that customers know where to go.'

Ms BANKS: Mr Hartzer, I would like to compliment you on your work in relation to the Male Champions of Change program. It seems to me that you have an authentic and genuine understanding of what this means, unlike your peer Mr Elliott, including calling out sexist language recently. Clearly, the business case for gender equality has been made and Westpac has made significant progress in that regard. As you may be aware from today's press, some 20 years ago I was refused a bank loan by the ANZ because I was, as I was told by the general manager at the time, a married woman of child-bearing age. That was a personal example of very conscious bias. What we are all talking about these days—and certainly the work of the Male Champions of Change program has done this—is the area of unconscious bias. Two things surprised me about yesterday's events. The first was your peer's response. He completely missed the point and said, 'No, we've got lots of women in branches and women in senior leadership.' As you and I, I am sure, both know, you can have unconscious bias coming from women and men equally. The second thing that surprised me was the overnight reaction and response to my story. It is not uncommon, and I did not think it was. I received numerous messages and emails from women around Australia who believe intuitively that they have been victims of unconscious bias at the customer interface level, where they have applied for a loan or even a credit card. I had one example of that. I am getting to my question.

As we know, in the modern world a number of women are setting up start-up businesses, for example, from home so they can duly manage their child-caring responsibilities as well as set up start-up businesses in areas that are non-traditional, versus the tradie carpenter who might be setting up his small business—let's say that is a man. They have said that they have been unfairly treated. I know Westpac has done unconscious bias training, or I suspect you have, at a leadership level. Would you consider a mandatory requirement of unconscious bias training at that customer interface level, where your employees who deal with customers are trained to recognise in themselves an unconscious bias—we all have unconscious biases—to effectively deliver better outcomes for our total population; that is, our male and female population?

What would be your thoughts about that idea?

Mr Hartzer : The first thing to say is I heard your story and was very touched by it. It just brought it home for us. One of the things I say to our people a lot is that—it might sound odd to some people—banking is an emotional business. You are dealing with people's money; that is a deeply personal thing for people. The reality in Australia is that more than 50 per cent of financial decisions are actually made by women. It is in our commercial interest, as well as the national interest, to make sure that women are supported in engaging in financial services, from a banking point of view, increasingly from a business point of view and definitely from a retirement and investment point of view. This is something that Westpac Group has focused on for a very long time.

We have a separate business unit called Women's Markets that does extremely well. It is focused on specifically reaching out to women and helping them engage, learn, be supported and the like. It is run by a woman called Ainslie van Onselen, who used to be my chief of staff, and she is responsible for looking after women as a business opportunity. She also dual hats as the head of diversity and inclusion for the bank, because we do see that interaction between how we think about and engage with women in the company and how we support women from a business point of view.

One of the things that I asked Ainslie to do a year ago, when she went into that job, was to specifically look at whether there were any policies or practices embedded in our business that were disadvantaging women and to fix them. Thankfully, we did not find too much, but we have found a couple of things. For example, we recently announced that we will take into account people's pay when they are on maternity leave and the like when assessing credit, which previously had not been the case. It was just one of those historical things—a bit like your experience—that did not make any sense in a modern era but through the depths of time had been embedded. So we have made those changes and we continue to work on these things.

I completely agree with you that one of the biggest issues for women has been unconscious bias. It is something I have spoken publicly about myself. I have four daughters, so it is an issue that means a lot to me. We have had unconscious bias training in the last 12 months for our top four layers of management. We first introduced unconscious bias training at Westpac 20 years ago. We will continue to look at everything we can do to make sure that, from a customer interface point of view, women feel very welcome at Westpac. We do that. Women's Markets promote something called the Ruby Connection, which is an organisation online that provides access and information for women. We have the Stella Network, which is about female financial planners and which is something else that we promote not just within BT but more broadly. We continue to do things to advocate on that, and we think it is something the whole industry should embrace.

Ms BANKS: That is excellent, but I guess my question goes again to the tribunal. I know you referred to it as an appeals tribunal. I see it more as another vehicle, an access tribunal for the banking customer as well as a tribunal—as the ACCC does or the TGA does for the pharmaceutical industry—to put mandatory requirements on the big four banks in relation to, for example, training expectations such as ethics training or unconscious bias training. It may well be that Westpac do all that training internally, but the tribunal concept that we have in mind is ultimately to provide benefit to consumers. The only way to provide benefit to bank customers, really, is to ensure all employees across the banks are appropriately trained. That was the concept I was getting at. What would be your thoughts about embracing other mandatory requirements within that tribunal as the access vehicle?

Mr Hartzer : I certainly acknowledge and support the idea that the industry should continue to explore whatever it needs to do to build trust with the community. I suppose I have some concern about more prescriptive regulation. We already have a lot of regulation, and regulation has not necessarily saved consumers. I think forums like this that bring scrutiny to what banks are actually doing and make people feel the public heat—to stand up and talk about what they are doing for their customers—and ultimately give customers choice about who they want to bank with is what I tend to be biased toward, rather than expecting too much prescription, because the more you start to prescribe exactly how a bank has to do what it does then the more unintended consequences of that there are, and I just think those things need to be thought through very carefully.

CHAIR: Thank you. We will now take a 10-minute break.

Proceedings suspended from 14:55 to 15:06

Mr KEOGH: Mr Hartzer, have you had any conversations with anyone in the government about this idea of setting up a tribunal to deal with customer complaints prior to today?

Mr Hartzer : I think I was at one meeting a couple of months ago where the idea was mentioned. It was certainly not an extensive conversation.

Mr KEOGH: Who was that with?

Mr Hartzer : I would guess that it might have been the Treasurer.

Mr KEOGH: It might have been?

Mr Hartzer : As I say, it was several months ago. I would say I have probably had a very short conversation with the Treasurer about it, but I could not swear to that. My memory is a bit hazy.

Mr KEOGH: What sort of suggestion about the tribunal was put to you in that conversation?

Mr Hartzer : There were no details. Actually, I do remember—sorry. I know where this came up. There was a meeting with representatives of the banks. It was in the press. It was April, May—I cannot remember exactly— and there was a discussion and one of the issues that was raised was about resolution of complaints and whether that whole thing needed to be looked at. We agreed, as I said in my earlier response, that it is important that there is an appeal process. If there is a gap between the different institutions then it is reasonable to look at that.

Mr KEOGH: So the idea of a tribunal was raised at that meeting. The Treasurer was present at that meeting and you said representatives of other banks were also present at the discussion?

Mr Hartzer : Yes. It was in the press at the time that there was a discussion between the Prime Minister and the Treasurer and representatives of the banks. I believe that that was one of the items that came up in that discussion.

Mr KEOGH: What was the view that you and your bank expressed about that idea at the time?

Mr Hartzer : It would have been what I said in my response earlier, which is that we are very happy with the idea that the architecture of appeal, to use my own word for it, should be looked at. If there is an issue of people falling between the stools or having limits that are too low, we are very supportive of that being looked at.

Mr KEOGH: Initially your response was you thought that that was a few months ago. You then said there was a discussion in around April or May. Has this issue been raised with you subsequent to April and May but before today?

Mr Hartzer : I could not tell you definitively. What I can absolutely say is I have never had a long conversation about the topic of a tribunal. I am not really even aware of what the details are of what is recommended. My immediate response is that I am very happy for that issue to be looked at—whether there is a gap in what sorts of customers are eligible to go to a review process. I accept that there might be places where there is overlap or gaps in coverage and it seems perfectly sensible to us that that would be looked at. As to whether the answer to that is a tribunal, a new institution, a merging of some institutions or a reframing, I am completely agnostic.

Mr KEOGH: But you cannot rule out that there has been a conversation more recently where that may have been raised in some degree of detail that you cannot properly recall at this point?

Mr Hartzer : Correct.

Mr KEOGH: When you said you were not aware of the detail of the recommendation, or a recommendation, is it your understanding that there may be a recommendation floating around government?

Mr Hartzer : Only what I read in the papers.

Mr KEOGH: But you do not know—

Mr Hartzer : Well, I understand that there is a conversation going on about the possibility of a tribunal. To be honest, the wheels of government turn and turn, and different proposals come and go. The only thing I can add as an input to that is that if people are worried about there not being a robust, consistent and comprehensive appeal mechanism then by all means that should be looked at, and we are very supportive of whatever emerges from that process.

Mr KEOGH: In any of these discussions, was it suggested to you that such a proposal or idea might be raised with you in these hearings?

Mr Hartzer : No, not that I am aware of.

Mr KEOGH: Not that you are aware of? I am asking about conversations you participated in.

Mr Hartzer : I have not had conversations with anyone in the government about this process. I think it has been well trialled that there were no conversations about what was going to happen in this meeting before it happened.

Mr KEOGH: Okay. Can I take you to point 6 of the Australian Bankers Association's six-point plan? The second part of that says that the banking industry:

… will also work with ASIC to enhance the current breach reporting framework.

You previously said that you thought in relation to industry funding for ASIC that ASIC is doing a good job. What is it about the breach-reporting framework that you think needs to be improved?

