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

ELLIOTT, Mr Shayne, Chief Executive Officer, Australia and New Zealand Banking Group Limited

GEORGE, Ms Alexis, Group Executive, Wealth Australia, Australia and New Zealand Banking Group Limited

HODGES, Mr Graham, Deputy Chief Executive Officer, Australia and New Zealand Banking Group Limited

CHAIR: We will resume the hearing. We have representatives from ANZ present for today's hearing. 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 a contempt of parliament. Mr Elliott, would you like to make an opening statement?

Mr Elliott : Sure. Thank you for the chance to speak to the committee again. I wanted to briefly address four topics: one, our view of the economy; secondly, our response to these conditions; third, the significant improvements we are making for customers and the community; and, finally, our commitment to anti-money laundering laws.

Firstly, about the economy: jobs underpin the health of our community and our economy. Since March it is pleasing to see good employment growth. Our own ANZ job ad series is up seven per cent in five months and trend employment is up 2.6 per cent over the year. I do note, however, that underemployment remains a concern. Mining jobs are growing again and there is strong growth in tourism, health and other service sectors. Private investment has increased, assisted by growth in public spending and infrastructure activity. Some regional areas that have borne the brunt of the mining downturn appear to be stabilising and improving. When averaged across the country, house price growth is moderating. Household debt, however, has increased a little and at a faster rate than wages. But as debt has increased, so have savings. We agree with the Council of Financial Regulators that this is something to watch. The ability of households to withstand economic shocks has diminished a little.

That brings me to my second point on how we are responding to these conditions. We think it has been prudent to tighten home loan standards and encourage customers to pay down debt at a faster rate. We have done this by reducing our rates for people paying off their loans and removing fees for people moving from interest-only to principal-and-interest repayments. Our price and policy changes have taken into account portfolio risk, the competitive environment and our capital and regulatory requirements. Pleasingly, about 38 per cent of our home loan customers are actually repaying their principal faster than they are required to do. Having said that, I do acknowledge that some customers are doing it tough. This is generally due to job losses, reduced income levels, family breakdown or illness. We work closely with people in these situations to reschedule their payments, reduce interest rates and even grant repayment holidays. On the business side, credit growth remains low. I am optimistic, however, that this will improve as more businesses build confidence to invest. In particular, I am encouraged by our own customers' interest in expanding offshore. This year we have taken around 62 business customers to Asia to help their export businesses, and there is strong interest in our Be Trade Ready website.

I would now like to turn to our customer-focused reform work. We have acknowledged that we must do better as an industry. I am determined for ANZ to lead the way by building a bank our customers, our staff and the community are proud of, but I accept we have much to do. But we have achieved a lot in a short period. In August I wrote to all of our people about The ANZ Way, a guide to the way we work and our promises to customers, because I wanted to make it clear that we will raise standards in everything that we do, going beyond merely complying with the law. Colin Neave, our customer fairness adviser and the former Commonwealth Ombudsman, has strengthened our approach to customer remediation. We will publish principals to assure our customers that ANZ will quickly acknowledge and compensate any failures. We are changing how we pay people, including through new scorecards that emphasise good customer outcomes.

We are taking the spirit of the Sedgwick review beyond its focus on branch staff. With the rest of the industry we are working through the Sedgwick and ASIC home loan broker recommendations and we have strengthened the governance of our broker channel. We're also working with the industry to include new consumer protections and a shorter and simpler banking code of practice. To deliver better quality financial advice, we're doing more audits using data analytics and providing better training. If we don't get our advice right, a dedicated advice review team examines this and compensates customers. The new ABA reference checking protocol is making it difficult for advisers with proven conduct issues to move from firm to firm. There is, however, a risk of these advisers joining firms outside the protocol, and we urge parliament to close this loophole.

As we discussed in March, ANZ is supporting reforms recommended by this committee. We see real benefit from the banking executive accountability regime, and we've started our implementation planning. We're working to make open data a reality by setting out a deliberately simple and safe form of open banking for the government's independent review. Our suggestions provide a pathway for open data across the economy that can drive innovation. We will start sharing comprehensive credit data next year. We look forward to the commencement of the one-stop Australian Financial Complaints Authority, and we are engaged with the Productivity Commission's review into financial system competition and support making it easier for new and smaller banks. We encourage the government to look at reforms that will drive safe financial innovation, such as digital identity.

Finally, I would like to comment on anti-money laundering. Action against financial crime is in everyone's' interests. At ANZ we work closely with government to detect and disrupt those who seek to break our laws. It is our responsibility to ensure that we only open accounts for people we know and trust. We also need to report cash transactions of $10,000 or more, all international fund transfers and any matters that raise concern. Each year, we report millions of transactions to AUSTRAC. AUSTRAC has advised us that it has found no evidence of noncompliance concerning our ATM network.

So, to recap before taking your questions, stronger economic conditions are helping communities and reducing financial system risk. At a time of low wage growth and high levels of debt, we are encouraging less risky forms of lending, and we are deeply committed to customer-focused reforms as they help people and communities thrive. Thank you for your time.

CHAIR: Thank you Mr Elliott. I wanted to pick up on the issue that you addressed in your statement regarding AUSTRAC and anti-money-laundering legislation, which is a very serious matter. Similar to a question I asked Mr Hartzer, could you paint the competitive commercial picture as it relates to the use of these machines for deposits? Your limit is $5,000. Obviously, Commonwealth Bank made a decision very different to you in having a limit of $20,000 for those deposits. What are the commercial motivators here around why banks would have a particular limit on the use of these machines for deposits?

Mr Elliott : We have to balance two things here. They are in our customers' interests, because these machines are efficient. It's easy, they are generally 24/7—not always but generally—and they are really used increasingly by small businesses that have the need to deposit cash. They are efficient and effective and our customers like using them. On the other hand, we obviously have a responsibility around making sure that we do everything we can to reduce financial crime. We are very conscious of our reporting obligations and when we did the risk assessment we wanted to have a safety margin, so we put in a limit of $5,000. I think it's important to note, though, that that is not the only control we have in place. We monitor activity in a pretty sophisticated way—and I think Westpac referred to the same examples—by making sure that people don't do multiple transactions of $5,000, and they are not walking into the branch depositing $5,000 and then going to the ATM. So we have all sorts of scenarios and data that we analyse.

CHAIR: Leaving aside the regulatory issue for a second, from a purely commercial perspective, would it be fair to say that, by seeking to scrupulously comply with the law, you are effectively at a competitive disadvantage, arguably, against another bank that accepts $20,000 deposits through those machines?

Mr Elliott : Potentially. I'm not sure that that was widely known by customers, possibly, until recent press reports about those limits. To some extent it was in our interests not to publish those limits, because the more transparent those limits are, the easier it is for criminal activity to manoeuvre around them. I take your point, but it's not something that we particularly took into account. We really focused on the risk aspects.

CHAIR: Presumably, there are legitimate businesses that want to deposit $15,000 because they're high-turnover restaurants or whatever and it would be a competitive advantage, presumably, if you could take that larger amount.

Mr Elliott : I think that's potentially true, yes.

CHAIR: I want to come to this UBS report, which no doubt you've read about in recent days—the so-called 'liar loans' report. UBS conducted a survey of mortgage applications and effectively stress tested the factual accuracy of those mortgage holders against reality. They made a number of conclusions, including that, broadly, there was a very high level of inaccurate representations by borrowers. Relevantly to you, they said that ANZ was the worst affected by this issue and that your applications have, according to UBS, the lowest level of factual accuracy in the sector, so much so, they said, that 45 per cent of mortgages that you hold, in their view, have been subject to false or inaccurate representations by the borrower. That's obviously a massive number—45 per cent—and I would imagine that would be of great concern from a prudential perspective, a risk perspective and a range of other perspectives. What's your response to that UBS report?

Mr Elliott : Firstly, it's not in our interests to lend money to people who can't afford to repay. Under our responsible-lending responsibilities, we have to take reasonable steps to assure ourselves that our customers do have the ability to repay. What was missing from the report and some of the journalists' articles afterwards was that we don't just rely on what customers fill out on a form. We've been in business for 185 years, and it's not new to us that sometimes customers forget to tell us all the full details of their financial situation. So we have all sorts of systems in place and checks and balances to mitigate that, and that's really very important as part of the process.

CHAIR: But UBS says that, basically, you are worse at this than the other banks.

Mr Elliott : I think it's worth looking at the way that the survey was done. We have a million mortgages on our books alone at ANZ. The entire sample size for that survey was fewer than 1,000 for the whole country. Based on our market share, that means that survey was based on 150 ANZ customers; to then extrapolate that to say that that's true for the whole million I think is a bit of a stretch. But the fact is that we have systems in place to verify—to check—as we are obliged to do and because it's good business, to make sure people do disclose what their financial situation is, and then we test it to see if it sounds reasonable before we approve anything.

CHAIR: Do you benchmark your processes against the other banks?

Mr Elliott : We don't know necessarily what the processes of other banks are.

CHAIR: So does it surprise you—

Mr Hodges : Sorry to interrupt, but I would say that APRA have done two hypothetical borrower scenario investigations in the last three years or so and we benchmarked very well in those scenarios. I think it involved about 18 participants in the sector and showed where we sat around a range of those areas. On many of those—most, I would say—we were at the conservative end of that.

CHAIR: So the UBS's report is wrong, in your view?

Mr Hodges : It's a survey. Ultimately, with a relatively small population survey, you'll get numbers which won't necessarily reflect the portfolio. As Shayne said, the process we go through here, both internally but also with external people who refer loans in, is rigorous.

CHAIR: Sure. I guess the point is that the UBS survey, for its faults, has identified your clients as more problematic than others. I think what you're saying is you don't accept that and you think the UBS report is wrong. Is that a fair comment?

Mr Elliott : What we're saying is that we don't base our credit decisions purely on what customers tell us at the time of the application and that we do rigorous testing around that, and then we run a bunch of stresses against that. For example, if somebody comes to us and says that their current household expenses are X, we go away and check it against the HEM index—and I know you are aware of that index that we look—to see whether it sounds reasonable for a family of that situation. We then take the higher of the two. If somebody's income is reliant on an investment property, we discount the rental and assume it's lower. We run a bunch of stresses to make sure that people can afford the loans that they are applying for.

Mr Hodges : When we look at an interest-only loan, and a number of those obviously had that, we assess it on a principal and interest basis in terms of serviceability. As Shayne said, it's not in the bank's interests to lend money and not be able to have the customer afford to repay us. We do believe our processes are conservative in that sense.

CHAIR: You don't think 45 per cent of people have misled you in their applications?

Mr Elliott : It's a sample size of probably 150 of our customers.

CHAIR: No, I understand. But let's be very clear: you're saying you don't agree; it's wrong from your perspective.

Mr Elliott : We haven't seen the actual detail of what they did. We've read the report like everybody else. Whether it is true or not, the issue is: do we have good risk processes and systems in place to mitigate that? We are confident that we do.

CHAIR: I want to move onto OnePath and specifically the compensation. Recently, ASIC confirmed over $10 million in additional compensation that was paid to 160,000 of your customers for various breaches between 2013 and 2016. This was things such as the inappropriate processing of their balances, failure to correctly deal with lost balances and a number of other matters. Given that this matter has progressed somewhat since we last spoke, I want to understand whether there have been any consequences for senior management as a result of these OnePath breaches?

Mr Elliott : I might ask my colleague Alexis to talk about the status of that one.

Ms George : Firstly, I think you are aware of where we are at in relation to that. We have two items to close and the number did grow, and it grew because we had to go back and look at individual customer circumstances and make sure we put them back into the positions they should have been in. If we look at the real consequences of that, firstly I would like to point out that we migrated nearly 300,000 customers from legacy products in to new digital, transparent products; as a result, offering the customer quite a better service. As a result of that, we did discover some of those issues. If we talk about consequences, it's the same across the bank. There are many forms of consequences that we can apply to executives, including development opportunities, remuneration and promotions. Those things were considered in those particular examples.

CHAIR: What happened?

Ms George : I can't recall the individual ones now because we're talking about several years ago, but there would have been consequences for some of those people as a result of that.

CHAIR: I think we are talking about things that that happened between 2013 and 2016, and we are talking about an additional fine effectively—or compensation of $10.5 million.

Ms George : Firstly, it wasn't additional. The total amount was 10.5 and it did increase from 4.5, where we originally estimated it to be.

CHAIR: Are you saying as the head of the division that you don't know what the consequences for management were?

Ms George : I honestly don't know the individual consequences. At that particular time, I wasn't in this role, but there would have been consequences for particular people that were involved in that, including remuneration—

CHAIR: When did you start in your current role?

Ms George : 14 months.

CHAIR: Okay. I would have thought that, given that this is a fairly significant issue, you would be aware of what the consequences were for management?

Mr Elliott : The reality is the senior management of the wealth division has changed considerably. It changed when I took over as the CEO in January last year. Were performance issues in regard to the business performance and were some of the risk issues taken into account when we were making decisions around the right executives to run that business? Absolutely, they were, and that's why we've seen a reasonable amount of change. I think what Alexis is referring to is that down in the more operational areas of the bank there were clearly consequences for those people as well, people who are either no longer with the bank or had their incentives changed or had their promotional or career opportunities changed as a result.

CHAIR: I noted your comment that you support the new BEAR, the accountability regime, and this is the sort of matter, no doubt, to which it would turn its mind.

Let's move on to comprehensive credit reporting. It is interesting that recently there have been various comments from the banks about, 'Well, we're going to do comprehensive credit reporting now.' As I said before, I think this is in the same sort of scheme of issues as open data, because basically it is about liberating information—after all, it is the information of the customer—and enabling that information, with the customer's consent, to be accessed by others so that they can make competitive offers and so on. You said to the FSI report—or, your submission more than three years ago said:

Comprehensive credit reporting (CCR) is a major improvement to the availability of information and will provide significant benefits to financial institutions, consumers, and small businesses over time. ANZ is implementing CCR systems and would expect the market will inevitably move towards the inclusion of SME lending in CCR.

That was more than three years ago, but not much has happened, right? Is that because, commercially, it's not actually a good thing for incumbent banks?

Mr Elliott : No, I don't think so at all. I think it's an issue of scale. Comprehensive credit reporting works really well when you have more banks contributing, because then there is a real richness in the data that's available. I think there is progress on this. Some of our peers have announced they're moving towards a CCR regime. We've announced we are doing so next year. It is coming and it will be to the benefit of customers.

CHAIR: But it has been coming for several years, though, hasn't it?

Mr Elliott : But this is real. We've said we're going to do it and we're going to do it.

CHAIR: Can you explain the time line for that and what, if any, prerequisites or hurdles there are between you saying that you're going to do it and actually doing it? For instance, would you turn around in six months and say, 'Well, bank X didn't do something so therefore we're not doing it'?

Mr Elliott : No, we wouldn't say that, I don't think. I think that now there is a critical mass of larger banks. I would point out that while we are one of the big four, we are relatively small: we have 15 per cent market share. We will be contributing; we will not be making those kinds of excuses.

The real issues and limiting factors are that there is a lot of process to change and there is a technology investment required. It's something we actually have to invest in to get ready to do and that is exactly what we're doing. I can tell you that the CCR work—the project, if you will, under that—is funded in the bank. It's one of our key priorities. Just yesterday I was down with the team and looking at all the project investments we are making, and there it was right at the top of the board. So it is something we're committed to doing.

CHAIR: Okay. You mentioned the Australian Financial Complaints Authority in your opening statement—the one-stop shop for consumer redress that the government is putting in place in response to a number of things, including the recommendations of this committee. So, do you believe that that is on the right track and are you supportive of that process?

Mr Elliott : Yes.

CHAIR: And have you been engaging around the final structure of the AFCA and so on?

Mr Hodges : Yes. I met with Professor Ramsay many months ago now. We had our first round of dialogue and I think there has been dialogue with the banks since then as well. I gather that the report is pretty much done and has been handed to government, and that we're waiting to hear the outcome from that. So we have been actively engaged in that.

CHAIR: Okay, thank you. Another issue arising from our last round of hearings was the new financial services unit within the ACCC—

Mr Elliott : Yes.

CHAIR: under the leadership of Marcus Bezzi. As I understand it, this team is on the ground getting internal banking documents, emails, board minutes, board subcommittee minutes, other exchanges and so on. I presume that the team has been in touch with your bank?

Mr Elliott : Yes.

CHAIR: We talked a little earlier about interest-only loans and the response to APRA. I note from the various analysts' reports that the consensus seems to be that your adjustments in relation to these changes are, in a sense, less disproportionate than perhaps some of your peers. But when Mr Bezzi's team very carefully goes through all of the internal analysis and documentation and so on, do you think that what they will find will be entirely consistent with your public statements?

Mr Elliott : Yes.

CHAIR: And have you made the existence of this team clear to all of your executives, and the fact that it is important that the bank is open to this team and makes documents available as required by the team?

Mr Elliott : Absolutely. We sent a note and spoke to not only all of the people across, obviously, the relevant part of the bank but also all of our senior executives to make them aware that the review was taking place and that they were to be totally cooperative and provide any and all data and feedback that was asked of them.

CHAIR: In terms of the specific impact of the APRA interest-only change, where it's required a 30 per cent speed limit on new interest-only loans, you, like the other banks, have increased rates for all interest-only loans, not simply new interest-only loans. Given that the requirement only pertains to new loans, can you explain why you've also increased rates for existing loans?

Mr Elliott : I think it's important to step back a little bit.

CHAIR: Why don't we just answer the question? It's quite clear that it only applies to new loans, so can you explain why you've also increased rates on existing loans?

Mr Elliott : Yes. It's because we run a business, and we need to make sure that it's prudent, that we identify risk and that we price for it appropriately while still providing good, decent service to our customers. We started changing our approach in terms of lending standards, policies and pricing well before APRA put in place that speed limit. In fact, our first changes around interest-only loans started in April 2016. We made policy changes. We've reduced the amount of time people can pay interest only for; we've reduced the maximum loan to value on that. That was well before the speed limit, because we assessed that the risk in that book was changing and that we needed to be mindful of that. In fact, the first pricing changes we made, where we increased it for some customers, was on 24 March, which was a week before the speed limit came in place. Then, subsequent to the speed limit—probably a month or two later—

Mr Hodges : Two months.

Mr Elliott : we came out and reduced rates. We were first. We reduced rates for people who were paying principal and interest, whether they were investors or owner occupied, and increased others. We reduced it by five basis points for some and increased it by about 30 basis points for the others. We did that at a time when we did not know what our competitors would do and what our customer behaviour would be. We wanted to reward customers who repay principal because it's the right thing to do, and we wanted to give the right signals to them to move. I understand the point of your question. Yes, we repriced the back book, in our language, but we also gave those price cuts to the back book as well, so I think we were fair, reasonable and even-handed in the way that we applied those price changes.

Mr Elliott : Plus, we did introduce, for that transition period particularly, a fixed-rate principal-and-interest loan which was at the lowest we've ever given, which was 3.88 per cent. It was a chance for people to switch from an interest-only loan to a principal-and-interest fixed loan, which meant that the actual amount of money they had to pay each month was actually relatively small. That's because we were aware that people, if they were switching, would have to step up and pay some more money, even though they were getting the benefit of paying down their loan.

CHAIR: Indeed. One of the arguments that Mr Hartzer made this morning in relation to the back book people who have had their rates risen is that they can switch to principal and interest where there's a lower rate. There's no doubt that you'd make a similar argument. But, as you've noted, Mr Hodges, if you switch to principal and interest, by definition, as I understand it, you're paying more because you're paying interest and principal as opposed to just interest. Presumably, one of the reasons they may have happily contracted on an interest-only basis is because they were in the financial position to do so and that's what they were able to do. Isn't it disingenuous to go back to those people who actually aren't affected by the regulatory action and say, 'We have determined that, effectively, it's good for you to move to principal and interest'? It has the, from your perspective, happy coincidence of increasing profits at the same time.

Mr Elliott : I don't quite see it in those terms, but I understand your question. The point is: first of all, in terms of the notice period, we gave four months of notice for people to make changes, whether that was making a move with us or perhaps moving to a competitor. Going back to the point you made earlier, when people come in and ask for an interest-only loan, we assess them on the basis that they can afford to pay principal and interest from day one. If we assess them as, in a responsible way, being able to afford that, then we may consider it if they asked to pay interest only. So we do assess people's ability to be able to afford to pay principal. As you well know, rates have actually been falling for many years, so the nature of a variable-rate loan is that, when rates fall, they go down—and they've been getting the benefits of that—and, when they go up, they go up. And, to Graham's point, we knew that that could be difficult for some. That's why we gave lots of time and we gave alternatives, and we gave a very competitive low fixed rate loan for people who wanted a bit more certainty about that.

CHAIR: Did you conduct financial analysis on the direct financial cost to the bank or potential financial cost to the bank of complying with the APRA speed limit on interest-only loans?

Mr Elliott : Not so much about the speed limit per se. We did financial analysis about our price changes, absolutely. Yes, of course, we went through—

CHAIR: But before you do that, wouldn't you say, 'I think you're running it; what about 38 per cent' or something 'of interest only, if that drops to 30?' given that it's a more profitable product. All things being equal, that would be reduced profits, wouldn't it?

Mr Elliott : It depends what customers do. There's an assumption there that all ANZ customers stay with ANZ and those people move. That's not reality. I should point out, turnover is—it's a competitive market. About 10 per cent of our customers with a home loan choose to leave and go somewhere else every year. There are a lot of factors. Not to my recollection did we do an analysis purely with everything else holding still and say, 'What if it slows down to the speed limit of 30?' We absolutely ran analysis and said when we reduce rates on principal and interest by five points that will come at a cost. When we increase rates—by the way, just to give you the numbers, about two-thirds of our customers got the benefit of a lower rate. Two-thirds got the benefit of a cut, a third went up. Yes, we run the analysis—

CHAIR: Yes, but it's a much larger increase than a responding reduction, right?

Mr Elliott : Sure, but we were first. We did not know what the competition would do. We did that at a risk that a lot of those customer would choose to vote with their feet and go somewhere else or go to the fixed rate, which is a much lower-margin product. So there are a lot of variables. But, yes, we run scenarios to understand the financial impact. We have a responsibility to our shareholders to understand that we are getting returns for—

CHAIR: I do note in your press release, on this issue, you named a number of factors in relation to the rate rise. In relation to this issue about payWave and the impact on merchants, we all learnt about credit cards this morning. To put it in very simple terms, I would guess, and you would know far better than me, that there are a lot of people out there who have a debit account with one card that is provided or chosen that has a Visa or Mastercard badge in the corner. It's just one card. They don't have an EFTPOS and a Visa and proactively choose, case by case, which one they're going to use. I'm sure some people do, but I'm sure there are a lot of people who don't.

In relation to this issue of it being routed through the higher cost credit network, when someone simply presents the card with the Visa or Mastercard chip, Mr Hartzer made the argument that the consumer has elected to use Visa or Mastercard rather than EFTPOS by presenting that card. A lot of merchants might say, 'Well, not really, because that consumer probably uses that one card and has no cognisance of the underlying fees that are charged to the merchant or the fact that, ultimately, those fees charged to merchants can boomerang back to the consumer.

So do you think it reasonable, as I understand it, that the banks, if I do present that Visa or Mastercard at the shop, automatically route it through the higher-cost channel, or do you think it should be much more explicit and with, preferably, a default option that pursues the lower cost rather than higher cost?

Mr Elliott : I think Mr Hartzer has covered some of this. The reality is that the original default was because Visa and Mastercard were the innovators here—in fact, they launched payWave in 2011, I think—so they were way ahead. Let's remember who owns EFTPOS: we do, the banks. So we have nothing to gain, here, by EFTPOS not being successful.

CHAIR: Just on that point, is it the case that you are, economically, completely ambivalent about whether it goes through EFTPOS or the cards? I would have thought the cards were more attractive for you.

Mr Elliott : If you are doing the pure maths on the finances, it'll be here or there, either way. I don't think we would pay a whole lot of attention to it, to be perfectly honest. That's not really the driver. The driver is, 'What's the best customer outcome and how can we do great things for our customers so they choose to come with us?' That's why we launch things like Apple Pay and Fitbit pay and things like this. But to your point, Visa and Mastercard have been in place for a period of time. They set the standard—and great; Australians love it and they really enjoy it, and we have the highest penetration of contactless payments in the world. EFTPOS, a little bit late to the game, only just launched recently. The good news is that that is spiking usage of the EFTPOS contact list. It's spiking up really fast.

Now we get to your point. We essentially have three types. We have a credit card, a debit card and the hybrids. We all understand credit and debit cards; they go to the default. On your question about the hybrids: until now there really hasn't been a choice. I think Brian made the point: if you insert the card, you get to choose, but with contactless, you don't, so it's defaulted to Visa. It's the machine that sits on the shop counter that makes the decision.

What we're doing now is saying: if those merchants want to default it somewhere else then we will do that for them. If that's our customer, we're happy to do that. Now, maybe it's to do with the publicity—and I know there'll be a lot more after this inquiry—but at ANZ we've had one merchant who has come to us to ask us, 'Could you please switch the default?' We will do it. We'll work with them. It takes a bit of investment—

Mr CRAIG KELLY: I'm sure there would be a lot of merchants who would be pleased to hear that.

Mr Elliott : One important thing that wasn't covered this morning were the rates that were talked about in the reports—the carded rates. A lot of merchants don't pay those rates. They get discounts because of the volume they put through or because of the relationship they have with the banks. The pricings are not the same; they are actually different. Lots of people today, for example, will even use contactless to buy a cup of coffee. The merchant fee paid on Visa and Mastercard is actually lower than EFTPOS for very small transactions, so it's not quite the same. It does depend on the nature of your business.

CHAIR: It's materially higher overall—

Mr Elliott : But if I'm a coffee shop, and the average transaction is $5, I'm actually getting a good deal. So it's not quite—

CHAIR: But I think your key point, Mr Elliott, is that if merchants want to do that—to route through the lower-cost channel—then you'll facilitate that happening.

Mr Elliott : If they're our customers, obviously, yes, we will do that.

Mr THISTLETHWAITE: I want to ask some questions about AUSTRAC. The AUSTRAC statement of claim that has been filed in the court proceedings as part of their allegations against the Commonwealth Bank also makes the claim that half of the six money laundering syndicates that they've identified have washed major portions of their funds through ANZ accounts. Is that something that concerns you?

Mr Elliott : Yes, of course.

Mr THISTLETHWAITE: Has this been discussed at the board level in your organisation?

Mr Elliott : Yes. What we did, when the press report and the actual statement came out, was convene a board meeting, I think, literally the next day. We went through that statement of claim—and there were obviously some press reports and stories—to make sure about whether there were any issues that we needed to deal with urgently, whether there was anything in there that we needed to be aware of, or whether there were any changes we needed to make. As you would imagine, that's triggered quite a large amount of work for us to go back and retest all our processes and to look again at our relationships. We met with AUSTRAC—I've personally met with them—just to make sure about whether there was anything we could learn from this, so that we could tighten up controls further.

Mr THISTLETHWAITE: The CBA also claim that they were going to use court discovery to query whether rival banks had made sufficient disclosures. Have they done this with ANZ?

Mr Elliott : Not to my knowledge, no.

Mr THISTLETHWAITE: Are you confident that ANZ has made all the relevant disclosures to AUSTRAC under this anti-money laundering and terrorism financing legislation?

Mr Elliott : Yes.

Mr THISTLETHWAITE: That's good. On the issue of Prime Access refunds: ASIC, in a media release in May 2017, found that further compensation of approximately $7½ million was required to be paid to ANZ Prime Access customers for ANZ's customer failure to rebate commissions in line with agreements with customers. That was in addition to the $52 million in compensation that ANZ has already paid as part of remediation for the fees-for-no-service issue. Can you explain why you had to pay this additional $7.5 million to customers?

Ms George : Firstly, we're almost at the end of that process. I think we have about 150 customers now that we're yet to remediate. Unfortunately they're customers that are in deceased estates now or that we are unable to locate, so we're still trying to move through that. We're very much at the end of that process. As we've gone through the process of lifting files, looking at files, it was important that we be as thorough as possible. As a result of that we found some additional customers and we put them back in the right place where they should have been. But it's important to note that we're really at the end of that process right now.

Mr THISTLETHWAITE: The way ASIC tried to characterise this was that it's $7.5 million of additional compensation that you're required to pay, and you're saying it's because—what is it? A further sweep of all the customers or—

Ms George : In consultation with ASIC, although we've done it ourselves, we've had to go back and look at all the processes over a number of years. As we've become more and more thorough with each customer, we've found some additional fees that we need to reimburse. I don't think it's an expansion of the problem; we've been more thorough—we've made sure that we went through the files with thoroughness.

Mr THISTLETHWAITE: Is it a concern that you're continuing to find more customers who you need to compensate?

Ms George : It's important to note that in the financial advice space, over the last few years, we've really focused on improving the auditing and monitoring, we've put in place new professional standards across advisers and we've also, in conjunction with the ABA, brought in reference checking. We're going through a massive transition in financial advice to improve the quality there. As a result of that we are finding additional issues. I can't sit here today and say that we're not going to find more, because, with the use of new technologies, we can really hone in much quicker on issues and we can identify issues quicker. We need to get the people who are doing the wrong things out of the industry.

Mr THISTLETHWAITE: In terms of the wealth business that ANZ owns, is it true that you're trying to sell that at the moment?