Mr Hartzer : I would have to come back to you on that, to be honest. I do not remember that being a significant issue for us at Westpac. Peter, do you—

Mr King : I think there are always judgement and interpretations. One of the pieces of legislation is a material breach. What is 'material'? It is working those down into operational interpretation. When do you tell ASIC? What time? Often when we think we need to tell them we will give them advance notice before formal acknowledgement of the issue. So it is just a matter of getting it down into clear operational procedures so there is no doubt about when you need to advise.

So the intent, I think is clear—

Mr KEOGH: So your view is that there is some lack of clarity around how the breach-reporting framework works?

Mr King : The legislation says 'material breach', and that can be interpreted in different ways. I think it will be good for the industry to have clarity so that everyone is doing it in the same way.

Mr KEOGH: Okay, thanks for that. Mr Hartzer, can I just ask what your base salary is—what your standard cash salary is?

Mr Hartzer : All my pay is fully disclosed in our annual report every year. My base pay is, I believe, $2.68 million.

Mr KEOGH: And what is the total of your short-term incentives?

Mr Hartzer : It is the same as that—$2.7 million.

Mr KEOGH: As well. What proportion, as you understand it, of your short-term incentives is based on financial performance?

Mr Hartzer : It is about 30 per cent. Yes—so, my short-term incentive is based on a scorecard. That scorecard is 30 per cent based on returns, 30 per cent based on growth in the business and 40 per cent based on strength of the business. There is a variety of component measures underneath that.

Mr KEOGH: So those measures are all financial or market—

Mr Hartzer : No, there is a mix in there. Return would cover the economic profitability of the business and how we go on our earnings targets. Growth would be about customer numbers, market share and service quality. Strength would be about how we manage our balance sheet, how we manage risk, people and culture measures and improvements in our technology infrastructure.

Mr KEOGH: And what is your total annual remuneration?

Mr Hartzer : Last year, as disclosed in our annual report, it was $5.7 million.

Mr KEOGH: It was $5.7 million. And how does that compare to the starting salary of a teller in one of your banks?

Mr Hartzer : The starting salary of a teller is about $45,000. On average, our tellers make a little over $50,000 a year.

Mr KEOGH: We have had a lot of discussion already today about the importance of culture and how incentives can drive culture, I guess. Obviously, you have highlighted how Westpac has removed those direct product-related incentives from remuneration for your tellers—although there was still some element around their targeting. How is it that your remuneration and the remuneration of your senior executives does not include anything in that scorecard in relation to customer satisfaction?

Mr Hartzer : It does.

Mr KEOGH: No, it does not.

Mr Hartzer : It does.

Mr KEOGH: There is no score in your annual report that relates to customer satisfaction. The only measure that could be close to that appears to be whether you have grown the customer base, but there does not seem to be any measure that I can see in your annual report that talks about measuring customer satisfaction or even a net promoter score.

Mr Hartzer : A net promoter score is in my scorecard. It may be that in the annual report we do not disclose every little item in my scorecard, that the measures that are there absolutely include—

Mr KEOGH: So it is a net promoter score?

Mr Hartzer : Last year, we used a net promoter score.

Mr KEOGH: Because there has been a lot of criticism of the net promoter score both in terms of its accuracy for what it purports to talk about and also in that it is not a measure of customer satisfaction itself. In any event, what proportion of your overall scorecard does that particular item represent for your short-term incentive remuneration?

Mr Hartzer : From memory, it is 10 per cent.

Mr KEOGH: That is significantly less—in terms of looking at the customer view of the bank—than your peers, it would appear.

Mr Hartzer : I have got a series of other measures that are really about the transformation of our company into becoming a service-based organisation. My scorecard is around the changes that we are driving in the business. There are things like technology, for example; people and culture are very much aligned to the service strategy that we are going after.

Mr KEOGH: And a lot of your peers have those measures as well, but I think there is an interesting disconnect that seems to be embedded in your scorecard versus that of some of your peers around how much a customer satisfaction rating or a net promoter score—which some of you have started to move towards as an alternative to actual customer satisfaction—is part of your remuneration versus what you are trying to do with other parts of the bank and the message you are trying to sell their. That than leads me to this issue around the advisers that have been notified to ASIC and moved on. You said that at the Senate inquiry there were 11 that were notified to ASIC in the last five years. Is that right?

Mr Hartzer : That is correct.

Mr KEOGH: Then you said that since then there has been another 11.

Mr Hartzer : Yes.

Mr KEOGH: Was that the conduct that had occurred in just that period or over the—

Mr Hartzer : Over the broader period. As we went back through the data around customers and did a review for the kinds of the things that we had found with the first 11, we identified another 11. The timeframe overlapped with the—

Mr KEOGH: So that is still over five years. It is not that there was 11 in the last 12 months.

Mr Hartzer : Correct.

Mr KEOGH: What was missed with the first 11?

Mr Hartzer : I would have to come back to you on the exact details, but essentially we have done a very thorough review view of customer files. We identified some things that individual financial planners might have done and then we have gone and said, 'Well, there are other examples in the base where somebody has done that similar thing.' That has flagged people and then we have gone looked at them and, in some cases, discovered issues of misconduct.

Mr KEOGH: I have raised this issue before. I am interested to know what your view is—especially as you have worked in the UK—about their new strengthening accountability framework, which is putting a statutory obligation on senior managers for financial services to identify areas of the business that a senior manager is responsible for and that they are responsible for certifying that people under them that are doing advisory work are fit and proper to do that work on an annual basis. Do you see any merit in that sort of regime being established in Australia?

Mr Hartzer : I would break that into two parts. I think I and all my management team are absolutely accountable for maintaining high standards and for not just reacting to issues but proactively looking to make sure that the business systems we put in place are designed to deliver sustainable and good outcomes for customers. With respect to the standards for financial advisers, we are very much in favour of higher standards for someone who calls themselves a financial planner. We have lifted the standards and requirements for our own people to make sure they all have an appropriate qualification. We support improvements in the registry around people who are approved financial advisers, and we also support a registry for people who have done the wrong thing and should be banned from the organisation.

One thing that BT did recently, voluntarily, was that we introduced something that is an online review of our financial advisers where their customers can go on and post reviews, just like TripAdvisor for financial advisers. That is public. It is online and people can go look in their local area and look at the ratings and the comments from customers of each individual planner. We think that something like that would make a lot of sense for the country because some of these registries that you have tend to be held in a regulatory body. People have to go looking for it. They are not necessarily out in the public domain in a way that customers are going to come across it. So, we think that technology offers the opportunity to lift the game around disclosure of who's got the right capabilities and encourage people to do a proper investigation before they get financial advice.

Mr KEOGH: You have said that internally in the bank, you make sure that your senior management take responsibility for their roles and that they are accountable for that. If that is the case, you would not see any concern with that being reflected in the law then?

Mr Hartzer : That is a matter, I suppose, for the government.

Mr KEOGH: The law is a matter for the parliament, but I am asking if your view is that your senior executives and your staff are accountable and responsible for their work or where things go wrong, would you see any concern, then, with that accountability and responsibility being reflected in legislation?

Mr Hartzer : Inherently, no. Although I would say I have not really thought through all the unintended consequences of that. I would just make the observation that, overwhelmingly, people want to do the right thing. I am convinced our people do not come to work in the morning wanting to do the wrong thing by customers or break laws or break regulations. It is entirely appropriate that we are subjected to accountability and transparency for the impact of the decisions that we make. If you try and run everything on the basis of rules and punishment, you also take good people and, in some cases, discourage them from trying things, innovating, taking risks and the like. So there needs to be some context and balance in these things. The answer to everything is not the threat of criminal prosecution. I mean, I am sure that is entirely appropriate in some circumstances, but we are in a dynamic market. The financial services industry is very innovative. We are asking, on the one hand, people to try new things and innovate and have a regulatory sandbox and, on the other hand, we put all sorts of restrictions and threats against people—they are not going to do that.

Mr KEOGH: I think the key thing here about what I am asking you though is—we are not saying do not take risk and we are not saying do not innovate—that where people take that risk, or the bank as an organisation decides to take that risk, with what is effectively other people's money by advising them to put it into certain products or to buy certain products from the bank, that the advisers are responsible for it, but also that their senior management are responsible for the culture that surrounds that and for the systems that are in place and the training that has been put in place, so where that advice is given and risks may be advised to be taken, that there is a chain of accountability and responsibility for that.

Mr Hartzer : And I support than wholeheartedly. What I would say is when you are in the realm of investing, the nature of investing, as I said earlier, is that past performance is not a predictor of future result and the nature of investing, unlike, say, buying a term deposit from Westpac, when you make an investment in the equities market, you are taking risk.

Mr KEOGH: Of course, but this is about the advice not what the markets may do.

Mr Hartzer : Sure. I suppose what I am saying is our experience is—and we saw this a lot after the GFC—when investments go wrong, if they have been poorly advised, absolutely, there should be consequences for that. Absolutely. But, sometimes when things go wrong—

Mr KEOGH: Sometimes things just go wrong.