Mr Elliott : For a couple of years now we've been rethinking the best way that we can offer the best service to our customers. People are insuring their life and their loved ones and also saving for their retirement—a really good idea, and most Australians should do that—so we want to be in the business of providing those solutions to people. We don't necessarily have to be the manufacturer—the people who actually manage the life insurance or superannuation—so we're seeking a better model, and we've highlighted that for a period. We'll be in the business. You'll always be able to come to ANZ, whether it's through a branch or through a planner or digitally and find those solutions, but we want to work with partners. We're in the process of looking at that right now as we speak, but that doesn't take away any accountability for us in terms of doing the right things by customers. That stays with us, clearly.

Mr THISTLETHWAITE: No; I'm not suggesting that. But you are trying to sell that business at the moment?

Mr Elliott : We've said that. We're going through a process at the moment to look at the—

Mr THISTLETHWAITE: Who will have responsibility for these issues that are ongoing with wealth management?

Mr Elliott : We will.

Mr THISTLETHWAITE: You're not going to sell those liabilities as well?

Mr Elliott : No.

Mr THISTLETHWAITE: Does that include Timbercorp?

Mr Elliott : Timbercorp is not really part—

Mr Hodges : We didn't lend money to any customers around Timbercorp.

Mr THISTLETHWAITE: I know that.

Mr Hodges : We had the synchronisation loan to the entity. That was a wholesale loan structure.

Mr THISTLETHWAITE: So it shouldn't be affected by the sale?

Mr Hodges : It won't be affected at all.

Mr THISTLETHWAITE: Ms George, is it the same case for the OnePath breaches? ASIC announced in August that there's an additional $10½ million in compensation for 160,000 superannuation customers within the OnePath group. Is that again you continuing to look over these accounts and reviewing them?

Ms George : It was just about being absolutely clear about what was owed to customers and putting them back in the position they should have been in. That's what we've done with both of those processes. Regardless of whether there is a transaction or not, the responsibilities for finalising those remain firmly and squarely with ANZ.

Mr THISTLETHWAITE: Going back to the issue of the so-called liar loans that the chair mentioned earlier, the survey that was mentioned found that, of all the big four banks, ANZ had the highest proportion of those so-called liar loans within that 907 sample. Is that something that has triggered a review within your organisation? If so, what has the outcome been of that review?

Mr Elliott : Of course we're sensitive to any third-party information. We'd be negligent if we did nothing on that. So we did go back and say, 'How could this be? What have we misunderstood? Should we go back and look?' We're doing that as we speak. We haven't seen anything, as I mentioned. That survey was really about the veracity of what people tell us at the application, but, as I said, that's not how we assess the loan. In fact, we do a lot of adjustments to that. But we have gone back and, absolutely, we're going to look at that to try and understand why that might be. I'm not in a position to say whether it's right or wrong or potentially misleading. As I said, the sample is pretty small, but we're going to do our best to learn from it—absolutely.

Mr THISTLETHWAITE: Has the bank amended its credit assessment for residential home lending recently?

Mr Elliott : We're constantly changing it. Over the last two years we would have made changes to our policies probably every month or so. So we're constantly trying to tighten that up and learn from what's happening in the marketplace, where we see risk et cetera.

Mr THISTLETHWAITE: Do you use the household expenditure benchmarks as well?

Mr Elliott : Yes, we do. We don't primarily use them. We lend based on, first of all, what people tell us about their actual expenses. If they are a customer of ANZ we can check that and see if that matches with what we see in their account. But, increasingly, particularly for somebody like ANZ where we are relatively small, a lot of our mortgage customers aren't banking with ANZ, so we don't have that ability. That's why comprehensive credit reporting will help going forward. We use things like HEM, the Housing Expenditure Measure, to check to see whether what we are being told by a customer kind of makes sense.

Mr THISTLETHWAITE: Is it the case that you use that as a default or do you only use that in the circumstance where you believe that the customer might not be telling you the truth about their expenses?

Mr Elliott : That's a good question. If a couple walk in—I'm making this up—and they tell us that their expenses are $1,000 a month, if they are an ANZ customer we check and look for evidence of that. We then check it against HEM and say, 'Hang on; a couple with two kids with that income should be $1,500 a month' or whatever. We then go back and ask them. Maybe they've forgotten something. Maybe they forgot the life insurance policy, the car lease or the private school fees or something. So we use that as a test. If we are not sure, we default to the higher of the two to give us some safety and make sure what we are doing is responsible.

Mr THISTLETHWAITE: So there can't be a situation where the expenses that the loan applicant reports are higher than the HEM and you default to the HEM?

Mr Elliott : No; we take the higher of. That is a good question. That doesn't happen that often; it's probably 20 or so per cent of the time that people actually disclose higher expenses and we take the higher of.

Mr THISTLETHWAITE: I have some questions about your funds. In terms of the retail super funds that ANZ operates, you have got the ANZ OnePath Masterfund that has 990,000-odd member accounts with a total of $34.5 billion in funds under management. They record zero investment fees and zero expenses. Does that OnePath Masterfund really cost nothing to run?

Ms George : It would be interesting to find details on that. Clearly, it costs money to run our funds. Under the new legislation, we are transparent about all the fees that are in our funds. We have to be and we abide by the legislation.

Mr THISTLETHWAITE: Are you referring to RG 97?

Ms George : Yes. There are a couple of cash funds that have zero fees. They are cash funds and low money to run and we pick that up through the admin fee. If you give me some details of the particular things, I would be happy to look at that. But it is important to understand that there could be bottom funds where they are zero. It is the actual fees that the customer pays that we disclose to the customer, because that is what is important from the customer's perspective.

Mr THISTLETHWAITE: So if the customer is a member of OnePath but they've got investments in an associated entity and OnePath is disclosing zero investment fees and zero expenses, are you saying that fees from the associated entity will be disclosed?

Ms George : I'm saying there could be some wholesale funds at the bottom levels where it might be disclosed as zero. As it rolls up, the real fees that are charged to the customer are absolutely disclosed to the customer, with the exception of the ones that I mentioned about a couple of cash funds, which are really zero.

Mr THISTLETHWAITE: If you have funds like this OnePath Masterfund, with so many customers, how do you make money on them?

Ms George : We charge an administration fee. So we make money on administration fees. We use various investment managers who charge fees as well, but they are included in the disclosure to the customer. If they are not cash funds that you are referring to, I am more than happy to take that question on notice and have a look at them. They could be wholesale funds, as I said, that roll up into the funds we offer customers directly.

Mr THISTLETHWAITE: Okay; I will provide those questions in detail on notice. I just want to ask some questions about consultancy fees. It has been reported that, in the financial year to June 2017, you reduced your full-time equivalent staff by six per cent. Is that correct?

Mr Elliott : Yes.

Mr THISTLETHWAITE: But, in the same period, you paid consultants, particularly Ernst & Young, more than $20 million in consulting services. Some might say that you have got your priorities wrong and that you are not getting value for money in paying consultants this much money and reducing your staff, particularly in the context of closing branches in regional areas.

Mr Elliott : I can understand that question. First of all, the reductions in staff are not all in Australia. We operate a bank in 34 countries. We have been restructuring the kinds of business—what we do, for whom and where. That has resulted in having fewer people.

Mr THISTLETHWAITE: Can you tell us—and you may need to take this on notice—what percentage of that is Australian?

Mr Elliott : Sure. I will have to take it on notice. I can't recall. The Australian numbers have come down too, but it is not all from there. As to the consulting fees: 'consulting' is a broad-brush description of things. For example, a lot of the professional services firms do tax work for us. They are the people who help us do things like CPS 220. They do the reviews. We have to pay for that. They come in and do risk reviews for us. They provide a wide range of services. This is not in the general bucket of management consulting and talking about strategy and theory. They are usually doing risk-related work or, increasingly, actually, a lot of those practices, like EY, will have quite large technology practices. One of the issues—and perhaps another time we can talk about it—is the lack of skills in Australia around certain digital and data skills, and therefore it is really difficult to hire the right people and so we are forced to use consulting practices to mitigate that risk so that we can get out great products to our customers.

Mr Hodges : Part of that, too, is that, if we have a relatively short-term project into which we are looking to attract particular skills, we will use some external skills to do that project and then those people disappear. So they are more project or transaction related, and we use them for those reasons too.

Mr THISTLETHWAITE: If a lot of it relates to risk then, given the increased attention to risk mitigation and management, particularly in the big four banks, wouldn't it be better to have that service in-house?

Mr Elliott : You are right and it is. Don't quote me, but we have about 45,000 FTE and our risk team's about 1,500. It is probably one of the few areas that has been growing over time. And that includes compliance people. We have been investing heavily in terms of the nature of the people and training. It is absolutely right that we want to skill up there. What these independent parties do is exactly that—provide an independent review. So they are not actually doing the work for us. They are really coming in and saying: 'Have you set up processes that meet your regulatory requirements, the board's requirements, around your risk appetite and the kinds of things you want to do?' We use them as a third set of eyes over us.

Mr Hodges : Just for context: $20 million does sound a lot of money. It is a lot of money. But, in the context of our total bank costs, which are—

Mr Elliott : Nine and a half billion.

Mr Hodges : nine and a half billion, the $20 million is not a big number in that sense.

Mr THISTLETHWAITE: As to the retail network: you have been closing branches recently, and it was reported that in September alone you closed seven branches.

Mr Elliott : Yes.

Mr THISTLETHWAITE: Many of those are in rural and regional areas. Do you think that you are meeting your customers' expectations by closing branches in rural and regional areas?

Mr Elliott : I think we are. The reality is: why are we closing branches? It is because our customers have already made the decision for us because they no longer come to the branch. The reality is: there is a role for branches, and we understand that—particularly in rural and regional areas. What we've found, though, is that customers aren't coming to those branches anymore. If they are, they are tending to go into regional towns—the Ballarats of the world et cetera. People are coming and doing their banking there. To mitigate that and make sure that customers have good service, we're generally leaving ATMs in those towns to make sure that people still have access, and, like other banks, we have an arrangement with Australia Post that means that our customers can walk into any of the 3½ thousand branches in the Australia Post network and do their basic banking in there. We do make sure that we're offering alternatives for those customers.

Mr Hodges : Just to add the other side of it: we're investing in a lot of renovation and improvement in other branches as well. It's sort of been both sides of it. We've been investing in the network of branches to make them more fit for purpose in terms of what people are using them for today.

Mr THISTLETHWAITE: In your The ANZ Way document you set out your business strategy, and you've got quite a focus on your retail network. Doesn't that go against what you've got in your own documents—the closure of some of these branches in rural and regional areas?

Mr Elliott : We're really focused on our customers. Our customers don't want to come into branches. They really don't want to. They want to be able to get their banking done when it suits them, 24/7. They want to be able to do it on their phone or on the internet. They're looking for those services, so that's what we're providing. As I said, they're voting with their feet and their fingers. They're choosing these services, which means we have less and less volume in the branches. It's quite a remarkable change. Even if we think about things like cash—and I know we've been talking about cash from an AML point of view—the usage of cash in Australia is diminishing. People don't even use ATMs to the extent that they used to, because more and more they're using cards and mobile and internet solutions to make payments for things. And that's because they love the convenience.

Mr THISTLETHWAITE: Do you have plans to close more branches in the course of the next couple of years?

Mr Elliott : Yes, we do. The reality is we have plans to make sure we're responding to our customers' needs. I imagine that will mean fewer branches.

Mr THISTLETHWAITE: Just finally, I have some questions about the Sedgwick review. Are you going to fully implement all of those recommendations?

Mr Elliott : We're going to implement all that we can, yes. The one that's the most complicated is around third-party brokers, basically. The only reason for that is that it's hard for us to do it unilaterally. But we're working really hard with the industry, through the ABA, with our peers, and with the broking industry, to get that done. We agree with the intent; we've just got to work that through.

Mr THISTLETHWAITE: Is that recommendation 16?

Mr Elliott : I believe so. It's the last one.

Mr THISTLETHWAITE: The mortgage brokers?

Mr Elliott : Yes.

Mr THISTLETHWAITE: That's the one that recommends that banks cease the practice of providing volume based incentives that are additional to up-front trail commissions?

Mr Elliott : Yes. I can't remember the exact wording. Essentially, I think the industry's done a lot of good work, partly pushed along by this committee, to make sure through our own channels that we're really focused on good customer outcomes and that we're not incentivising poor behaviour. It's only reasonable that we would extend that through another really important channel, which is the broker channel. Australians increasingly choose to go to a broker, particularly when they're looking for a home loan—in fact, it's more than half the market today. It's only reasonable we should make sure that we have the same basic principles in place there to make sure that they are incented to provide good customer outcomes. Large brokers are aligned with that. I don't feel there is resistance. We've just got to work together to get it done.

Mr THISTLETHWAITE: If that's the case, why can't you commit to implementing that recommendation?

Mr Elliott : We can as an industry. If we do it alone, what will happen is we'll be out of business in that sense. As I said, we're a small player. We've got to get everybody aligned. The ABA is aligned to get this work done, and we're sitting down with the brokers. The major brokers I've spoken to—ANZ is different from our peer group. We do not own a broker. Most of our peer group do. But I don't see any resistance. It's just that we need to get to the table and work it through.

Mr THISTLETHWAITE: Haven't you just pinpointed the problem with the banking industry in Australia at the moment—that there's no competition on many of these issues? You don't move—

Mr Hodges : I think it's the opposite.

Mr THISTLETHWAITE: None of you move.

Mr Hodges : It's not putting ourselves at a competitive disadvantage, because the market is so competitive. That's where the industry itself has to get to the table and say, 'We know it's the right thing. We think it will be done.' The ABA's aligned around it. The devil's in the detail of how that's going to happen. Clearly it's going to affect thousands of brokers in the market too. As Shayne said, the aggregators understand and accept the principle here. It's about working through the detail.

Mr THISTLETHWAITE: What about recommendation 9—formally examining workplace culture and formal processes to redress any conscious or unconscious bias towards sales preference in customer service? Can you outline the process that your bank's undertaken to meet that recommendation?

Mr Elliott : I could do it at a high level but I'm happy to respond on notice about the actual program of work that we have around that, because we do have a program of work around that.

Mr THISTLETHWAITE: Do you use this balanced scorecard method assessing remuneration?

Mr Elliott : Yes.

Mr THISTLETHWAITE: To meet any of these recommendations in Sedgwick, can you inform us how that balanced scorecard approach has changed? In other words, how have the percentages changed in terms of moving away from sales to other factors on the scorecard that may be influential in determining whether or not someone gets a bonus?

Mr Elliott : Typically, our scorecards, whether it is in a branch network or is, frankly, the one that I have, will tend to be in four quadrants. There will be an element of financial to make sure you have your financial results. There will be risk. Did you manage the place well? There will be people, obviously, particularly if you're in a leadership position, to make sure you're operating a safe and healthy work place, et cetera. Finally, obviously, good customer outcomes. Depending on your role, we would weight those slightly different. If I'm the CFO, the weighting would look different than if I'm running the branch network. In the branch network, what we have done over time is push down the weighting on financials and increase the weighting on customer. So, now, more than half of the weighting is on good customer outcomes. You might say: what does that mean? We essentially survey—we use a system called net promoter system—to ask our customers. Literally, on a daily basis we survey them, whether on SMSs, emails and others, to say: 'With the experience that you had in the branch today, when you came in and you had you're A to Z review, you asked for a home loan or you wanted to talk to a planner, was it good enough that you would recommend that to a friend?' Out of 10, you have to get seven or above for that to be good. Everything else is kind of not. That's how we look. So that tends to be one of the lead metrics that a branch will get measured on—do people walk out of the branch feeling good about what they have experienced, rather than how many cars did people apply for today.

Mr THISTLETHWAITE: Can you tell us at the moment what proportion of that at-risk pay is in the financial category?

Mr Elliott : The way that that works is we look at the whole scorecard. The customer piece, as I said, is more than half in a branch. But we assess—

Mr THISTLETHWAITE: Sorry. So customer piece includes risk, people and customer together?

Mr Elliott : No; just customer. So that's more than half. I can't remember the weightings of the others to be honest. We can show it to you. Then we assess the overall performance. We balance all of those things. I will give you an example. There's not point saying, 'Great customer outcomes but hopeless on risk management.' So we balance them. We kind of score them. Then we assess on the overall basis: did this individual, this branch or this team deserve incentive payments or not? We don't say, 'You get an incentive for financials, you get a different incentive for people.' We balance it all out.

Mr THISTLETHWAITE: Have you made any changes to the actual percentage of pay that is at risk—so the overall total of pay that is bonus driven, if you like?

Mr Elliott : Not in any material sense most recently. I appointed a new head of what we call 'talent and culture'—or 'human resources' in older terms—four months ago. One of the primary things we're doing right now—and we've got a lot of people working on it—is exactly that review to make sure that we rethink what is the right balance between fixed remuneration and variable, and the nature of those. We're taking Sedgwick as a guide on a lot of those things but also just looking at best practice around the world. I would imagine the target is to do that work towards February, I think, as we're scheduled to sit down and actually make some decisions, and then take it to our board to implement next year.

Mr Hodges : I can just confirm that on the financial component, or the weighting, if you like, for all of business and private banking scorecards, it's under 33 per cent. So it's less than a third for all of the business.

Mr THISTLETHWAITE: I have just a final question. You mentioned earlier the importance of surveying. Do you survey your staff—

Mr Elliott : Yes.

Mr THISTLETHWAITE: to get their feedback about whether they would prefer to see more of their pay paid upfront rather than through a bonus—at risk, in other words?

Mr Elliott : We survey our staff on a number of issues. We survey them regularly around culture. 'Is this a place where you feel safe to speak up?' 'Is this a place where you feel you have opportunity irrespective of your background?' We do all of those things. 'Is this a place where the leadership role model our values?'

We do all those things. It's interesting you say that because I literally just approved a survey—I think it was last week—of our staff to actually understand what people think about the weighting between variable and fixed, what they would like to see, how they would value those things and what they think some of the risks are. We are actually going to be doing that in the coming months in preparation for this work we are conducting.

Mr THISTLETHWAITE: Will that be a first time for that?

Mr Elliott : It's certainly the first time during my time as CEO, which is not very long, but certainly in the last few years, yes.

Mr THISTLETHWAITE: Thank you.

Mr EVANS: Thank you all for being here today. I'm going to focus my questions on small business lending practices. We might start with unfair contract laws, if we can. ANZ and the other big banks recently sat down with ASIC and the Small Business and Family Enterprise Ombudsman and reached this agreement to remove certain unfair terms from your lending contracts with small businesses. That was in August. In a public statement I found, you have, quite forensically, set out exactly what it is that ANZ's committed to do in that agreement. There will be no more unilateral changing of contract terms, no more entire agreement clauses, no more using general material adverse change to default customers and so on. That has all taken effect as of August, which is a good outcome for small businesses. Thanks for that, I congratulate you. I want to ask a pretty fundamental question around that, though: do you consider that these commitments are consistent and in line with compliance under the unfair contract laws, or do you consider that you've gone above and beyond what's required by the law?

Mr Elliott : That's a good question. I will ask Graham to answer because Graham spent most of his time on this.

Mr Hodges : At this stage, I would say we believe we are absolutely compliant with the law. The law has been changing on this. I think we first provided our draft contracts to ASIC probably about this time last year. We've had some feedback on that through the course of this year, and we've made some amendments to those contracts as a result of the feedback from ASIC. It is moving a little bit and it has been moving. We think we've now landed that and we're looking to introduce those contracts at the end of this calendar year, in the sense of being formally finalised. But, as you noted, in our release at the end of August we said we'd apply those rules from 1 September so that, even though the contracts weren't yet out, we'd apply that to all of our customers anyway. At this stage we think this is a big improvement on where things were for the customers. I couldn't tell you exactly how far in advance of the required black-letter law it is, but we think it's good progress for customers.

Mr EVANS: I want to test something with you that's been put in some of the public commentary. I would say that the architects of that legislation—probably the parliament, looking at some of the debate and the explanatory memo and so on—would have considered that things like clauses that enable you to unilaterally change contract terms would always have been included as an unfair contract, in the sense of the spirit of that legislation. Those laws took effect in November, I think it was, of last year, which would have been a good nine months before this agreement was reached with ASIC and the ombudsman and when these changes took effect. I suppose the accusation is that the compliance has come late.

Mr Hodges : From our perspective, we've been working through and we actually had those drafts ready late last year. We worked through those with ASIC, we got feedback and we've been implementing those through the course of the year. As I said, there are quite a lot of changes to these contracts. We've not only had it for customers of up to $1 million in their borrowings but now up to $3 million in their borrowings; we've applied it to a wider pool, as well. We think it is absolutely within the spirit of what was expected from the law.

Mr EVANS: I'll touch on some of those thresholds. You're looking at individual contracts of up to $1 million and total loan facilities up to $3 million. That's good. That sounds like you're ahead of your peers, or most of them, in terms of the thresholds your applying and the time frames with which you've been able to roll some of these things out, certainly in relation to non-monetary default. Can I generally confirm whether you are or you are not looking at whether you can expand some of that work even further into say larger size businesses or different categories of businesses? I know there was some push back from the industry around the ombudsman's suggestion $5 million was an appropriate threshold.

Mr Hodges : I think there is still a difference there, to be honest. We have done the work and said that the $3 million threshold will cover 99 per cent of our customers, and I think a similar comment has made by other banks. The reason is once you get beyond that certain size you start to get into more complex legal situations for the companies. Essentially, they are both more complex, they are likely to have these structures and actually it means we need more protection. If we don't have that protection for these larger borrowings, clearly either there will be a higher cost of credit or the availability of credit will be affected by that. I think the industry has gone through this in quite a lot of detail. I know there has been a good debate with the ombudsman around this. I think as we get further benefits from technology over time, we might see that change. But, right now, I think the industry feels that is the right level.

Mr EVANS: Just to confirm, then, ANZ is happy with where it has landed on this and isn't immediately looking at going further?

Mr Hodges : That is exactly right. That is correct.

Mr EVANS: You have set out how nonfinancial default might still occur. There is, I think, a list of six specific exceptions that you have published.

Mr Hodges : Yes—nonmonetary defaults. Unlawful behaviour was one.

Mr EVANS: I just want to talk about one, failure to provide information—I think the exact words are 'failure to provides accounts'.

Mr Hodges : 'Financial accounts or information' I think is the one.

Mr EVANS: I was just after a bit more clarity around what that means and how it applies in practice? It is four or five words only. It might be fine or there might be more to it. I guess I see some potential for ambiguity.

Mr Hodges : If we ask you as a small business 'Would you provide us with a copy of your financials?' and they refuse to do that, you have got a position where you don't really know what is going on in the business. I think what we have asked there is not that it would be a specific nonmonetary default immediately, but we would give them notice of 30 days that we wanted to have that information or there is a possibility for us to then default. For that one, we effectively are saying, 'You have got notice that we need that and we would like to have that.'

Mr EVANS: I suppose I could envisage that there is a spectrum of possible cases there, everything from you making a very specific finite request, very reasonable, all the way through to repeatedly requesting a fair bit of information from a small business customer that is unable to easily comply—fishing expeditions. I am not suggesting it is your policy.

Mr Hodges : That is not the intent.

Mr EVANS: Have you put more flesh on the bones of what the exception is?

Mr Hodges : I don't think we have, but I think the issue around that is what is the reasonable behaviour of the bank in terms of asking for that. I will ask our teams are we prepared to do anything around that.

Mr EVANS: I think that would be useful. Lastly, in your opening remarks you talked about the new code of banking practice, due to be finalised by the end of the year. I think Westpac took it on notice but I will ask you guys in person: can you tell us more about the ways that that code might in practice apply to small businesses?

Mr Hodges : First of all, I think it will cover a slightly wider group of small businesses than does the current code. Secondly, the language that is going to be used in that is plain English. We are looking to have an online version so you have a search capacity. If you go in as a small business, it will bring up the clauses in the code which are relevant to you as opposed to the whole thing. It gives a more targeted view. We are looking to implement that. We are picking up some of the Carnell recommendations such as 90 days' notice where we are not intending to continue with the loan, as was the recommendation. Also, there were recommendations from Carnell around providing copies of valuations or investigative accounting reports to the customer, so that will be picked up in that too. I think from that point of view it will be of benefit to small business with those extra clauses in there. That sounds promising and we look forward to it.

Mr KEOGH: Thank you for coming along today. I suspect you paid a bit of attention to the Westpac hearing earlier today. Can you take me through your decision-making process around deciding to remove fees to non-ANZ customers when using your ATMs?

Mr Elliott : Sure. I may have mentioned this before at one of the previous committees, but when I took over as CEO we did a range of focus groups. In most capital cities we talked to customers and also conducted a lot of research trying to understand what issues were out there. Frankly, I was surprised that, top of the list, the number one issue that people raised was these ATM fees. So we went back and looked at my team—this was well over a year ago—and talked about what the options could be there, because it was clearly a pain point. It wasn't a significant revenue generator for ANZ, and what could we do about?

So we embarked on a series of work to say what could different models be? The one that we were worked on, and which got a bit of press recently, was what we call a utility model. It is pretty common in parts of Europe. It would say that rather than going to the local shopping mall and having a bank of all sorts of different coloured ATMs, there would be one ATM. There would be an industry, and when you stuck your ANZ card into it it would come up blue, and if you put in your CBA card it would come up yellow. That would be a cost-effective way of us doing it as an industry.

We did the ground work on that, spoke to some of our peers and tried to get an industry solution to get a better way to eliminate these fees. We were working heavily on that. In fact we had to engage with the ACCC to make sure that everything was going to be done on a legitimate basis. We had done the work and were pretty close to pushing the button on that when CBA made their announcement. So we followed. We didn't want our customers or our network to be left behind, so we acted.

Mr KEOGH: Given that, from what you've said, over a year ago you started heading down one path to have a utility model, as you call it, how was it that you made a decision to cancel the fee within hours of CBA's decision?

Mr Elliott : As part of that process we discussed it with my board. At least twice we presented them with the options. One of the questions from one of our board members, quite sensibly, was whether we could go alone. We looked at that and had to run through a whole bunch of scenarios of what customers would consider et cetera. It was an unusual circumstance. We were prepared; we had looked at all the scenarios; we had all the information available. So making the decision wasn't that difficult. We were confronted with a competitor who had done something, so we were able to act really quickly.

Mr KEOGH: So in that context, where you had even had the board discussion before around the negligible loss in revenue from getting rid of these fees, and you thought you had found another model and you could conceivably get rid of the fee, and you had come to that view at an earlier point, why didn't you get rid of the fee at the earlier point?

Mr Elliott : I would love to have been first. I have gone back to my board. My learning here is about speed. We should have pushed harder and I should have pushed harder to get that done. Yes, I would like to have been first to say that we were leading the industry.

Mr KEOGH: Pushed harder with who?

Mr Elliott : Ourselves and our peers, to get coordination and get that solution. Perhaps we should have been more courageous. I ask myself that question in front of our board. Maybe I should have been courageous and just done it, and worried about the utility and the delivery model later. That's what I've learnt.

Mr KEOGH: On the delivery model, now that all of the banks have gone the route that they've gone down, there seems to be negligible utility in having those banks of four ATMs sitting next to each other in each mall and every corner.

Mr Elliott : Exactly.

Mr KEOGH: What happens? Is it now the race to get rid of your ATMs to reduce your costs so that someone else's bank is the last one standing on each corner?

Mr Elliott : I mentioned the amount of game theory you can go through to see what that might be. I still think there's an opportunity—

Mr KEOGH: I'm not interested in the game theory as much as what you are going to do.

Mr Elliott : We are going to still work hard on this utility model. I still think there's an opportunity for that, which is a better outcome for customers. We could end up with better ATM access across the country, and shared. So we're still working on that. But as a result of this I've also asked my team to go back and consider what the options are here and what we can look at doing. It's worth noting that we have about 2,400 ATMs that have an ANZ brand on them. Nine hundred and seventy-five of those sit in an ANZ shop or branch, and the rest sit in the shopping malls. Those numbers have been coming down because, frankly—one of the other reasons for the changes—people use ATMs less and less. I think the ATM usage is falling at about four per cent per annum.

Mr KEOGH: Given those two factors—the costs of managing the network are going up because you've got fewer ATMs, fewer transactions—and given, as you said, you've asked the team to look at the options, I presume one of those options is reducing the number of ATMs you've got.

Mr Elliot t : Yes, possibly, but let's remember why we have those banks of ATMs at the local shopping mall. It's to service ANZ customers. We don't fish for—

Mr KEOGH: Which made sense when they would get charged a fee for using another bank's ATM, but now they won't be.

Mr Ellio t t : I agree with your proposition. It's absolutely reasonable and sensible that you would expect, as a result of this—the utility, or value, of those things has fallen—that there will probably be fewer ATMs in the country as a result. What we've got to make sure of is that there's still a decent footprint that services customers' needs.

Mr KEOGH: You raised this point. What sort of response did you get out of the ACCC about these sorts of discussions being entered into between the banks about a coordinated approach to ATM placement?

Mr Ellio t t : We're really conscious of our responsibilities around competition et cetera. The conversations with the ACCC—and, look, they've only just kicked off—were really more about the fact that we're not the only people who run ATMs in the country; there are third-party providers who run a different economic model. We were obviously making sure that it was fair and reasonable from their perspective as well.