Mr Hartzer : If people feel like I cannot give you advice to take any risks because if it goes wrong you are going to blame me and I am going to be subject to a criminal penalty, then a normal person is going to be a lot more reticent about potentially giving you with the advice that you should be getting. So, all I am saying is that there can be unintended consequences and—

Mr KEOGH: Is that the feedback you have been getting from what is happened with the UK, with this regime being implemented?

Mr Hartzer : We have not had any significant discussions around that. All I can reflect on is my own experience when some of these things were mooted and I was there. The discussion on management teams there was, 'Well, of course we want do the right thing and, of course, we accept that there needs to be a regime in place and consequences when things go wrong'—nobody disputes that. I merely saying that—

Mr KEOGH: We just have to get the nuance of it right.

Mr Hartzer : Yes, and just be careful about the unintended consequences of leading people to be too risk adverse.

Mr KEOGH: I will just change track a bit. Do you know what the cost is on a per transaction basis for running your ATM network?

Mr Hartzer : I think we typically assume it is around 20c for a transaction. It depends on the kind of transaction.

Mr KEOGH: What is the marginal additional cost for a transaction on your network by someone from another bank?

Mr Hartzer : I do not know that figure off the top of my head.

Mr KEOGH: Would it be 100 per cent, 50 per cent, of that?

Mr Hartzer : It is difficult, because ATM networks are really expensive to run. They are big physical devices; people try and deface them—

Mr KEOGH: I understand all of that, but I am just asking—

Mr Hartzer : The point is that it is kind of hard to answer the question without pointing out that you have to make assumptions about cost allocation.

Mr KEOGH: How do you allocate cost between your own customers for the maintenance of the network and the assumption that a proportion of the transactions on that network are undertaken by customers who are not yours?

Mr Hartzer : I suppose the backdrop to this is that, previously, we had an interchange regime that allowed banks to net off our customers using each other's networks. That allowed the cost of a broad, open network to be shared between the banks. There used to be negotiations bilaterally between banks that would—

Mr KEOGH: I am actually trying to get to that. There was a view that transparency was required, and we moved to this new regime. I understand that.

Mr Hartzer : Yes, and so we moved to where interchange was ruled out—

Mr KEOGH: I am after a little bit more transparency about what is the marginal cost.

Mr Hartzer : I do not have that figure, but the point is that right now the cost—and I think it is a very important point, because some people probably do not quite remember that this is actually the case. We do not charge our customers for using our ATM network. It is free. We absorb all the costs of the ATM network for our customers.

Mr KEOGH: When you say—

Mr Hartzer : So the only customers who are paying to use our ATM network are people who do not bank with us.

Mr KEOGH: To clarify some parts of that: when you say you absorb the cost, that cost is not accounted for anywhere and the cost of running that network is, effectively, entirely paid for by the cost of non-Westpac customers using the network?

Mr Hartzer : No, absolutely not.

Mr KEOGH: Or you do account some of that cost back to your own product base?

Mr Hartzer : There are fees that we charge foreign users—what we call foreign ATM fees. The fees that we charge to noncustomers using our network help to defray the cost of running our network, but absolutely come nowhere near covering the cost of running out ATM network.

Mr KEOGH: Okay, but it is the case then that customers from another bank using your ATMs are paying more than the marginal additional cost of your running the network in order to offset the cost of your running the network as a whole, for your own customers?

Mr Hartzer : I am sorry, you lost me. Can you say that again?

Mr KEOGH: The cost you charge a non-Westpac customer for using your ATM is more than the marginal additional cost of them as a noncustomer using it, but is actually subsidising the use by your own customers?

Mr Hartzer : I could not say that for sure, but that is probably a reasonable assumption. But, again, I would come back to the core point, which is that these are people who do not bank with us but are taking advantage of an infrastructure that we spend millions and millions of dollars to make available to our customers. Do we charge them a fee for that? Yes, we do. Does that cover the cost of our ATM network? No, it does not.

Mr KEOGH: I might put some extra questions on that in writing subsequently. Can I ask a final set of questions: we have had a lot of discussion about mistakes of the past during these hearings, with yourself and with other banks. In respect to those past mistakes and performance issues that have arisen at your bank, as I understand it from what you have said, your process has been to review what has occurred and why it has occurred and then to try and put in policies and procedures to address those issues in an attempt to try and stop those things from happening again in the future. Is that a correct summation of what you have done?

Mr Hartzer : Yes.

Mr KEOGH: So it would be true to say that, before setting out and implementing new ways of going forward to address customer issues and complaints, you think it is a good idea to try and work out what those issues are and how to really do an assessment of how to address them. To not just—

Mr Hartzer : I am sorry, can you say that again? I did not—

Mr KEOGH: Following on from that, you are saying that before you go and change a process you assess what the issue is that you are trying to address, what issues are not working. Like you said with your reports that are coming up to you—are there systemic issues that you need to address in customer complaints? Is that what you do in your bank to address those issues?

Mr Hartzer : Yes.

Mr KEOGH: I think following on from that and the process you have adopted, you are looking—and would see it as being more important almost—to not just identify where there is rogue activity, but whether there is a systemic issue, something that has been dropped, where you need to fix a broader problem in the bank.

Mr Hartzer : Both of those are important. We have detective controls for if someone is doing the wrong thing, and we also have a process where we are going through all of our products, processes, policies and the like to see if those need to be changed.

Mr KEOGH: And if there are any systemic issues that need to be addressed?

Mr Hartzer : Yes.

Mr BUCHHOLZ: How much does your credit card business generate as a profit? Are you able to disclose that to the nearest whatever that you feel comfortable with?

Mr Hartzer : We do not have a credit card business. We are organised around customer segments. We have a consumer bank. We have a business bank and an institutional bank. Within that we have lots of products, but we mostly run our business through our brands and through thinking about different customer segments. So we do not actually have a credit card business that has a profit.

Mr BUCHHOLZ: If I were to carry a Westpac credit card, in what part of your business would you record that expenditure and revenue? And where would you allocate the profit to—in a commercial book?

Mr Hartzer : It depends on what kind of customer relationship we are talking about. For a consumer, they would be looked after in our consumer bank. We would look at the overall revenue from that customer. Then we have a whole different series of costs, which we manage separately. So we have the cost of our branch network; the cost our ATM network, our product management functions and our risk management functions. We essentially add that up at a business unit level—like the business bank and the consumer bank—but we do not take the process of allocating all of those costs down and saying, 'Okay, here's the PnL of all the different products.' We obviously think about the economics when we are setting our pricing, but I do not get a report. Peter does not get a report that says this is the profitability of that.

Mr King : A small business will often have business products and consumer products—a consumer card. That customer is managed in the business bank, including the consumer products that they use. That is why we do not have a cards business.

Mr BUCHHOLZ: You don't have a cards business. So you are unable to advise us as to whether or not that part of your business is profitable?

Mr Hartzer : It is not a business per se.

Mr BUCHHOLZ: You don't catch that data?

Mr King : We do not attempt to do things, like the board costs, to allocate that down to product levels, because there are lots of costs in the group that are enterprise-style costs and we do not push them down. What we find is that there is no benefit in trying to do that, because the cards product cannot drive any decisions in relation to those costs. What we are saying is that there is no fully allocated—

Mr BUCHHOLZ: How do you set your risk? I am assuming that I am a very successful small business. I have a credit card linked to it. I have never missed a payment with you. You do not have a credit card business, but I seem to have a credit card, which I am paying whatever per cent on, which is many per cent above my business loan. I am exactly the same risk profile. Why am I paying 19 per cent then?

Mr King : When we set the risk—if we think about the product of cards—there are four big costs that go in there. There is capital, credit costs, funding costs—

Mr BUCHHOLZ: Sure. I am only asking you about the risk. How do you assess the risk if you do not have a credit card business? I become the risk. It is the head rather than the product. How do you assess me paying 19 per cent on a credit card on which I have never missed a payment with Westpac? I have been a customer for five generations, yet I am at this higher level of interest rate.

Mr Hartzer : You raise a good point. From a risk management point of view, we tend to do risk assessment at a product level, although it gets a little muddier when you get into business customers because we do look at the overall history of the relationship generally when we are doing that. A credit card is a product that is managed on a mass basis. It is a portfolio product. Most of the work that we do there is done by analysing large amounts of data and coming up with risks at a portfolio level. It would be too expensive, if you like, to do the same sort of review of a small business person's credit that you do at a credit card level, because the balances are much smaller. You just cannot afford to do it. You raise an interesting point, which is: in theory would it be nice to be able to individually price every individual product for a business customer? Yes, it would. Practically, we are not able to do that right now.

CHAIR: For a point of process—Mr Buchholz has asked you a fairly direct question about the profitability of the credit card business, and just for our procedures, I think it fair to say that you are not answering that question. Is that fair?

Mr Hartzer : What I am saying is, we are unable to answer that question because we do not have a credit card business per se.

CHAIR: I will just note that under the practice, at page 123 paragraph 9, that is something that the committee will note and may correspond further with you about.

Mr BUCHHOLZ: This raises an interesting point. Is it then possible for you as a business, on the whole, to reduce your credit card interest charges and still be profitable?