Mr KEOGH: In looking at removing these fees, was part of the driver that you don't exclusively kill but almost kill that third-party model?

Mr Ellio t t : No. Honestly—and, again, you're welcome to look at our own papers on that—that wasn't even discussed in any of the proposals we looked at.

Mr KEOGH: Is it a likely impact?

Mr Ellio t t : To be honest, I haven't really given it any thought. I think it's possible but, on the other hand, with a lot of these third-party networks the service they operate is by having ATMs in different locations that are not serviced by banks.

Mr KEOGH: So is the flipside that if the banks start reducing the number of ATMs that are available, on the basis that people use them less and also, in theory, your customers can now use another ATM, we may now see a proliferation of these third-party ATMs, where people are not going to get a $2 fee but will have to pay a $4 fee as a consequence?

Mr Ellio t t : It's a possibility. I don't know. I'm not for a minute suggesting that ANZ ATMs are going to disappear and we'll just tell our customers to run down the road to CBA. The reality is that our customers still look for blue ANZ, and that's great. They vote for team blue and they want to use our ATMs, and we service them in that. Remember that our ATMs all do different services, actually, so there's a value in us still providing it. But I take your point that the competitive dynamic in the market has changed and therefore there will be an impact. We have to see what that will be.

Mr KEOGH: Could I turn to the bank bill swap rate. I understand, from reports, that ASIC has tried to reach some sort of settlement agreement with the banks that are involved in that case and that to date those discussions haven't gotten anywhere productive. There are a number of people in your own team, or who have been in your team previously, who seem to have been potentially caught up in this case. I'm interested to know whether ANZ have looked into the involvement of people such as Steve Bellotti, who was the managing director of global markets, Eddie Listorti, who was the co-head of fixed income, currency and commodities, Richard Huston, who was head of markets, and Ben Gulliver, who was head of credit trading and syndicate—those people specifically—and then what you have looked at in terms of their involvement and the capacity to claw back any bonuses or incentive payments that they may have received.

Mr Ellio t t : This is still subject to discussions with ASIC. We don't agree with their allegations. We're trying to reach a settlement, as you quite rightly point out. But we've conducted our own internal investigation into those things. Except for the last name there, which I can't recall, it's worth pointing out that those other three no longer work for the bank. Every year, during the year, whenever there are any deferred incentive payments, before they go out the door from ANZ, we have a clawback committee who review them to see if there are any reasons why any of that should be withheld. That process has been undertaken. I literally don't know, in the case of those three names, but we go through a pretty thorough process, and if we felt that there was wrongdoing or any reason to withhold it would be in our interest to do so and we would have done that, we would have clawed back.

Mr KEOGH: I'm familiar with an organisation that used to run ethics courses internally. They'd set out a scenario of some certain unethical behaviour that had happened, and the person running the course would always finish it with the phrase 'and that person no longer works here'. You just used that phrase. Is there a connection between those people no longer working for ANZ and the case that's been alleged by ASIC?

Mr Elliott : Not directly. I don't want the committee to walk away suggesting that those people lost their jobs as a result of the BBSW case. We take into account all sorts of things. Some of those people left of their own volition—in all four cases, I think. We take all of those things into account.

Mr KEOGH: Did any of them have bonuses or incentives that were denied to them?

Mr Elliott : I believe that is the case, but I'd have to get back to you on the details of that. It was some time ago they left the organisation.

Mr KEOGH: Can you let us know with those?

Mr Elliott : Sure.

Mr KEOGH: Also, as a general proposition, if this case goes to hearing and ASIC is ultimately successful, would there be people who are still in the bank, or who may have left the bank, from whom ANZ would be looking to claw back bonuses or incentive payments that those people may have received?

Mr Elliott : It's an interesting question. At a high level, if, through that process, we receive new information about activities of people at ANZ and we, as a result of that new information, change our view about their performance, would we look at a clawback? Absolutely, we would. Would we think about dismissal of people or changing promotions? Absolutely. But that would assume that there was new information that came to light during the proceedings. It's a bit of a hypothetical question. We certainly would not ignore the outcome of such a case.

Mr KEOGH: I think you may have answered my next question, but I want to put it to you anyway. If, then, ANZ settled the proceedings with ASIC and was able to do so on the basis of not making any admissions of wrongdoing, or contraventions, it's not anticipated that there would be any further clawbacks or actions being taken against ANZ employees—

Mr Elliott : Again, you're asking a hypothetical. It's possible. It would depend on the nature of what any settlement was and what was required of us as part of a settlement.

Mr KEOGH: And also, presumably, that ASIC brings some information that they haven't already made you aware of to the table.

Mr Elliott : Yes. Again, we're talking hypotheticals here.

Mr KEOGH: Well, it's not hypothetical. What you said to me was if you had new information that came out in the course of a trial where ASIC was successful, yes, you would claw back. But the implication of that is that you wouldn't unless you got that.

Mr Elliott : We have our own view of what happened in terms of any kind of breakdown in process or procedure, or poor behaviour or misconduct—whatever words you want to use—from ANZ's perspective. We've done thorough investigations of that. We've satisfied ourselves in terms of the outcomes and there has been consequences to things we have found. I think, famously, because of that investigation, we uncovered some other misconduct that came through in markets and we dismissed people and we did so publicly. As we receive new information, we act.

Mr KEOGH: ANZ people—not you personally—will have bonuses vesting in November. Are there any of those potential bonuses affected that now won't be vesting because of things that you've uncovered in the course of dealing with this case?

Mr Elliott : Not to my knowledge. We have a lot of people at the bank. There's a list of equity and deferred comp that vest in people now-ish, and we're going through the process of approving and making sure that those things should still take place. I'm not aware that any of those individuals are receiving any, but I might be wrong. I'd have to go back and check.

Mr KEOGH: You can take that on notice.

Mr BUCHHOLZ: I want to start with a comment that you made just then. When you first became the CEO, you went and did some focus groups. My line of questioning today will be in and around the credit card space. You said ATM fees were up there. Were credit card interest rates up there, in the focus groups?

Mr Elliott : No.

Mr BUCHHOLZ: They were quite happy to pay?

Mr Elliott : I don't know that they were quite happy! It's interesting. It's one of those unprompted things, if you sit down and ask people, 'Hey, what do you think about banks and what upsets you?' No, they did not raise the rate of credit card interest. To be fair, I know some of your interest in previous questions has been both about individuals and small business. But the focus groups I did tended to be individuals, so they weren't necessarily a problem.

Mr BUCHHOLZ: So you were the first to move, of the banks, in that space.

Mr Elliott : Yes.

Mr BUCHHOLZ: Congratulations to you and ANZ for that move. Can you share with the committee how your clients that have migrated are finding the rate?

Mr Elliott : Let's just remind ourselves what we did. We took an existing card product that has a lot of customers and a lot of borrowing in it and we cut the rate by 200 basis points. That's a two per cent cut. That puts money back, into people's pockets, from day one—as opposed to our peers who have launched new products, who have no customers, and require people to shift to them. We had a slightly different approach. Interestingly, we haven't seen that low card suddenly have lots of people apply for it. You might ask why, because it is a really good deal. The reality is that when people come and apply for a card, a lot of them don't imagine they will be borrowing. And the interest rate, interestingly, is not the primary driver of what they're interested in. The annual fee is really important, and they do think about rewards and other things. So it's not always top of mind.

What we've got to do is make sure that when people do end up using it as a borrowing facility they're in the best product for them and not paying rates they shouldn't be. We have been working on some technology to nudge people we notice who might be having a reasonable level of credit card debt, making sure they're not in those high-rate cards. Those cards are really for when you need a bit of money for a short period of time. But if people are sitting with a solid amount, we can move them to a more appropriate product.

Mr BUCHHOLZ: You mentioned earlier on as well, in your lines of response, that you had a somewhat sophisticated way of communicating with your consumers, with SMSs for some of them and others where you get virtually instant feedback. Is there any feedback from clients on the getting of a two per cent reduction?

Mr Elliott : It's a good question. I haven't asked that question. I have tended to focus on whether customers were choosing the product, and there was an uplift, when we first announced it; there was a bit of a tick up and people liked it. But I'd have to go back and look and suggest—

Mr BUCHHOLZ: I can forecast what the response would have been if you had put rates up two per cent.

Mr Elliott : Sure; that's fair.

Mr BUCHHOLZ: Three out of the four banks have now moved in line with the committee's suggestions of lower rates on credit cards. And, within one day, on the ATM fees, you all moved. Do you have an understanding as to why we haven't seen the group move more collectively and why we've got one bank still to make any announcements in that space?

Mr Elliott : I don't, actually. All I know is we come to work every day and work in a competitive environment. We watch like hawks what our competitors are doing and we don't want them to get any advantage over and above us, and we are always trying to figure out how we can get an edge and do the best thing we can for customers. But I don't know.

Mr BUCHHOLZ: You also spoke about, in previous comments and just before, wanting to make sure your client is in the best product you can get.

Mr Elliott : Yes.

Mr BUCHHOLZ: What is ANZ doing in that space to migrate internal clients to a lower rate? You have products with a higher rate, and they're very similar products, and external clients.

Mr Elliott : That is a good question. What we've tried to do is simplify our portfolio of products. We really just want to have three cards: a low rate card, a card that has low fees, and that's primarily for people on lower incomes, and people on lower incomes like that one; a low-interest rate card, the one we were just talking about; and the bells-and-whistles card that people like because they get frequent flyer points and insurance and all those other things. Now, essentially, we have the three. Then we focus on making sure that people are in the right product. When they come into an ANZ branch, we've been training our staff to push people or to suggest the right product for people—so, if they want a credit card, to make sure they're not choosing the bells and whistles card when they don't really need it. And then what we're doing is we're looking at the way they use it, so we use data to then say, 'Hey, look: the way that Alexis is using her card would suggest she'd be better off over in this one—it'll save her money.' We're only in the early days of being able to do that analysis, and then we would talk to you about moving cards.

Mr BUCHHOLZ: External clients? How do you chase them? If you're 200 points in front of a competitor who's out there in the market and hasn't moved, why are you not making hay while the sun shines? You have competitive advantage in that space.

Mr Elliott : We do, so we use that, obviously, through advertising and other things. But, as I said, surprisingly—and the research shows it's not unique to Australia—when people are choosing a credit card, that headline interest rate is not the primary driver of their decision.

Mr BUCHHOLZ: It's interesting because, as I said, I can forecast what their reaction would be if you put it up two percentage points.

Mr Elliott : Yes.

Mr BUCHHOLZ: I think that'll do. Thank you very much for what you did in that space.

Proceedings suspended from 14:50 to 15:00

Ms MADELEINE KING: Thank you all for coming in today and appearing before us. You said earlier that you'd paid attention to today's session with Westpac. I'm probably going to go through the same questions, so there's a bit of an advantage for those who appear second! In relation to the maximum deposits into machines, Westpac has a $4,000 limit, you have a $5,000 limit—

Mr Elliott : Yes.

Ms MADELEINE KING: and we know that CBA has a $20,000 limit, which puts it in a different area of risk. Do you have any insights, considering that ANZ and Westpac are quite different to CBA, into why that would be the case?

Mr Elliott : I don't. We rolled out the machines in about 2011—roughly at that time. Essentially, the machines we're talking about are intelligent and capable of doing more things. You might remember you had to put money in an envelope with a slip and stick it into the old ATMs. With these ones you can just put money in. The machines can tell whether it's counterfeit, what the denominations are et cetera, so they're pretty effective. But we did a risk assessment. We said, 'We understand our obligations around money laundering; how do we mitigate that, do the right thing and provide good utility to our customers but make sure we're not going to have any problems about suspicious transactions?' We ran that and came to the conclusion that $5,000 was about right. Part of it was also an assessment of what our customers were doing. To be honest, we don't get a lot of people coming in with more than $5,000. We felt it was a nice balance between the two. But I can't comment on why somebody else came to a different conclusion.

Ms MADELEINE KING: Did ANZ use the same intelligent deposit machines as CBA?

Mr Elliott : To my knowledge, they're not the same actual machines, but they have the same capabilities or very similar.

Ms MADELEINE KING: Regarding the ATM fees, as we know, CBA went first on announcing they wouldn't charge for other bank customers to use their machines.

Mr Elliott : Yes.

Ms MADELEINE KING: My understanding is that they ceased charging fees straightaway. We heard from Westpac earlier that it took a couple of weeks, and I think ANZ was the same.

Mr Elliott : Yes.

Ms MADELEINE KING: Is there any reason for the delay, given that you said earlier that ANZ had thought about this quite a lot?

Mr Elliott : It's just technical. We literally have to go to all of the ATMs, or do the programming—change the software. We hadn't prepared for that, and obviously CBA knew they were doing it and could get that done.

Ms MADELEINE KING: So it's the same reason as Westpac.

Mr Elliott : Yes, but we wanted to do it as quickly as we could.

Ms MADELEINE KING: I do acknowledge your earlier comments that, having your time again, you might have gone harder on that and gone first.

Mr Elliott : Yes.

Ms MADELEINE KING: I look forward to seeing what you might go first on, given the opportunity in the future. I want to go back to the contactless card things. I was thinking I could maybe talk to you about this offline, but, given that we've raised it already with Westpac today, it's only fair to keep it online and in the record of this body. I just want to understand and be clear. Can a shop owner selling a product come to you at ANZ—and I don't mean to repeat what the chair said, but I'm just trying to be clear—and request, with a bit of work and whatever fees you might charge for it which wouldn't be unreasonable, to change from a Visa-Mastercard payment system to the EFTPOS payment system?

Mr Elliott : Yes. Essentially, that merchant has an option. First of all, they don't have to take either; they can just say, 'We only take cash.' But they want to have the ability to take all sorts of payments from customers. When we install those little terminals—the little machine thing on their desk—they can talk to us about the defaults. With all else being equal, if there's one of those hybrid cards, what would it default to? I'm not an expert, but my understanding is that, yes, they can choose that. What I do know is that, if they ask us, we will enable that default to change.

Ms MADELEINE KING: You've come around to what I was trying to clarify. The little machine that you get, if it has as its default EFTPOS, does that mean that the ultimate consumer, the purchaser, me going into the shop to buy something, can only use a payment system that's EFTPOS?

Mr Elliott : No. Those machines by and large are pretty smart too. They will know the card that is presented. If the card is swiped or inserted—you get the little option that says 'credit' or 'debit'—that defaults differently. If it's a debit card, it will go through. My debit card in my wallet doesn't have a Visa thing on it, so that would go through my EFTPOS. If I give it a credit card, it will go through Visa. We are really talking about those cards that are somewhere in the middle, where they look like a debit card but they have a Visa chip or a Mastercard—

Ms MADELEINE KING: Say you've got that one—

Mr Elliott : Those ones, if you insert it, you can choose—

Ms MADELEINE KING: You can choose savings—

Mr Elliott : The real issue is the contactless ones. So, at the moment, 99.9 per cent of those default to go through the Visa rails.

Ms MADELEINE KING: Yes.

Mr Elliott : Therefore, the merchant in most cases, not all, end up paying us a little higher.

Ms MADELEINE KING: Sorry to labour this point I just think we should take the opportunity to make it clear. So a merchant says to someone, so they get it done really quickly, they want the underlying transaction sales system to be the EFTPOS one. I use my hybrid card which has a Visa or Mastercard, but I have also linked it to my savings account so I could EFTPOS it. I tap it. The underlying payment system is EFTPOS. Where is the money going to come from—my credit account or my EFTPOS?

Mr Elliott : No, EFTPOS will only come from your savings of your bank account.

Ms MADELEINE KING: Because that is the underlying payment system that the merchant has chosen to use.

Mr Elliott : Correct.

Ms MADELEINE KING: I understand. Thanks very much for that. Perhaps there are other forums to get this out but it is good to get it out nonetheless. I have got it clear in my own head now; hopefully, others do now as well. Again, for ANZ it's a benefit, however minor; it would be better for you to have it running through the Visa or Mastercard system?

Mr Elliott : To be honest, I don’t know that we have ever looked at it in forensic detail. What we want is more consumers choosing payment devices that we provide and we want more merchants banking with us. I think today people expect choice, so we provide whatever our consumers and our merchants want. The profit motive, if you will, is not changing the way we do it or what we offer our customers. We want to offer them whatever we can. That's why we offered Apple Pay, Fitbit Pay, Android Pay and Samsung Pay.

Ms MADELEINE KING: Yes, I have just seen the Fitbit Pay.

Mr Elliott : Yes.

Ms MADELEINE KING: That's dangerous but interesting. I will move on from that. But thank you for your answer. In relation to the government's proposed BEAR—banking executive accountability regime—the government recently put out the legislation and conducted a week-long review of that legislation. I'm just wondering: do you have a view as to whether that consultation period was long enough? What do you think of that?

Mr Elliott : I guess with anything like this it is complicated to some degree—not on the face of it; the principle we agree with. We are now getting into the detail of how it is going to work. How do we think through some potential unintended consequences? I would say, as a general rule, that more time would be useful on those things. We understand the government has an agenda and wants to get that done. But we would have liked more time.

Mr Hodges : To be fair to Treasury, they did contact us earlier—

Mr Elliott : That's true.

Mr Hodges : I think I was offshore at the time but I dialled in for meetings, and people were in the rooms and they had meetings around some of the general principles and what was going on. So, while the formal consultation period was relatively short, there had been dialogue with Treasury in the period leading up to that too. What arrived on the day, if you like, as the draft legislation was not dramatically different to what we were talking about I don’t believe.

Ms MADELEINE KING: So there were not too many unexpected surprises. My last line of inquiry—and I asked Westpac this earlier—how long do you spend preparing for these inquiry appearances?

Mr Elliott : It's a lot. Obviously, the first one was probably the most, particularly because I was new to the job and it was like an accelerated MBA program for me, learning a lot about the bank.

Ms MADELEINE KING: Was it as expensive?

Mr Elliott : Good question; no. I would say, if you added it all up end to end, it wouldn't be a week but it'd be close. It'd be three or four full days. It is pretty intensive actually because we want to show that we are over the content and we want to be prepared so that we can answer your questions.

Ms MADELEINE KING: How are you finding the whole process of this?

Mr Elliott : I think from the beginning we understood the intent was to try to make improvements in the industry. I think it's fair. Where there have clearly been some failings in the industry, I think the public and the community have a right to hold us—and me, as the chief executive of a large company—to account; I get all that. I think that has been useful. I think we've had an opportunity to be heard and to make our case, whether people agree with it or not, so I feel it has been fair. I think we pretty much agreed with the 10 recommendations, more or less, and I'm not just saying that because we have to. To your credit, the industry has taken on those things and we've got some stuff done, which is to the benefit of the community overall. So I'd say it's good.

Mr Hodges : Shayne may not thank me for this comment, but—

Mr Elliott : Then don't make it.

Mr Hodges : But this is the House Economics Committee, and we can provide insight into some broader conversations around what's happening and what are the issues facing Australian consumers and businesses and things like that. I think the committee could take advantage of the experience that we have. I think there is a point where the value of that may be something that the committee spends a bit more time on, to be honest.

Ms MADELEINE KING: Personally, I've found being on two rounds of this an interesting experience. But it shouldn't be about what is interesting for me, of course. I can think of something more useful for the ongoing sustainability and enhanced reputation of our banking sector; I'm not going to argue about this, but we support a royal commission into the banks. Obviously, some banks are in a worse place than others. CBA is obviously a primary concern, given the recent money-laundering activities. Can you see any utility in a royal commission?

Mr Elliott : It's hard to know exactly what the benefit would be. We've had a number of views, including those of this committee. We've had all the reports—the Khoury, the Sedgwick, the Carnell et cetera. They focused on—

Ms MADELEINE KING: But still we see these problems.

Mr Elliott : They are pretty recent and they've recommended real action, which we're doing. For ANZ and the industry, I believe we can stand here today and say that the conduct and the operation of the industry today is better than it was in the past and we're making real progress to restore the community's confidence and trust in our system. We have a very, very important role to play in the economy. I think that should be our primary focus. Yes, we should fix all these things. I personally believe that a royal commission would be distracting.

Ms MADELEINE KING: Do you think the banks have restored the confidence of the Australian public?

Mr Elliott : Not enough, but I think we're on the path to doing so.

Ms MADELEINE KING: Thanks very much.

Ms BANKS: Thank you for joining us today. First I'd like to go to the AFCA. Indeed, in the last reviews there was much discussion about cutting through the churn in the best interests of Australian consumers so that consumers could avoid having to engage in litigious action or lengthy, protracted mediations. The government is getting things done with respect to our one-stop shop. Do you support the principle that the one-stop shop will benefit consumers and small businesses?

Mr Elliott : Yes.

Ms BANKS: If so, how? Have you seen any ways that it has currently that you could elucidate on?

Mr Elliott : I will ask Graham to comment on that because he has spent a bit more time on this than me, but I think we support anything that makes it easier, simpler and of lower cost for people to raise concerns and get them resolved. That's in our interest as much as it is in that of our customers, so we support that. I think it's fair to say that some of the other processes have got too complicated, particularly for consumers. So we support that.

Mr Hodges : We haven't actually seen it roll out yet. It's proposed. We haven't seen the final report. As Shanye said, we are supportive of it. In the meantime, what you have seen the industry do, as part of the ABA six-point plan, is that all banks have consumer advocates. We have had one for 14 years. As well, what we are seeing is that focus coming around dealing with consumer issues quickly but also in a low-cost jurisdiction. Actually, we've always been an advocate of the banking Ombudsman. We felt that that model was working well. We think the new model will pick up the strengths of that and widen it out into one regulator or one place where customers can go. Actually, as long as we pick up the strengths of what we've already got and build on that, we would be very supportive. I think that is what we will get when we finally see it.

Ms BANKS: Great. Do you agree, therefore, Mr Hodges, that this one-stop-shop tribunal is much better and much more palatable for a consumer because it delivers immediate outcomes and recompenses aggrieved consumers, versus a protracted royal commission that will not have any direct impact for consumers, potentially, for years to come?

Mr Hodges : Put that way, yes, we would agree. We haven't seen the operation of the one-stop shop yet. In terms of remediating and dealing with issues, absolutely that is a better way to go.

Ms BANKS: I would like to go to recommendation 7 in regard to CPS 220. The ANZ responded to that more extensively than the other banks. In response to recommendation 7, you refer to the efficacy of CPS 220 and you stay loyal to it. But in line with APRA's requirements, the banks must independently review the risk frameworks every three years. Do you think that is sufficient? Do you think that is regular enough given the current environment?

Mr Elliott : I do. I can understand why people would ask that question. We've only just had the first review. It is a really good step. It is great actually and it has provided really good feedback for us just to remind ourselves. That review is third party, where somebody comes in and looks at our framework and benchmarks us not only against local banks but also best practice internationally. That is really useful data and it is quite in-depth. The reason, I understand, for the three-year time frame is to give us reasonable time. Because you are talking about frameworks that need to be embedded in policies and processes around the bank and training, it gives us time to implement those things. It's a big undertaking.

Mr Hodges : And to see outcomes from it.

Mr Elliott : Yes. But if people decided it should be every two years or something—I'm not sure it is something that should be done every year. Because of the size and scale, I think we'd spend all our time reviewing and not enough time doing. But it has been a good process.

Mr Hodges : The BEAR is going to lean on that a bit as well. Because of the review that is required as a result of that around accountabilities and how the organisation works and where everyone points into, that will lead to some further tweaking, I suspect, of how that will play out in the organisation and who's going to be accountable and what the implications will be et cetera. I think BEAR starts from July next year, which we will be ready for. Over the next 12 months from there, we will start to see in practice how that's playing out. I think there's plenty of change happening through that space.

Ms BANKS: Could you explain about the quadrant system of review, which you alluded to earlier, in terms of people and culture and customers. You said that the customer quadrant is more than half.

Mr Elliott : For the branch network, yes.

Ms BANKS: Could you explain how that works and how you cascade that through the organisation, and how it is part of your risk governance framework?

Mr Elliott : The balance scorecard has been around as a management theory for probably 30 years. It came out of the United States from a famous professor. It is the idea of moving away from narrow incentives which have unintended consequences. How do we get balance into it? It is well thought through. We have those four quadrants. What we do is we start with the board—and we're doing it as we speak—who sit with me as the chief executive and we agree what the balance scorecard should be for the group: what are the things that we are trying to achieve? We try to get a balance between the four quadrants, and then there is one other aspect that we look at.

We need to run the bank well, and we also need to make sure that we're making strategic progress to make improvements in the long term for the benefit of our customers. There is a balance.

We go through those metrics, we have a pretty broad discussion at the board level about how we would define success in each of those quadrants, then we articulate that through some high-level principles. Then we look at what some metrics would be that would indicate that we're making progress against that. What we want to avoid is a narrow, formulaic score card that says there is a bunch of metrics and if you achieve them somehow you win. We said, no, that's not right. We need to look at data to inform our judgment, but it is ultimately a judgment, because the environment changes and management needs to respond to that. That's what we do: we take it, we agree those—we're just doing it at the moment—then we would cascade it to the various business divisions and our support functions—the Australia division, finance, risk, people, whatever; then they take the relevant pieces of that and refine and potentially add to it, with my agreement as the CEO. I sign off and say, 'Yes, that's what I'm asking you to do.'

Ms BANKS: That's helpful. How regularly does the organisation go through that process?

Mr Elliott : We do the score card once a year. We look at the actual metrics. It's fair to say that we're maturing in our approach to this. With the board, we learn what's working and what's not working. We do it once a year and then cascade that through.

Ms BANKS: So the results of that are ultimately reported to the board. It's cascaded through the organisation and then reported to the board.

Mr Elliott : Yes.

Ms BANKS: In the context of that risk governance process, if the BBSW case were to occur now, and you have that process in place, where does it fit?

Mr Elliott : That is an interesting question. At the moment, while we're thinking through what the score card would be for next year, we are also assessing how we went over the previous 12 months against that. To give a bit more detail to that: I will evaluate those quadrants with our chief risk officer, our chief financial officer and our head of people. We will write a report and say this is what we have looked at and taken into account, and this is our assessment of performance. In that case, if something like BBSW happened tomorrow—I am imagining here—that would come into the way we have assessed risk. One of the metrics about being well run from a risk perspective is whether we meet our regulatory requirements, whether we conduct ourselves well, whether we're improving our reputation et cetera. Those are the things that would come into account, absolutely.

Ms BANKS: In terms of reputational risk, which you referred to, where in that structure would you identify reputational risk such as the pure employee misconduct element?

Mr Elliott : It comes through in a couple of areas. One will be in general in our risk category. The risk one is the most important. In fact, in the way we structure our score card it is a bit of a gateway. Our businesses have to be well run from a risk perspective before we look at the other areas, as I mentioned before. You can't say, 'I did great on customer but hopeless on risk.' There are no trade-offs there. Being well regarded from a regulator's point of view et cetera and making sure we meet all our obligations would be in the risk piece. The broader issue around reputation, in the broader sense of community reputation, reputation with other stakeholders, government, shareholders et cetera, we would have in our people and reputation quadrant. We use external review. There's a corporate confidence indicator survey; we use Glassdoor; so we use third party metrics to inform some of these things.

Ms BANKS: Finally, recommendation 7 requested an independent review that would then channel into APRA. As the ANZ, with that description of a quite robust risk management framework beyond APRA and ASIC requirements, would you be prepared to review that, in terms of that recommendation saying that an independent third party should review the bank's risk management processes on, say, at least an annual basis, for example?

Mr Elliott : We have no issue with having third-party reviews. They have a role to play to give comfort, particularly to the board, that management has designed the right structures and frameworks, so I don't have an issue with that. I think the question here is about the value of a further review, given that we already have independent audit, the CPS 220 and other factors. The question is: would this just cover old ground or could it be additive? Obviously, I watched the discussion with Westpac this morning, and I am open minded, at ANZ, to say that, if we consider it's additive rather than just replicating things we're already doing, I don't have a general issue with it.

Ms BANKS: That certainly is behind the intent of that recommendation.

Mr Elliott : I know that's your intent, sure.

Ms BANKS: It would have an additive component to it. Thank you.

Mr HOGAN: I would also like to start by acknowledging your openness in this process during the multiple hearings we've had, because it has all been different with different institutions. I want to follow on from the member for Burt and some of his questions earlier. I also went down this line with Westpac, and you may have seen it. With ATM fees, I acknowledge again that you've said that you ran with that, if you like—you were in the process of doing that but were looking at getting industry agreement on how you would solve some issues there. And then, god forbid, a competitor went early on you—who would have thought that would happen! I do want to go to that, because, as a regional MP, when I heard that, the first thought I had was: what does that mean for ATMs, especially in remoter communities? Given that you were looking at a solution for that—about having shared ATMs—will you give a commitment that you won't withdraw ATMs, either yours or industry's, from remote and rural communities?

Mr Elliott : I'm not sure I can give that commitment. As I said, the reality is that people aren't using them like they used to, so I also have to think about that. You're right to raise that question. I did watch you, and you nailed it in terms of the risk that presents itself. That's not our intention, and that's why we were looking at a utility model, a shared model, so we could sit down together and make sure that, as an industry, we were giving access to banking to all parts of Australia and doing it in a cost-effective way. That is still our intent. We will still push and work very hard to make sure that is the outcome.

Mr HOGAN: I hear that, but, as a practical example, for some of these—while the marginal cost can be different, there is still a cost for you with the ATM network in some of these very small communities.