Mr Hartzer : Credit cards are certainly an attractive product. Over time, it is a contributor to our profitability. As I said, we do not allocate all the costs down, so we are not in a position to say 'this is the full profitability of that'. But I would certainly agree that credit cards in total are profitable. What I would also say about credit cards, and I know the committee has heard testimony on this from a number of people, is that a credit card is a different kind of product than a normal loan. It is a—

Mr BUCHHOLZ: I understand.

Mr Hartzer : So the economics of it are different, and has been said by others, we do our pricing around those things to reflect the dynamics and the costs specifically to that product, and also the credit performance over a cycle. Credit cards in particular are a product that, when things go wrong—

Mr BUCHHOLZ: Sorry to interrupt, but could you reduce credit card interest rate charges and still be profitable?

Mr Hartzer : We could, yes.

Mr BUCHHOLZ: Yes, you could. What do you do for loyal customers? You know, that fifth-generation customer that has been with you with their credit card? What do you do for them as Westpac?

Mr Hartzer : What do we do for them—in what respect?

Mr BUCHHOLZ: I am sorry. I know what you do for someone who does not deal with Westpac. Most of the banks do it. They will offer them an enormous inducement to come and consolidate their loans—bring it, and the banks will offer zero per cent. That is a wonderful, wonderful inducement. My question is, what do you do for the guy who chooses not to leave, stays behind, shows loyalty to your brand and who by all endeavours has a great credit history, other than shifting from 21 per cent down to a 13 per cent on an unsecured loan? I know what we do for those people who want to be transient in the market. They get an incredible deal at zero per cent. What do you do for loyal customers of Westpac?

Mr Hartzer : I put that in two categories. If I talk about it within the context of credit cards specifically—and this flows on from the earlier conversation about reviewing our products and our processes—one of the things that has come up as we have looked at credit cards through that lens is that there are some people who are using a credit card as a long-term borrowing product, who really should not be. A credit card is a short-term, revolving product. One of the things that we have been doing is using our data to identify customers that we feel are potentially not in the right product, given their borrowing needs. We have been proactively going out to them and saying, 'Shall we have a conversation to explore whether there is a better solution for you?'

Mr BUCHHOLZ: Consolidate them into an unsecured loan with a fixed beginning and end—

Mr Hartzer : Right—into an instalment loan.


Mr Hartzer : We are doing that, they let us do that—

Mr BUCHHOLZ: Reduce their lend, get them out of 20 grand, give them a two grand limit and away they go.

Mr Hartzer : Right—we think that is a responsible thing to do. One of the answers—in terms of loyalty—is, the more data we know, the more we can make an assessment.

Mr BUCHHOLZ: When you consolidate them into an unsecured loan, is that zero per cent for the first transfer of balances—the similar attraction that exists in the credit card world—or what would they be paying as a loyal customer when you consolidate them into an unsecured loan?

Mr Hartzer : It would depend what—

Mr BUCHHOLZ: Roughly—a range.

Mr Hartzer : It could be anywhere from eight to 14 per cent.

Mr BUCHHOLZ: But it is not zero.

Mr Hartzer : No.

Mr BUCHHOLZ: No—so, it is eight to 14 per cent. That would be in line with the industry standards. I will wrap it up, actually. I suggest that the industry, and Westpac, have the capacity to reduce the interest rate across the board in their credit card space on assessment of risk profile. I suggest that is able to happen. It would compromise some profits, but you would still be able to be very profitable. I would suggest that there are far more attractive parts of your business that appeal to clients who are not your customers and that not enough work is being done in the area of looking after your loyal clients. If I go to you I can get zero. If I am your loyal customer, the best I can get is trimmed up to eight per cent. Do you understand what I am saying?

Mr Hartzer : I absolutely understand what you are saying. I think the broader point about loyalty is an important one. When we think about our strategy of building long-term relationships, one of the things we are actively thinking about is: how do we demonstrate that we can reward customers who have been with us for a long time? There are lots of ways we do that already in terms of the quality of service we give people, the way we stand by them when things get tough—all those sorts of things. I absolutely acknowledge that there is more we can do to be rewarding and recognise loyal customers and it is in our interests to do that.

Mr BUCHHOLZ: Assuming that all the machinations now exist for it to happen—and you have been very frank with us today, which has been appreciated—if you were to offer your loyal clients a two to three per cent reduction on their credit card, what, in your opinion, would their reaction be? During the process today, we have spoken about a lot of research being done with clients and market research. If you went to the market and said to your loyal clients, 'Thanks for coming; we have assessed your risk; here is a two to three per cent rate decrease,' what would they say?

Mr Hartzer : I suspect they would be happy.

Mr BUCHHOLZ: Giddy-up! Well, there you go; there is a thought. Thank you.

Mr BANDT: I understand that between 2004-05 and 2014-15 Westpac made $1.8 million in donations to the Liberal and Labor parties. Given that during that period of time, under various governments, you have avoided a royal commission or any additional tax being put on your world-leading profits, do you consider that money well spent?

Mr Hartzer : What I would say is that we at Westpac have a policy that is very open and transparent about our support for the political process. We do not give cash donations to political parties. We do, however, believe it is important that we engage in discussions and support the political process by attending conferences and the like. We disclose everything that we donate, fully, in our annual report and to the AEC.

Mr BANDT: Earlier, NAB was telling us—in part so that there was no perception of conflict of interest—that, for the same or similar reasons that they were changing their remuneration structure, they would no longer make donations to political parties for the appearance of being clean and so as to be seen to be doing the right thing. ANZ said that they would also be considering their practice of making political donations. In light of that, is that something that you would reconsider?

Mr Hartzer : Again, our policy is very clear and we do not have any plans to change it. We do not make cash donations to political parties but we do engage in the political process. We think, as Australia's oldest company, that is an appropriate thing for us to do.

Mr BANDT: Moving to another matter. In your opening statement I think you said—and I do not have the exact words in front of me—that your return on equity of around 15 per cent was actually necessary for you to be perceived as financially strong and, domestically, systemically important. Do I understand that correctly?

Mr Hartzer : That is what I said, yes.

Mr BANDT: Apart from Canada, can you point to anywhere else where systemically important banks are routinely returning above 10 per cent on equity, let alone 15 per cent?

Mr Hartzer : If you are talking about the US, the UK and Europe, I think these are markets with broken banking systems that have had massive fines for misconduct around mortgages and that have had massive losses in investment banking activities. Neither of those things pertain to the Australian market. What I can say is that if you look within those existing businesses—and I ran a large retail bank in the UK and can tell you—the returns underneath those banks are equivalent or better than the returns we generate in Australia. The differences are easily explainable by the fact that those markets have very challenged banking systems.

Mr BANDT: But it might also be that in some of Europe they have taken steps towards redressing the fact that these big banks are treated as too big to fail by asking those banks to perhaps pay back some more into the public purse for that implicit government guarantee that they get. As the Reserve Bank governor has suggested, that is something that could potentially mean that it comes out of return on equity rather than being passed on to shareholders. That might be another reason, mightn't it?

Mr Hartzer : I suppose I would not really think that we would aspire to have the situation that they have in Europe. Banks in Europe are in deep trouble. We have seen the news in the last couple of weeks about Deutsche Bank, and most of the banks that have had these issues are banks that have very large investment banks that have been active in capital markets, have had massive losses and have had to be bailed out by their governments. None of those things are true in Australia.

Mr BANDT: During the global financial crisis, the big four banks did get some support from the government over and above the smaller ones. It enabled you to come out of the GFC with greater market share, and this return on equity of around 15 per cent is effectively a two-decade long average. The Reserve Bank governor has invited us to consider whether there are ways of making systemically important banks bear the cost of post-GFC liquidity and stability reforms without it being passed on to customers. I am suggesting that that is one way of ensuring that you remain stable and successful but that there is some recompense for the implicit government support you get. It might be a small levy on the big four banks that might bring return of equity, and it will still probably be above 10 per cent, but that is something closer to what is happening in the rest of the world.

Mr Hartzer : I would make two points on that. One is that I do not think we should aspire to have a banking system like the rest of the world.

Mr BANDT: I do not think anyone is suggesting that. We are wanting you to be stable and successful, but when you are making world-leading record profits off the back of implicit government support, the public is entitled to ask for a bit of it back, aren't they, rather than bearing all the costs themselves?

Mr Hartzer : I would take issue with the assumption of that. We pay, already, for the CLF and the RBA. We, as domestically significant banks, are required to hold higher capital than the smaller banks are. I would just make the observation that if you were to start to charge banks for an implicit guarantee, you are effectively making that an explicit guarantee, and I think the government would want to be pretty careful given that we do not actually guarantee our large banks to make that an explicit undertaking.

Mr BANDT: So if there was another situation where credit was difficult to access then you would not be asking for government support?

Mr Hartzer : We did not ask for government support. I think it is important to remember that the Australian banks did not require support and, in fact, during the financial crisis Westpac continued to lend $2 billion of mortgages. We stayed open for business and were very clear about that.

Mr BANDT: Because the government generously underwrote your credit.

Mr Hartzer : What happened in that period was a reaction to the rest of the world, and the Australian banking system imports capital on behalf of the Australian economy from wholesale markets overseas. We have a current account deficit—that is the nature of our bank. What happened then was that countries like Ireland and other places that had banking systems that were completely broken guaranteed their deposits and guaranteed the wholesale borrowings of their banks. Because investors overseas have choices, they are likely to choose a bank guaranteed bond rather than a non-bank guaranteed bond, particularly in a time of crisis. So the determination was made, and I would hasten to add it was mostly to support the small banks in Australia rather than the big banks. Without some sort of guarantee the small banks and potentially the Australian larger banks would have had trouble accessing international markets because the playing field had been tilted against us, and, in the event, we paid for that guarantee. Westpac paid over $900 million for that guarantee, and the Australian banking system is the only one that actually paid a net contribution to the government coffers during the GFC.

Mr BANDT: And you came out of it ahead of your smaller rivals. Anyway, I will move on to another matter. I want to raise the case of Kaye and Michael Downer that was featured on ABC earlier this year. They were a 60-year-old and a 65-year-old respectively who were spruiked a property that Westpac valued at $400,000 maximum. You did not disclose that valuation to them and you, in fact, lent them nearly half a million dollars. Not only did Westpac not disclose the valuation to them but, when they got into trouble and they saw the bank's files, they found that in fact you had overestimated their creditworthiness and inflated Mr Downer's income from $60,000 to $93,000 and Mrs Downer's from $12,000 to $28,000. Do you condone that?

Mr Hartzer : The first thing to say is: any situation where someone's house is at risk is terrible and the last thing we ever want to do is throw someone out of their house. It is a disaster for them, it is terrible for us from a reputational point of view, it tends to be very costly and we tend to lose money. So that is not a situation we ever want to see happen. I cannot remember the details, I have to say, on that particular case. We would have to come back to you. I have a vague memory that there is a bit of a dispute about exactly what happened and who did what, but I would be happy to take that one on notice and come back to the committee with more details.

Mr BANDT: This was on national television, and the reporter said Westpac:

… was taking the Downers' claims very seriously and working on establishing the facts through a full investigation.

That was in April. It was an allegation that someone who had banked with you for 20 years had had their income inflated on their mortgage application so that you could lend them more money on a property that was worth less than they had anticipated. That was broadcast on national television. That would ring alarm bells, wouldn't it? It is surprising that you have come here without any knowledge of that.

Mr Hartzer : I have now been handed a bit more background. I am sorry; I had forgotten the details of this. I do remember this one now. There is a limit on what I can say about it because of confidentiality; however, what I can say is that this particular matter was appealed to FOS, there was an internal and independent review, and it was found that our decisions were responsible.

Mr BANDT: So what has happened internally since then? Has anyone lost their job because of this?

Mr Hartzer : No. As I say—

Mr BANDT: Have any systems been changed because of this?

Mr Hartzer : Again, what I am saying is that sometimes in these matters there are different points of view expressed, and this one was subject to an independent external review which found that our decisions had been appropriate.

Mr BANDT: Do you dispute any of the facts—

Mr Hartzer : But that does not take away from the fact that it is a terrible situation any time a customer is at risk of losing their home.

Mr BANDT: This was an allegation that Westpac inflated someone's income so that you could lend them more than they could potentially afford, to make them appear more creditworthy. You have given us a lot of evidence today about how you take customer data very seriously and you use it to match their transaction history so that you can sell them appropriate products. This was a couple who had banked with you for 20-odd years. You would have known exactly how much they earned and exactly how much they could afford. If I were running a bank and I saw this story on national television, this would ring alarm bells for me, because it suggests that within Westpac, despite the fact that you have 20 years worth of income history for someone, you are happy to disregard that and lend them more money than they can afford.

Mr Hartzer : I understand your point. I cannot go into any more detail about the specifics of that situation.

Mr BANDT: But why didn't this prompt an organisation-wide review to find out whether it was happening elsewhere?

Mr Hartzer : We would absolutely have followed up on the allegations that were made there. We have no incentive and no desire to have a business system that lends people more money than they can afford. That is not in their interest and it is not in our interest.

Mr BANDT: Are there any other instances within Westpac where people who have been applying for a loan have had their incomes altered or inflated?

Mr Hartzer : I cannot say that it has never happened, but not to my knowledge.

Mr BANDT: After this have you made an inquiry about whether it is happening systematically across your organisation?

Mr Hartzer : Our credit people absolutely looked into that issue and—

Mr BANDT: But, aside from this particular case, is it happening more broadly? Can you guarantee us here and now that the systems have been fixed so that no-one's income, especially when they have banked with you for more than 20 years, can be overinflated in their loan application?

Mr Hartzer : At some point we rely on what people tell us and—

Mr BANDT: But you had their bank details for 20 years, and you have just told us how much you go through it to match them with particular products for other purposes. It seems you are quite happy to look at the data when it comes to selling them a product and then you will turn a blind eye to the data when it comes to selling them another product.

Mr Hartzer : I do not accept the premise of that. We absolutely want to get the income data right. Again, I cannot go into the details on this one because of confidentiality but what I can say is that we reviewed the case and we do not accept the allegations there.

Mr BANDT: What concerns me is when you put this particular allegation next to what is happening more broadly in Australia. We have household debt that is over 120 per cent of GDP. In the US, it did not even reach 100 per cent before they got into trouble pre-GFC. You have household liabilities now getting up to almost twice the level of disposable income. Meanwhile, housing is becoming more and more important to banks' bottom line. The financial system inquiry has raised concerns with how exposed banks are to housing. The Australian banks have amongst the highest exposure in the world. We have a potential housing bubble. There does not seem to be a great level of concern about whether banks are lending too much or, in fact, inflating people's incomes so that they can borrow more.

Mr Hartzer : We are very concerned to make sure that people do not have more debt than they can afford. Remember that one of the easiest ways for a bank to have a big problem is if there is a big credit bubble. That is the last thing we want. We believe that the fundamentals of the Australian housing market are sound, but we do absolutely acknowledge that housing has become more difficult for people to afford. It is a real challenge for families. It is a real challenge for young people who are starting out and wanting to afford their own home. It is a challenging issue and one that the bank takes very seriously.

We have made a number of changes in our credit policies over the last couple of years to tighten our restrictions and our assumptions before we lend people money. We have worked very closely with our regulators to compare data across banks to make sure that we are not getting out of line on that. We have no incentive to lend people money to buy a home that they cannot afford. That is counter to everything that we are about, and it is not in our commercial interest.

Mr BANDT: There is more I would like to ask about that, but perhaps I will put it on notice. Lastly, last year at your general meeting you said that Westpac was committed to operating directly and indirectly in a manner consistent with supporting an economy that limits global warming to less than two degrees. The Paris agreement that has come into effect today calls for a limit of global warming to two degrees and ideally 1½ degrees. You said you would link that with concrete action in your lending and investing activities. It has been reported or estimated by market forces that, since you made that statement, you have either lent or financed to companies somewhere in the order of $900 million or $1 billion to either continue or expand new fossil fuel operations. Is that number right?

Mr Hartzer : I would have to take that number on notice, but my comment would be that we support the move to a two-degree economy. We are committed to taking actions that support that. It is part of why we were recognised as the world's most sustainable bank recently for the third year in a row. Westpac has a very strong record on leading in this domain.

We also acknowledge that as we sit here today we are still dependent on a variety of fossil fuel based businesses, and we support those companies and their migration to a more sustainable future. We do that in a variety of ways—supporting lending for clean tech, environmentally friendly bonds and lots of other things. Our commitment remains the same.

Mr BANDT: Do you accept that at some point there will have to be some fossil fuels that will have to stay in the ground and that Westpac will not be able to finance the continued operation or expansion of fossil fuel reserves and that at some point you will have to tell shareholders that, to stick with that commitment that you made, you will not be financing projects that expand the global stock of fossil fuel reserves?

Mr Hartzer : I am not sure it will get to that point. It is a matter of developing the general policies around the two-degree economy. We certainly are committed to whatever makes sense in that context.

Mr CRAIG KELLY: On the recent decision by the High Court on the case against ANZ on bank penalty fees, were there separate proceedings pending against Westpac based on the allegation that what you were charging in late payment fees was an unlawful penalty?

Mr Hartzer : I believe that the case was just against ANZ.

Mr CRAIG KELLY: But were there separate proceedings pending against Westpac?

Mr King : There were, and they were put on hold while the ANZ case proceeded. They have just been discontinued.

Mr CRAIG KELLY: Did you ask for any legal costs after the claim against you had been discontinued?

Mr King : We may have. I will take that on notice.

Mr CRAIG KELLY: What are your current late payment fees on a credit card? Let's take, for example, someone who had a $1,000 limit, $500 outstanding and a $25 monthly payment and was late with that monthly payment. What fee would you charge them for a late payment?

Mr Hartzer : The answer is $9. We made a series of changes. It is important to remember that a number of years ago, when a lot of the attention on fees came up, the industry took a look at it. We at Westpac took a look at it. We made significant reductions in our fees. All those fees at Westpac are now $9.

Mr CRAIG KELLY: What were they previously?

Mr Hartzer : I do not remember exactly. I would have to take that on notice. But it was in the order of $25 or $35. So significant reductions were put through.