Mr Elliott : Sure.

Mr HOGAN: Right now there's only one ATM, and while it might not be highly used it's still very important.

Mr Elliott : Yes.

Mr HOGAN: We would hate to see those being removed from communities, because there is the scenario here that, if you don't come up with an industry solution—as you are aware—there's a withdrawal of them. If you get out first, that's great. But, if Westpac is the one left in that community, it'll be the one under pressure not to remove it, because you are not having to pay for it. But I take that you are looking for an industry solution, and I encourage you in that process.

Mr Elliott : Yes.

Mr HOGAN: Capital requirements are where every bank seems to be focusing all its lending. I'll make the point to start with—you may disagree, but this is my strong opinion and the opinion of many others—that you have an advantage over the smaller players with capital adequacy requirements. I've raised that point with APRA and others. Risk weights for housing have become, I think, particularly skewed. Are you consciously targeting low-LVR housing assets at the expense of loans to more productive areas such as small business?

Mr Elliott : No, we're not. We're in the business of taking deposits and making loans to people. Obviously, we do so responsibly and thinking about the returns. We've made commitments to grow our small business lending book for a number of years, and we continue to raise that commitment. The reality is that there's not a lot of demand today. Our business and our lending to small business has been growing, double digit, for many years. It has dipped below that in the last 12 months, but that has nothing to do with our risk appetite or with us diverting resources to housing. We want to grow both. In fact, we have a three-prong strategy at ANZ: we want to be the best bank for people who want to start and run a small business; we want to be the best bank for people who want to buy and own a home; and we want to be the best bank for people who want to move goods and money around the region. Small business is absolutely core to who we are.

Mr HOGAN: You talk to a lot of people around the country, so why do you think there has been less of a demand from small business?

Mr Elliott : That is a really good question. If we take a dry economic viewpoint, there's no doubt that business conditions are good—unemployment is low, interest rates are low, the economy is growing et cetera—but there continues to be some gaps in terms of confidence. Some of that is just about the future and some of it is to do with the impact of new technology and new entrants in the market and people feeling a little uncertain. I don't know that it is a massive issue, but there's undoubtedly a lack of small business hunger and commitment to get out there and invest and grow—they are a little bit uncertain. But there is nothing that we can see in terms of access to credit, for example, holding them back.

Mr HOGAN: I looked at Westpac's and I looked at yours, but I don't think your asset mix is as accentuated. You've told me that your loans to small business are increasing, but I notice with Westpac that their asset mix has changed quite measurably, with an increase in housing assets as distinct from small business. How is yours moving?

Mr Elliott : Ours is probably a little bit like that. We're in the business of responding to our customers. There is more demand for home borrowing than there is for small business borrowing right at the moment. But, as I said, it's not because we've made the decision that we don't like to lend to small business; we would love it to grow more.

Mr HOGAN: That's interesting. Both of you have said that's really a grassroots, grounds-up thing that is happening and it's not happening from you as a conscious decision.

Mr Elliott : There is research that is done by a man called Ross Cameron every quarter. He's been doing this for pretty much 25 years. It's qualitative and he actually goes and asks business, 'How's business?' The general tone that they use is that it's okay. Some are doing very well indeed, and particularly those exposed to property infrastructure spending. Retailers are struggling. Overall it's pretty good. Sentiment/performance disconnect. So the actual performance of the business and the sentiment seem to be disconnected a bit. So they are performing better than they appear to be talking about. Business owners are working very hard and are continuing to tweak their business models. I presume many of the small businesses are also at the back end of what you'd call the margin compression that's happening across parts of the economy. They're margin takers effectively and they are trying to provide product into the economy and they're responding to that.

So, in terms of businesses in distress, they're lower than they were this time last year, but the borrowing rates have fallen off a bit as well. I think we are getting mixed signals.

Mr HOGAN: A relationship that you wouldn't normally have put together before. That is very interesting. We will move on to the sales versus service debate. We spoke about this last time, and you made quite insightful comments about it. This was after the Sedgwick inquiry. There was a commitment to ceasing remuneration practices that drove poor customer outcomes—again, sales versus service. I get that your performance quadrant is now including customer service measurements. Obviously, though, there are still incentive payments for staff in front of customers. How do you get that right? Are we going to still be talking about it in five years time and talking about bad result for customers who got flogged a product that they didn't understand, the person who sold it didn't understand or the person did understand but they were just flogging it because they were going to get remunerated for flogging that product? Why do you think that you've got it right? I get that you say that there are service measurements there, but I'm still very suss on this one. If someone is going to be remunerated for flogging a product, they are going to flog that product whether it's good for the customer or not.

Mr Elliott : That's exactly what we're moving away from—the scorecard. We are paying people to get the good customer outcomes, that customers themselves describe as a good outcome. I'm reminded of the first branch I went to when I became CEO. It was in a small rural part of Victoria—Kyneton, a small town, a rural community. I walked into the ANZ branch and I saw a leader board, and I asked the branch manager, who had been in the bank for a long time, 'How do you balance targets with doing the right thing by customers?' He said, 'Well, it's easy. I live in this town, and those customers are my neighbours. They are parents at the school and I see them at the netball and they know where I live.' We should remember that our branch managers are members of the community. They are there; they're visible. The customers that walk into ANZ branches generally know our people. They're on first-name basis. Our people are not there targeting people to sell them an inappropriate product. They're trying to do the right thing.

Mr HOGAN: I apologise to interrupt. That's all a lovely motherhood statement, but that's not factual. That's factual for that branch. In that case, it's a small town; he does know people. You would have employees who live in big cities who don't really know their customers that well. They will never see them on the weekend. They're going to flog them products, if you remunerate them to, whether it's good for them or not.

Mr Elliott : I disagree you. I'm happy to take you around. We can go and visit some branches, whether that's in metro or whether that's here in Canberra. I don't think that's reality.

Mr HOGAN: Well, time will tell. But I get that, obviously, the quadrant has changed. You mentioned earlier, too, that you're selling off your wealth arm.

Mr Elliott : Yes.

Mr HOGAN: Is that acknowledging a conflict of interest in this sales-versus-service conflict that has been raised?

Mr Elliott : No. We're still going to be talking to our customers; we're just not going to be in the manufacturing of actually managing and the life insurance piece, or the superannuation. We're going to be more focused on doing the right thing by customers.

Mr HOGAN: But what I'm saying is: does it acknowledge the mistakes of the past? For example, your financial planner in the past obviously would have been recommending ANZ products. Whereas now, if you sell those products off, they're not going to recommend it. The model previously, obviously, was broken, which is why we have people calling for all sorts of things—because of unhappy customers. You had people on the frontline with a customer in front of them and, low and behold, they were recommending to that customer that they go and buy another ANZ product for the area that they may not have even asked about, or were asking about. Do you think that selling off this wealth arm is acknowledging that that wasn't a good model?

Mr Elliott : No, it doesn't acknowledge that at all. In fact, the way you articulate it isn't really the reality—certainly at ANZ. I can't comment on the other banks and their models.

Ms George : I think it's important to note that the financial planners within ANZ would have exactly the same obligations if they're not in ANZ. They still have to act in the best interests of their customer. We've talked about some rogue planners. There are, absolutely, some bad people in the industry. But I think most of those planners every day try to do the right thing by their customers. And if we talk about our product solutions, yes, we do offer ANZ solutions to the customer through planning. But we also have many other companies' offerings on the planners' lists. Do they write more of our product? Yes, they do. Because we understand our customer base better, we can develop the product set better to aim towards that customer. But they absolutely have choice and I think they take that best-interest responsibility very seriously. In today's world, where there's a lot of focus on that particular group of people, they take it very seriously.

Mr HOGAN: We might agree to disagree on that one, as well. With all due respect, I think that if you were an ANZ employee and you have an ANZ customer come in you have identified, maybe with a good process, that they need a certain product. I am sure the statistics show, as you have also indicated, that in the vast majority of cases you're going to sell them another ANZ product over another financial institution's product. I think maybe selling off the wealth arm might improve those outcomes.

There are two other areas I want to cover quickly. I have a quick one on data, actually. I know the chair has taken this issue up in previous hearings—the open banking and the freely available data. Do you think the data is owned by the bank or the customer?

Mr Elliott : Customer. Well, it depends what data we're talking about. If we're talking about customer data—their transaction history, their details of who they are and all of it—it's owned by the customer.

Mr HOGAN: You made a comment a little while ago, Mr Elliott. You were talking about how you would be employing less people in the future because of artificial intelligence and machine learning.

Mr Elliott : Yes.

Mr HOGAN: How far have you progressed with this?

Mr Elliott : It's an evolving situation. The reality is that, throughout the history of the financial sector, new technology impacts the nature of work. That sometimes changes the number of people we have, but, more importantly, it changes what we ask them to do. So, you know, there's a lot of benefits from using data, artificial intelligence, robotics, machine learning to get better customer outcomes—faster, better, cheaper solutions for customers. That will have an impact on the resourcing that we bring to the table—how many branches we have, how many people we have, call centres and all of those things. Our job is to make sure that we manage those transitions responsibly.

Mr HOGAN: Where do you think the job losses will be in your organisation with these developments?

Mr Elliott : At this point, with the technology that we know about today, we are probably talking more in the data entry areas. We still do a lot of very manual processes in the bank and, as I said, machine learning is pretty remarkable today. A machine can read a pay slip, identify what it is, take the data and stick it into a model for us. I don't know. All we are saying is: I think we'd be naive to say that technology is not going to fundamentally change the nature of work right across the economy, and that will absolutely include banks.

Mr HOGAN: It is happening across all sectors of our community. I suppose, just historically, a lot of those jobs have been lost in rural and regional areas in the past because you have not needed the face-to-face, with ATMs, for example, and other stuff. Do you see that the trend that is happening now with this artificial intelligence and machine learning will be more felt in rural—

Mr Elliott : That is an interesting point. If you are talking about regional and rural, really the employment that is out there at the moment is probably more through the branch network; we don't typically have big call centres. Actually, I was in Tasmania recently, and I've been out and about in different parts of Australia and actually rethinking some of that. Is there a case to be made that we should put more call centres or processing into regional towns?

Mr HOGAN: There is a very easy answer, Mr Elliott, and the answer is yes. And I have some real estate I'm happy to show you!

Mr Elliott : What the question really comes down to is: the binding constraint here is infrastructure.

Mr Hodges : And skill sets and capabilities. I think one of the things going the other way is that you might see more videoconferencing into areas where you are looking for specific skills and they are not available in that area. So it will cut both ways. But I think that, over the last 15 years, most of the staff who are in the regional and rural areas typically are, in some way, customer related, whereas the machine learning sort of activity is more what is happening in other parts of the bank, and we'd have somewhere around 9,000 to maybe 12,000 people who are doing that sort of work, which it will affect more. They are more in operations roles—

Mr Elliott : This is a really big issue for us, not because of the bank and costs and things like that but because actually those people are our customers too. I'm talking about the changes to the economy. We have been really outspoken and tried to contribute, whether it is with the BCA or any kinds of government bodies, to talk through, 'What are the implications of this for the economy in terms of jobs, the nature of work, training and development, university education et cetera, and what is our role?' I don't think it is our role to just ignore it. We are a large employer. We need to think through: 'How do we manage that transition? What is our role in terms of retraining and changing skills? What is our role in being more involved with the tertiary education sector and making sure that the right skills in data, software engineering et cetera are coming through and that we are sending those right signals?'

Mr HOGAN: I will do a deal with you. You offered before that I go into some of your branches. I'll do that. You come and look at some real estate for a call centre.

Mr Elliott : Okay. Done.

Mr HOGAN: Thank you.

Mr CRAIG KELLY: Mr Elliott, does your bank have a specific policy when it comes to lending for a proposed new coal-fired power station in Australia?

Mr Elliott : We have a policy around the financing, essentially, of fossil fuels, yes. Yes, we do. And that is publicly available. It essentially hasn't changed in some period of time. It is pretty robust.

Mr CRAIG KELLY: Does that set an emissions limit for that particular coal-fired power station?

Mr Elliott : Yes.

Mr CRAIG KELLY: Do you know what that is?

Mr Elliott : It is 0.8.

Mr CRAIG KELLY: And if it was 0.801, and it was an important infrastructure project for the nation, and it was important to get electricity prices down and to make sure we didn't have blackouts, and if it was stacking up as a profitable venture, from the fact that it was 0.801 you would not finance it?

Mr Elliott : No. Look, they are policies. It is no different from some of the questions we were talking about before. There is a danger in having narrow, single metrics driving things. We have to think of all sorts of factors. We take into account all of those factors. So, no, we don't blindly follow that. But that is a hypothetical case. We are not presented with many of those today.

Mr CRAIG KELLY: Has anyone come to you in recent years with a proposal to finance a new coal-fired power station?

Mr Elliott : Not a conventional coal station, no.

Mr CRAIG KELLY: But if someone came to you with a proposal for a new coal-fired power station, and it was around 0.8, being high intensity and low emissions, you would be prepared to look at it?

Mr Elliott :We support the transition of the economy from fossil fuels to renewables, in general. We can discuss around timing. We think that's a good thing. We're a bank. We need to make sure that when our customers are making investments and we lend to them that we have the prospect of getting the funds back for our shareholders. One of the ways we do that is to look at the risks associated with that project. Unfortunately, today, one of the risks, in the area of sovereign risk, is understanding policy changes that will affect the economic prospects of those plants. The reality is, the kinds of plants you're talking about today are long-term and require huge amounts of money. So policy certainty is really what's important in evaluating those things.

Mr CRAIG KELLY: What sort of policy certainty would you be looking at when you're considering a proposal to finance a new coal-fired power station?

Mr Elliott : I don't know the details. As I said, I can't remember the last time somebody came and asked for a program. It's not something we get asked about a lot. We take every customer at face value. And we look at that. One other thing we take into account is our own risk appetite. We already have an exposure to the coal industry. I have to make sure that our shareholders' funds are balanced and we get a decent spread of risk. I think I'm on record as saying I think we have a sufficient exposure to coal. We're one of the largest, if not the largest, of the major banks. I find it hard to imagine we'd want to increase that anytime soon.

Mr CRAIG KELLY: You don't have a specific policy regarding investment in coalmines, for the calorific value of the coal, as Westpac do.

Mr Elliott : Not to my knowledge. We have an environmental policy that talks about emissions as opposed to calorific content.

Mr CRAIG KELLY: So if someone came to you with a proposal to develop a coalmine in the Galilee Basin, you would look at it on its full merits, rather than just rejecting it outright.

Mr Elliott : Yes. We don't have any really simplistic limits to say, 'We don't do that area.'

Mr CRAIG KELLY: Even in your limit of 0.8, you said there's a little bit of flexibility around that.

Mr Elliott : Yes.

Mr CRAIG KELLY: It's not written in stone and handed out to every manager in the morning.