Mr CRAIG KELLY: Was that on the basis that a $25 fee could have potentially been an unlawful penalty and therefore you brought it back to $9? Was that part of the reason?

Mr Hartzer : I was not here when that happened, but I remember discussions around that. It was part of the reviews the industry was doing generally in the face of consumer concerns and a recognition when we stepped back and looked at it that we could not justify fees at that level. It is important to remember that running, for example, a credit card system is very expensive. Fraud costs are high. Technology costs are high.

Mr CRAIG KELLY: Which is the reason for the high interest rate, but the late payment is a different matter.

Mr Hartzer : The late payment is an indicator sometimes that people are going to have more risk. That is an element of it as well.

Mr CRAIG KELLY: Taking the example of the person I gave—someone with a $1,000 limit you have set, $500 outstanding and a $25 monthly fee—if they were late with that $25, what do you believe the cost to the bank would be?

Mr Hartzer : So the $25—

Mr CRAIG KELLY: The $25 is the monthly minimum repayment fee. If they miss that $25—

Mr Hartzer : I just want to make sure I answer your question right. When you say 'a $25 minimum repayment fee', are you talking about the repayment of the balance?

Mr CRAIG KELLY: No, the monthly minimum that they have on their credit card statement would be $25.

Mr Hartzer : That is not a fee. That is a repayment of—

Mr CRAIG KELLY: Sorry, I meant 'repayment'. If they missed that payment, what would the cost—

Mr Hartzer : $9.

Mr CRAIG KELLY: No, that is what the bank would charge them. But what would the actual cost to the bank be?

Mr Hartzer : I do not have that number handy.

Mr King : It depends. The three sources of the cost will include credit costs. As Brian said, in a lot of cases it is an indicator of credit challenges. In some cases people have just missed the date and repaid pretty quickly. There are additional capital costs. When you go into default, there is a different level of capital requirement for that particular product. There are also administrative costs around that. We have not put out a number on that.

Mr CRAIG KELLY: Perhaps you could take that on notice for us. Also, since the High Court determined that a $35 late payment fee was not an unlawful penalty, is there scope now for the banks to raise those fees that they previously lowered?

Mr Hartzer : We do not have plans to change the fees rate now. I would note that those fees have been unchanged for many years now. I would also note that interest rates have come down, which reduces the value that puts challenges on deposits. And risk costs have continued to rise, particularly around fraud and the like. So we are constantly assessing those things, but we do not have any plans to alter—

Mr CRAIG KELLY: The High Court also said, if I am correct, that your late payment fee could be set at a level that is an unlawful penalty—that, in fact, it could encompass the law of penalties. Do you know what the level would actually be where you would to trip into an unlawful penalty from a genuine pre-estimate of your costs?

Mr Hartzer : No. But I think the overall thing to say here is that we understand fees are an emotive issue for people. We try to balance it up to make sure the fees are reasonable but that we also cover our costs and are in decent return.

Mr CRAIG KELLY: There is no argument that you should—

Mr Hartzer : We would certainly have no intention of asking, 'What is the level of unlawfulness and how close can we get?' That is not how we would think about it. We think about it from the standpoint of, 'What is a fair and reasonable level in light of the—

Mr CRAIG KELLY: But surely the question that was before the High Court was: was a $35 amount an unlawful penalty? Therefore, from the bank's perspective, you would have to think, 'If that answer could be yes or no, where is the limit?' If $35 is not an unlawful penalty, is $40 unlawful? Is $50 unlawful? Where is that amount actually set? Is that still an area of grey following the High Court decision?

Mr Hartzer : Well, I suppose it is a purely hypothetical question because, as I have said before, we already made a decision several years ago to bring our fees down. So the last thing we are going to do is to think about how we put fees up higher than $35.

Mr CRAIG KELLY: Yes, but you would have had some consideration, if you increased those fees, that you weren't tripping into the area where they could be deemed an unlawful penalty?

Mr Hartzer : Hypothetically that is true, but that has never featured in our discussions about the level of fees.

Mr King : Mr Kelly, the only other thing I would say is: we are looking to use technology as much as we can to help customers understand that the fee is there and how they can act without—

Mr Hartzer : How to avoid it.

Mr King : Yes.

Mr CRAIG KELLY: The average credit card debt in Australia is $4,300, according to some government information. Take a typical family in Western Sydney: a husband and wife with two young kids, a car and a pretty heavy mortgage—and both have got a $4,300 credit card limit, which they are using, basically, as extra debt. On that, the average interest rate would be $700 on each credit card, which means they would be paying about $1,400 a year in credit card interest. If that couple had been loyal Westpac bank account holders for many decades, what interest rate would they be paying at the moment?

Mr Hartzer : It depends whether they have benefited from what I described in an earlier answer, which is that the fundamental point here is: your credit card is not designed as a long-term debt.

Mr CRAIG KELLY: Yes, but if they—

Mr Hartzer : We would, ideally, have made contact with the customer and, if they were keeping it over a long period of time, said, 'Is this really the right product for you?' And we would look to move them, with their support, to an instalment plan that made more sense and allowed them to save money.

Mr CRAIG KELLY: So how many people with a credit card debt of $4,300 or less would you have contacted to try and move them across to another—

Mr Hartzer : The last figures that I am aware of are that we contacted, in the last round of this, about a quarter of a million customers.

Mr CRAIG KELLY: That would be $4,300—

Mr Hartzer : I cannot speak for the $4,300. I am saying: we identified in our data a quarter of a million customers who it seemed to us would benefit from perhaps moving to another thing. But we have to be very careful about that because we have to discuss it with them. It has got to be their request.

Mr CRAIG KELLY: So you would do that. That would lower their interest rates from, around, say, 18 per cent down to what?

Mr Hartzer : It would depend what product they had started from, but probably they would end up in the 13 per cent to 14 per cent range.

Mr CRAIG KELLY: Yet if, say, there was another couple who lived next door who had never had a single account with Westpac, they could actually transfer their balance from another bank and get zero per cent from you for 18 months on their balance and one per cent over the next 12 months on new purchases.

Mr Hartzer : As in any competitive market, people make promotional offers from time to time to try to grow their business and I think, in an environment where we are trying to encourage competition and offer good deals to customers, I am not sure that there is an issue.

Mr CRAIG KELLY: I am not complaining, but isn't the issue about the loyalty of an Australian consumer to one particular bank—that they are the ones getting slugged for their loyalty, whereas someone who transfers banks occasionally is actually better off?

Mr Hartzer : As I said in an earlier answer, it is in our interest over time to build long-term relationships with customers, and certainly it is on our agenda to think about: 'What are the sorts of things we can do that give people reasons to trust us and stay with us for long periods of time?'

Mr BUCHHOLZ: Reducing interest rates is a good place to start.

Mr HOGAN: Thanks, Mr Hartzer and Mr King, for being here. I just want to start really with an observation about market power and, I suppose, the strength of the four majors. I will make a point I have made every time: I believe that the previous Labor government's ill-designed government guarantee, back during the global financial crisis, really did advantage you and the other three majors. You were charged 70 basis points for a wholesale funding guarantee. The smaller banks were charged 150 basis points. Indeed, there were institutions within our community, such as mortgage trusts, who could not access the guarantee. I had two high in my region—both Mayne Investments and East Coast Mortgage Trust—which literally had to shut their doors from not being included in this scheme. I think it has drastically reduced competition in the sector, and I note that other countries did design their schemes differently, where both small banks and large banks were charged the same and retail deposits, especially of mums and dads, were guaranteed in any market.

I also, just really for comment, raise this issue. This chart—I am a long, long way from you—basically shows the mortgage lending spread, which is obviously the mortgage rate less the cash rate. As we know from the 1990s it was very high at around 500 basis points. With competition from Aussie home loans and RAMS and those types of institutions that margin came down to around 200 points. In the last few years that has now widened back to 300. I am certainly aware, and other CEOs that I have asked about this have said, 'Well, our funding for all this does not come from just the cash rate'. So I take that, but I just make that comment.

But I want to move, as a segue, to mortgage brokers—and I have mentioned some. Fifty per cent of mortgage customers come from brokers is my understanding. Obviously RAMS, which is one that you acquired, were in stress after the global financial crisis and not able to access guaranteed funding. How much of RAMS's business is directed to Westpac and how much to other banks?

Mr Hartzer : RAMS is an originator of our product. They are not a broker per se. RAMS, once upon a time, did do that. But RAMS's business model is more—they sell RAMS home loans.

Mr HOGAN: Okay. So RAMS is now just simply originating—

Mr Hartzer : We do not own a broker.

Mr HOGAN: Okay. Just so I am clear: RAMS is just originating your transactions or everybody's?

Mr Hartzer : Ours.

Mr HOGAN: Just yours and nobody else's?

Mr Hartzer : Correct.

Mr HOGAN: Okay. So they are now just simply a transaction centre of the bank?

Mr Hartzer : They are a separate brand. They target a particular customer segment and they sell a RAMS-branded home loan.

Mr HOGAN: Okay. That is a little bit different from some others, as you probably know.

Mr Hartzer : Yes. There are other big banks in the market who own large brokerage businesses. We do not.

Mr HOGAN: Right. I would just make the point too about the bank account switching service, which required banks to transfer requests—and we touched on this in earlier questions—within five business days. I know there are issues with that. My understanding is that typically it is taking the major banks 30 to 60 days to process these. The claim is that the major banks are stalling on doing this to try and keep the customers. Why and how long does it take you to do this? Do you know?

Mr Hartzer : There are two different streams. There is the APCA stream, which is a paper-based process, as I understand it, and 30 days is the number that I recall. You are sort of dependent on the response you get from other banks. But I would come back to the answer I gave earlier today, which was that we have an online service where people can switch straight to us online in less than 10 minutes, and we move all their payments right away.

Mr HOGAN: Could you come back to us with the data on the paper system and how long it takes to do that bank switching.

Mr Hartzer : Certainly.

Mr HOGAN: Thank you. I have just two more questions, Chair. We have legislated that you can allow farm management bonds to offset against farm loans. Why are you not allowing farmers to do this?

Mr King : We understand there is a product similar to the mortgage offset product. Our systems cannot handle that treatment at the moment. It is very complex across multiple business products and offset accounts to actually operationalise it, so our systems do not allow us to do that.

Mr HOGAN: Are you looking to change your systems so that they would?

Mr King : Our preliminary work is that it is probably not possible, with our existing systems, to do it.

Mr Hartzer : We are happy to take that on notice. I recall that that issue has come up in the past. I am afraid my memory is that little hazy on it. Can we write back to the committee with some clarification on that.

Mr HOGAN: That would be good. I understand that some of the smaller banks are looking to do that and offer that offset.

Mr Hartzer : What I will say for the record is that we are hugely supportive of the agricultural sector in Australia. We want to grow our business in that area and we will look at anything that will help us be more competitive.

Mr HOGAN: That is good. I am getting a lot of feedback that that would help a lot of farmers and agricultural people. The last question I will ask is one I have asked of most of the CEOs, Mr Hartzer. The analogy I have used is: besides probably your senior staff and your families, everyone else in this country thinks that what we are doing is a good thing—to have CEOs come in, to chat to them and to grill them, if you like—because people tend to be unhappy with the four majors. They are not asking us to go to the smaller banks. Why do you think we are here? Why, in your mind, have we got to the stage that we are doing this?

Mr Hartzer : I think there are a couple of things that have contributed to the reputational issues that we have in our industry. Some of it is, frankly, the legacy of the GFC. In other markets overseas, big banks contributed to a major financial crisis and, as I mentioned in my opening statement, we are still dealing with some of the aftermath of that. I think some of it is what the banks themselves have done. There have been a number of issues where consumers have been poorly treated and where banks have not responded well when things have gone wrong. I think all that contributes.

Mr EVANS: Mr Hartzer and Mr King, I take it you have had some good visibility of the proceedings here over the last few days.

Mr Hartzer : We have had a bit, yes.

Mr EVANS: Does that extend to the discussions that we have had around small business lending rates?

Mr Hartzer : Yes.

Mr EVANS: Do you broadly concur with the conclusions of your peers that small business lending rates are at comparatively high levels at the moment and that is here to stay?

Mr Hartzer : I am not sure I would characterise it that way. I would say that historically—and I am aware the Governor of the Reserve Bank put forward a table that looked at some aspects of pricing on small business. What we would say is that there are several perfectly legitimate explanations for why that has happened, one being the same thing that has happened across all of our lending, which is that our funding costs have risen relative to the cash rate, and that has affected small business as well. The second is that we are required to hold a lot more capital for small business, and there have been a number of changes in regulation about how much capital we have to hold. That has affected small business as well. The third is that we price risk increasingly through the cycle, so we have to think about not just what is happening at this point in time but what happens over time. The reality, which has been increasingly clear from the data, is that, when you look at small business lending over time, those loans are more likely to go bad, you lose more when they go bad and, when you are in a period of stress, the losses are a lot higher. So all of that has been priced in.

Mr EVANS: Broadly speaking, though, you agree that those settings are not fundamentally likely to change in the medium term?

Mr Hartzer : I suppose the main variable there will be around funding cost and the extent to which the international markets continue to be open to supporting the Australian banks through competitively priced wholesale borrowings.

Mr EVANS: I was heartened to hear your comments earlier about customers owning their own data. Taking that a step further on the topic around positive credit ratings—and I am thinking here especially about small businesses—what reassurances can you give, maybe, that small businesses who do have positive credit ratings are likely in the future to have you or other banks make more competitive offers to them to try to secure their business?

Mr Hartzer : I think the evolution of capability on data analysis has been a real positive for small business. A broader issue that often gets raised around small business is the cost of cash flow lending. Traditionally, when you do cash flow lending, you have to collect a lot of manual data and tax returns, you have to have a credit analyst look at it and so on, and that is very costly. What is happening now because of data is that we can analyse a customer's account very efficiently, and for small businesses that means a big difference in our ability to extend credit at lower levels of balances. So we have built that. At Westpac we have built something we call LOLA, and it is essentially that we have used the data we have on our small business customers to assess their credit in an automated way. When we built that system and ran it, we found we were able to prequalify $34 billion of loans for our small business customers. So we have $34 billion of lines of credit available to small businesses if they come and talk to us, and that is something that technology has enabled. So I think that, over the next few years, the availability of better data for small businesses will be a terrific positive for small businesses, and they are obviously really important to the future of the economy.

Mr EVANS: Specifically around letting you do some of those things for your non-customers at the moment, I assume.

Mr Hartzer : Certainly, the more data that we have access to, the easier it gets over time to be able to extend credit to people that we do not have a history with.

Mr EVANS: Yes. On the topic of data, I guess, congratulations on your support in principle around your open banking and account portability measures and your submissions to the PC on that. I guess I am always cautious about support in principle and whether that translates to support in practice. I note your comments around the importance of controls around data security. I also note that the UK is going down this path with pretty quick time lines and deadlines in place, and I note that you have some experience in the UK. I guess I wanted to give you an opportunity to flag for us now if there is anything significantly different in the Australian banking sector compared to the UK market when it comes to implementing open banking.

Mr Hartzer : I will probably have to take that on notice, to be honest. I think what is happening in the UK is very interesting and, as you say, they are going very aggressively at this. I just come back to the fact that we need to be really careful about making sure that privacy concerns are in place. One point of difference, for example, is that Australia does not have a history of lots of open data. In fact for many years—and I remember this because 10 years ago I used to run a credit card business—all the weight of public opinion was against the sharing of data because people were so worried about privacy. That seems to have flipped around, which I think on balance is a good thing. But I suspect as people become more aware of what this means in terms of the accessibility of data they are going to become more concerned about who is getting access to this data, what controls are going to be there and what oversight is there of these little start-ups that are suddenly accessing my data. So I suspect we are going to need an implementation to manage very carefully through those security and privacy issues.

Mr EVANS: How has your market share changed over the past 10 years?

Mr Hartzer : It has grown by one or two percentage points, depending on the product. It varies depending on the business and part of the business you are looking at.

Mr EVANS: Broadly speaking, what are customer switching rates?

Mr Hartzer : What do you mean by that?

Mr EVANS: You have a pool of however many hundred thousand customers.

Mr Hartzer : We have over 10 million customers in Australia.

Mr EVANS: There you go. So, approximately how many new customers are you getting a year and how many existing customers are you losing?

Mr Hartzer : I think last year we grew about half a million customers and then we would have had a couple of hundred thousand leave. I would have to take that on notice. I can't remember exactly.

Mr EVANS: Broadly speaking, a couple of hundred thousand out of 10 million.

Mr Hartzer : That would be about right.

Mr EVANS: That is a very small switching rate.

Mr Hartzer : The evidence is that around six per cent of Australians change banks in a given year. That is pretty consistent.

Mr EVANS: What was that number again?

Mr Hartzer : From what I recall, around six per cent of Australians change banks each year based on the research that I have seen.

Mr EVANS: That seems low compared to a lot of the regulated industries like telcos and electricity. Is that right, do you know?

Mr Hartzer : That is pretty consistent around the world.

Mr EVANS: For banking or for other industries?

Mr Hartzer : Yes, for banking.

Mr KEOGH: I believe I neglected to mention that I hold some accounts in a mortgage with St George. I just want to place that on the record.

CHAIR: Thank you.

Mr THISTLETHWAITE: You mentioned that six per cent switched. Do you know what proportion of those end up with one of the big four banks?

Mr Hartzer : I don't, but I would guess it would be around the same percentage as our market share.

Mr THISTLETHWAITE: The 2015 Senate economics committee inquiry into interest rates and informed choice in Australia's credit card market recommended that responsible lending obligations in relation to credit cards be amended so that serviceability is assessed on the basis of the borrower's ability to pay off their debt over a reasonable period. The government said that they supported this recommendation. What is your view?

Mr Hartzer : We support that recommendation.

Mr THISTLETHWAITE: Do you review a customer's credit history to work out if they are in financial stress?

Mr Hartzer : Yes, we do. We monitor accounts in an automated way through what we call 'scoring'. If we see people that have indicators of stress then, depending on the situation, we will often make proactive contact with them to discuss what is going on and try to help them.

Mr THISTLETHWAITE: What criteria do they need to demonstrate to get assistance?

Mr Hartzer : We have a hardship policy that they can request. Most hardship requests are approved. It can be anything from loss of job or financial situation, a health problem in the family or some other circumstance that has come up. We are pretty generous about it. Recently I went and visited our collections department in Adelaide, which administers the hardship team, and it was really remarkable how, even in that area, their whole focus is around the philosophy of the leader of that business. What he says to all his people is, 'We are talking to people who are going through a difficult patch in their life, and our job is to help them through that.' That is the whole ethos of the collections department, and so if people need hardship assistance we try to make it available to them.

Mr THISTLETHWAITE: On 5 April this year, ASIC commenced civil proceedings against Westpac in the Federal Court in respect of your bank's involvement in alleged manipulation of the setting of the bank bill swap rate in the period between 6 April 2010 and 6 June 2012. In the lead-up to that, a number of other, smaller banks—admittedly foreign banks—have admitted that they were involved in manipulation. They were UBS, BNP Paribas and Royal Bank of Scotland, and they have accepted enforceable undertakings and paid various sums of money into a financial literacy and training program fund. Some of those banks conducted external reviews of their activities prior to admitting that fault. Has your bank conducted an external review of the activities of traders that are alleged to have been involved in this manipulation?

Mr Hartzer : We have done a very extensive review that has included both internal and external people. External lawyers have been heavily involved in those reviews, and the conclusion of our investigation was that our people had not done anything wrong, and that is why we are defending that matter in court. But I should say that we respect ASIC's right to ask. We think it is a good sign that there is a robust regulatory system in place and, when these things are raised, they are investigated thoroughly. We have a good relationship with ASIC, but on this matter we disagree, and it is a very complex situation. We think the right place to work through the issues is in court.

Mr THISTLETHWAITE: Did the board ever discuss entering into some sort of voluntary undertaking as a means of avoiding the litigation?

Mr Hartzer : That has not been something that we particularly talked about. The reality was that we were given very serious allegations by ASIC, and we investigated them and came to the conclusion that we had not done anything wrong, and therefore we are defending the matter in court.

Mr THISTLETHWAITE: You mentioned earlier that you had met with the Treasurer about this inquiry and a potential tribunal.

Mr Hartzer : I would not characterise what I said that way.

Mr THISTLETHWAITE: Sorry—about a banking tribunal. You admitted that earlier.

Mr Hartzer : What I said is that I did not meet with the Treasurer to talk about this inquiry.

Mr THISTLETHWAITE: No, but it came up as a topic of discussion in other discussions.

Mr Hartzer : The tribunal was mentioned in passing.

Mr THISTLETHWAITE: Okay. Did those discussions also include as one of the topics avoiding a royal commission?

Mr Hartzer : Not in detail.

Mr THISTLETHWAITE: In detail? At all?

Mr Hartzer : I do not remember who said what exactly, but in the course of the conversation it would have been noted that there was a proposal to have a royal commission and that the government has instigated this set of meetings.

Mr THISTLETHWAITE: As an alternative.

Mr Hartzer : That would be one way to characterise it. I do not remember it being put that way.

Mr THISTLETHWAITE: Did you express your bank's view that you were not in favour of a royal commission?

Mr Hartzer : What I would have said—and I do not remember what I said, to be honest—is that we respect the right of the government to inquire into our affairs in any way the government chooses. Our position on this is that we know that there is a call for changes on issues in banks. We agree that change is required, and we would rather get on and make the changes that need to happen. We think that we have a robust regulatory framework. We are acknowledging the issues we have. We are fixing the issues. We do not see a whole lot of value in spending several years to run a process that ends up with a document and then recommends actions which we can take now. We would rather take action now, and we think that is what our customers want as well.

Mr THISTLETHWAITE: And you expressed that view to the Treasurer?

Mr Hartzer : Not in those words, but that would be effectively what I would have said.


CHAIR: I just want to come back to this question about small business that Mr Kelly has raised on a number of occasions and this issue about the spread. The Reserve Bank data says that the spread has increased significantly in recent years relative to the cash rate. I think what your answer, and the answer of some of your peers, is is that you have been required to hold more capital against small business loans, which has increased the cost, and, in addition, there has been some other market related change. Is that right? Is that a fair summary?

Mr Hartzer : There are several components. Like the discussion we have had about mortgages, we do not fund small business lending at the cash rate. Our funding for small business loans reflects the term of those loans—the repricing frequency of those loans.

CHAIR: Yes, but the change relative to the cash rate with small business loans is much bigger.

Mr Hartzer : There are several elements in the change, and they have different repricing characteristics to mortgages. The first theme is that the costs of our funding relative to the cash rate have risen substantially in the last few years because it includes deposit costs as well. That is theme one. Theme two is—

CHAIR: Which applies, presumably, equally to mortgages?

Mr Hartzer : It applies in the same concept, but the amounts may be different because the funding characteristics and repricing characteristics of the small business lending portfolio are different than a mortgage portfolio. It is quite technical. We have a process we call 'funds transfer pricing' that tries to remove the interest rate risk from different products, so the funding cost assumption on different loans is different depending on the characteristics of that pool of loans. I do not want to get too technical but the amounts of the impact can be different, but the concept is the same. Then on top of that you have the higher equity cost, which reflects the fact that when the economy gets in trouble the level of losses in small businesses can be much higher, and that reflects on the amount of capital that we are required to hold.

CHAIR: And that was changed at some point?

Mr Hartzer : That has changed—correct. Peter, in a minute perhaps you could comment on the details of that. The third theme is the expected level of credit losses over a cycle, and it would be fair to say that in the past we probably underestimated what those losses would be. Now, as time has moved on, we have a better idea of that, and what the data clearly shows us is that small business loans go bad about five times more often than a home loan does. The loss rate, given that likelihood of going wrong, is about 10 times what we lose on a mortgage and when you are in a stress situation, which is what affects capital, that loss rate can go much, much higher, so the combination of all those things has fed into that difference. I would note, however, having said all of that, that the average rate on a small business loan is about one per cent—actually, a little less than one per cent—more than a home loan rate, so I would argue that that is not a massive premium—

CHAIR: Or residentially secured small business loans?

Mr Hartzer : Correct. We are talking about one per cent more, so there are all these factors. It is not a massive increase relative to a more—

CHAIR: The Reserve Bank data, and I do not have it in front of me, seemed to show a significantly larger increase in the spread between a cash rate and the small business rate than would be implied by the average rate being only one per cent more than for mortgages.

Mr Hartzer : Again, we can come back to you with the details on notice, the data that I saw in preparing for today said that the average rate that our customers pay on a small business loan relative to a residentially secured home loan is about one per cent.

CHAIR: When Mr Kelly was asking Governor Lowe about this—I do not want to mischaracterise the conversation—I think it is fair to say that the governor, in response to Mr Kelly's question, said that it is a good question and was not, certainly in his mind, clear on why that spread had gone up by so much. If it is as straightforward as you outline, does it surprise you that the governor would not have been aware of that?

Mr Hartzer : The Reserve Bank's mandate is around funding and monetary policy. They are not our prudential regulator—that is APRA. APRA is the one who would have the analysis to look at the capital requirements on individual loan types and credit losses, so it would not necessarily be within the scope of the data that the Reserve Bank would look at on a normal basis to understand how we price our different loans.

CHAIR: Since you have made these changes to small business interest rates, is the small business business of loaning to small business more profitable than it used to be? I think you were suggesting that previously you did not price risk, which is another way of saying that you have raised interest rates.

Mr Hartzer : I suppose it depends on whether you are talking about profit over a cycle or short-term profit. Certainly if the margins have increased then the profitability of the business has increased, but, in a sense, what we would be saying is that we underpriced risk previously. So, yes, we have improved the economic position of that business, but that reflects the fact that the business was underpriced previously.

CHAIR: Okay, so it is fair to say that you have taken a conscious decision to reprice small business interest rates in a way which has made it more profitable for you and therefore, presumably, overall more expensive for small businesses relative to how it used to be?

Mr Hartzer : Relative to what was an economically priced and unsustainable level before.

Mr King : One of the views that we have to take in running the bank is: 'What does the business look like under stress?' In Westpac's case, if you look back to 1991, we actually lost money because of credit losses, and long may Australia not have a downturn of any significance. But, if we do, the buffer of margin is there to help us through a downturn and the inevitable increase in credit losses. We had credit losses of 18 basis points in the first half, which are low by any historical measure. I think one of the challenges is banking is a cyclical business, and we need to manage the business through a cycle and not just through times which are of strong economic growth.

CHAIR: Okay. Thank you for your evidence here today. The committee secretariat will be in touch with you in relation to any matters arising out of today's hearing. You will be sent a copy of the transcript of your evidence to which you can make corrections of grammar and fact. As Hansard may wish to check some details concerning your evidence, would you please check if the Hansard reporters have any questions before you leave. I declare this public hearing closed.

Resolved that these proceedings be published.

Committee adjourned at 16 : 37