Mr Elliott : No. But it is our intention to meet that requirement. It's not 'a soft target and we do it when it suits us'; it's our intention to meet that target. But to your point, there are always other issues. Some years ago, when I was running the institutional bank, I remember a situation in Western Australia where they were facing some power issues, and we were asked by a customer of an existing conventional power plant to step up and help the financing. It did not meet that requirement. We took a balanced view that it was the right thing to do for the community. So we have a balance to take into account.

Mr CRAIG KELLY: When you look at the whole risk of the bank, across the board, across different industries, industries that have very high electricity use in this nation and are internationally trade exposed, is that something you have concerns about, because of the increasing cost of electricity in the nation?

Mr Elliott : Yes. I can tell you today that when we sit with mid-sized customers, not the total big end of town, if we sit around and have a roundtable discussion, things come up. It is absolutely the No. 1 issue that comes up around energy costs, in terms of the impact it has. There is no doubt that that has, and that has an impact on our ability to assess the risk of lending to customers because, clearly, like lending to households, we have to have a good understanding of what the expenses of running these businesses are. The less predictable they are, the more difficult it is for us to lend.

Mr CRAIG KELLY: An Australian business that has energy costs, specifically electricity, as a high percentage of their cost of production, that increases the risk factor and therefore can increase the potential, your ability to loan to them. And at what rate?

Mr Elliott : Again, it's hypothetical. All else being equal, which is never the case, yes, that would be absolutely reasonable. For any business that has an unpredictable cost base, that's of material, we have to take that into account.

Mr CRAIG KELLY: It's something that adds to the risk—

Mr Elliott : Absolutely.

Mr CRAIG KELLY: and, therefore, when you're weighing it up as to what margin you may be able to loan at, electricity is a significant concern.

Mr Elliott : Yes, of course.

Mr CRAIG KELLY: Do you have concerns about the viability of businesses that you're currently loaning to because of the electricity focus?

Mr Elliott : Not to my knowledge or where I can point to customer A, B or C and say there's a problem. We have tens of thousands of customers.

Mr CRAIG KELLY: But your overall loan book, you would say, would be a financial—

Mr Elliott : When we think about our portfolio, we look at industry sectors and things and economic factors. Is it a factor we think about when we look at our overall portfolio and say 'what could happen if'? Yes, we do, and we try to understand that, just like we think about climate change or what if interest rates change, et cetera.

Mr CRAIG KELLY: On another subject: if I were to transfer $10,000 in English pounds to someone in the UK, how much would you charge me?

Mr Elliott : If you walked into a branch, we'd charge you $32—I think that is roughly the number. If you do it online, if it's $10,001 we charge you $10. If it's $10,000 or less, it's $18. That's the fee that we charge people.

Mr CRAIG KELLY: How is that fee competitive?

Mr Elliott : It's a competitive market. The other banks are there or thereabouts. We try to be competitive on that one. There's a wide range of new entrants—people like OzForex and TransferWise, who are new here—who provide a different service. I will say that there's a difference here, and people have been comparing apples and oranges. It's a very different service if you walk into a branch and have face-to-face service. The other benefit that bank transfers have is they are fast. When we transfer money from an account to another account, the international bank network makes that transfer much faster typically than other providers. We have a lot of controls around that. But we're comfortable we're competitive.

Mr CRAIG KELLY: There was a report in The Australian—you probably saw it—last week that made comparisons of costs of foreign exchange transfers between the Australian banks and other banks in the US and in Germany. They gave the example of transferring pounds to a British bank. Do you agree with the numbers in that report?

Mr Elliott : No. In fact, there's a new entrant in town. I would say they have got a very good PR strategy, and good on them—that's why it's a competitive market. They're out there and they're pushing their product. They've got a different level of service.

Mr CRAIG KELLY: What I was talking about was the comparison between the Australian banks, the German banks and the US banks of the cost of doing a virtually identical transfer.

Mr Elliott : After reading that report, as you would imagine, I asked—and we went and did the maths—how on earth would these numbers come about? They don't reconcile with what our customers experience at ANZ. I don't believe that that's a fair comparison. I haven't seen where they got their data from, but I think they're comparing apples and oranges in that review.

Mr CRAIG KELLY: They're comparing making a $10,000 transfer to a British bank account. They're looking at the cost of German banks, which charge less than 50 euros, which include a 0.3 per cent mark-up. They're talking about the US banks having an average mark-up of three per cent, but the Australian banks being around 4½ to six per cent.

Mr Elliott : They are not numbers we recognise, in terms of our offering.

Mr CRAIG KELLY: So you believe, currently, the cost of transferring foreign exchange in Australia is comparable with other banks in other countries?

Mr Elliott : Again, I don't know how they chose that number from Germany, et cetera. I know that the numbers they're quoting for what it costs an ANZ customer are not correct. I have to assume there are questions over all the data in that. But I don't know. I'm worried about what we charge our customers. I believe we're competitive.

Mr CRAIG KELLY: There's the disclosed fee, which is up-front. It's measured in dollars. But isn't a lot of the cost of the transactions for any customer the exchange rate that you're actually giving them?

Mr Elliott : Absolutely, yes.

Mr CRAIG KELLY: It makes it very hard for customers to compare apples with apples on transactions.

Mr Elliott : I don't know about that. You're absolutely right on the premise that there is a—

Mr CRAIG KELLY: We want you, as a bank, to be profitable and pay your tax so we, the government, can get it and spend the money. There's nothing wrong with you making a profit. But part of the profit you make in recovering your costs is on the dollars that you charge for the transaction, and part is also on the margin on the foreign exchange.

Mr Elliott : That's absolutely true. The question here is about transparency. A customer will know with certainty what the rate they are getting, in terms of the transfer, is—for example, buying pounds at what rate. Transparency is remarkably high. You can go online and in literally seconds find out what the currency rates are, what the midrate is—like a wholesale price—and where there are different providers. It's pretty simple. And, you know, good on them. There are new entrants, people like OzForex—

Mr CRAIG KELLY: The FX trading rate at the moment for the US dollar might be 0.7485321, or something like that. You think that's available?

Mr Elliott : Absolutely it's available—yes.

Mr CRAIG KELLY: What do you suggest of proposals that have been made that you would have to make some informational disclosure about that margin when you're offering that transaction to a customer?

Mr Elliott : Well, as I said, we disclose, today, the price that people pay. The wholesale foreign exchange market is a highly volatile and moving one; it's literally moving in not even seconds but microseconds. So, at any point in time, it's not quite as simple as it sounds. But we disclose exactly what the rate is, and people are free to search other banks and other providers—internet, local, international—to decide whether they want to deal with ANZ.

Mr THISTLETHWAITE: You mentioned policy certainty regarding energy policy in Australia. It appears to be an issue that's peculiar to Australia at the moment. If you look at Europe, they have a clear pathway. They accept that climate change is occurring. They accept that their nation needs to do more to reduce carbon emissions and to increase renewables. They have a clear pathway. They have mechanisms to achieve that through an emissions trading scheme. The same can be said for South Korea. The same can be said for Canada. China's moving that way now. New Zealand, our closest neighbour, is moving that way. Are you saying that it would be beneficial for the finance sector, in looking to fund energy projects and businesses in this country, if we had a similar policy certainty—in other words, a clear pathway—to achieving emissions reductions and increasing renewable energy in our country?

Mr Elliott : It's easier for us to provide financing at a competitive rate when we can model the future prospects of a business with a higher degree of certainty. Any policy or taxes, any kind of impacts on that business—the more certainty we have around that, the easier it is to model, irrespective of what the policy is, per se. Absolutely, it's a factor. The less certainty we have—it's really hard to know whether business A or business B is viable. How do we lend to that business if we're not really sure what might change in the future?

Mr THISTLETHWAITE: The Chief Scientist recommended to the government—twice now—that they should establish a clean energy target to provide that certainty of policy. It's fair to say, then, isn't it, that the government's inability to make a decision on that is harming the doing of business in Australia?

Mr Elliott : That's an issue for the government. From a bank's point of view, we would prefer a level of certainty or a level of predictability.

Mr THISTLETHWAITE: You mentioned that, in assessing borrowing or lending for a new coal-fired power station proposal assessment of risk, in the current environment, in terms of the way the rest of the world is moving—away from dirty, polluting coal-fired power to renewables—that would be a risky investment, wouldn't it?

Mr Elliott : We take into account two things. As I said, we do some predictions around the cashflows of that business, what that looks like. But one of the factors will be: 'Well, given they're generally long-term, what if government policy changes in that time? What if community expectations change? What if, suddenly, those businesses become unacceptable?' That changes our model. Again, it goes back to the certainty issue or predictability. Those things are of concern.

Mr THISTLETHWAITE: Given that you're talking about billion-dollar investments, you're talking about long planning, lead-in and construction times.

Mr Elliott : Yes.

Mr THISTLETHWAITE: From inception to commissioning, you're talking at least four or five years. That makes it even riskier, doesn't it?

Mr Elliott : Yes.

Mr THISTLETHWAITE: Thank you. In terms of foreign exchange and trading: in March 2017, ASIC announced that they'd accepted an enforceable undertaking from ANZ in regard to some inadequacies in your foreign exchange business. I don't think I need to go into the details; you're aware of this issue.

Mr Elliott : Yes, we are.

Mr THISTLETHWAITE: I want to know what happened to those traders that were involved in that conduct.

Mr Elliott : They're no longer with the bank.

Mr THISTLETHWAITE: Okay, so were they sacked or did they resign?

Mr Elliott : The recollection, again, is that largely they left the bank at the time that investigation was being undertaken.

Mr THISTLETHWAITE: Okay. Do you know if they're working elsewhere now?

Mr Elliott : My knowledge of some of the more senior ones is that essentially they're self-employed.

Mr THISTLETHWAITE: Did ASIC launch proceedings against them? Were they prosecuted in any other forums?

Mr Elliott : Not to my knowledge, no.

Mr THISTLETHWAITE: Were any customers or any clients worse off as a result of this?

Mr Elliott : That's certainly not what we found. Obviously, that was our primary objective—to go back and ask, 'Has there been any unintended or malicious harm to any customers?' Our investigations suggested that that was not the case.

Mr THISTLETHWAITE: So this particular issue and the ASIC work followed on from another area where ANZ was involved in conduct that resulted in fines—I think it was $9 million. There was a Federal Court fine for attempted cartel conduct in relation to manipulation of the Malaysian ringgit in 2011. Again, that involved traders. I assume again that they either resigned or were dismissed?

Mr Elliott : Yes.

Mr THISTLETHWAITE: You're currently involved in these proceedings brought by ASIC in respect of the bank bill swap rate manipulation?

Mr Elliott : Yes.

Mr THISTLETHWAITE: Given that you've been involved in all three of these actions, do you think there is a potential problem in ANZ with these sorts of issues within your organisation? And has the board looked at this and done anything about it?

Mr Elliott : Clearly, we have had issues and we need to change policies, processes and people to make sure that these things are dealt with and that they don't happen again. Absolutely, we have changed the way we run the bank. We've changed the people who run the bank and changed some of our policies around that. I'm confident that we are in a far, far better position today. I can't guarantee that things won't go wrong in the future, but that's what we're working really hard on.

Mr THISTLETHWAITE: Do you think that there is an issue—not only in Australia but particularly in developed nations—in the conduct of some of the people who work in these markets? Some of the jargon that you hear around what they do is really akin to gambling: 'We bet that the Australian dollar will do this or will do that. We backed a particular future position on a currency,' or something like that. Do you think that's a problem in terms of the culture not only within banks but in other financial service providers and financial stockbroking firms? That, really, it's becoming gambling: they're using other people's money—essentially, with their consent—to gamble on positions in foreign exchange markets, equity markets, shorting stocks and these sorts of things? Is that an issue that perhaps we should be looking at from a regulatory perspective?

Mr Elliott : I think we do have regulation in place around that. I think, actually, that the industry has come a long way. In fact, what you describe is really something—and I'm talking globally here, including in Australia—that was very prevalent in the eighties and nineties. I think the industry has matured incredibly since then. We have far more controls in place.

For example, we monitor what people say; we never used to do that. We record phone calls. We monitor what people are saying, what they're talking about in chat rooms and what they're doing online to make sure that we don't see that kind of behaviour. It's certainly not something that we run as a business—to say that at ANZ we have people who gamble, using your terms. That's not right and it isn't what we do in terms of the prosecution of our business.

Mr Hodges : Each of these people have limits that they operate within and we have systems to pick up if there are any breaches in those limits. And at the overall level of the business we have value-at-risk measures so that we can understand where those sit at any particular time of the day. I think the sophistication around that, as Shayne said, is substantial and that the monitoring is really close and tight.

Mr THISTLETHWAITE: But when it all falls apart in one market, doesn't it just move to another? Essentially, didn't it just move to the housing market with the global financial crisis—the residential mortgage-backed securities?

Essentially, people were betting on house prices continuing to rise, particularly in the United States, over a long period of time, bundling up these mortgages and selling them as securities—people just, basically, bet on the fact that they thought that things were going to continue to rise. We have a crash in one market, we say we learnt our lesson, the regulators come in, we do a few things and it just moves to another market. The same thing happens: it crashes again and then we introduce further regulation.

Mr Elliott : That's why we have due process and that's why we have regulation. I think Australia should be proud of the fact that it's a well-regulated financial system and we didn't suffer from the things that you're talking about. Does that mean things are perfect? No, clearly, and clearly we can improve. That's why we have committees like this—to constantly challenge us and to make sure that we are improving. I'm confident that we are improving. I'm confident that the Australian system is well managed, actually, and well regulated. If you go and talk to global regulators about APRA, the RBA et cetera, these are people held in high regard and globally seen as best practice in many ways. So I think we should feel confident in the system. There are always going to be issues—and there have been. Look, I wish we didn't need a BEAR. We shouldn't need one. We shouldn't need regulation to keep us operating ourselves well, but I understand the need for it. We are improving, we're focused on doing the right thing and, again, as I said, I think we should be proud of the system that we have.

Mr THISTLETHWAITE: I'm not sure I agree with you that we didn't suffer here in Australia in the wake of the global financial crisis, but I take the point—

Mr Elliott : Not to the extent that others did.

Mr THISTLETHWAITE: Plenty of people lost on their superannuation funds.

Mr Elliott : I didn't mean to be dismissive of that; I'm just referring to the system.

Mr THISTLETHWAITE: I want to go back to the foreign exchange fees that Mr Kelly mentioned. You pointed out that you disclose up-front the fee that you charge for the actual transaction, but you make money on the difference between the exchange rate that you do the transfer at and the exchange rate that you charge the customer at as well, don't you? It's called a mark-up.

Mr Elliott : We're a wholesaler and a retailer, and, just like any business, there's a wholesale price for our product—British pounds in that case—and there's a retail price. The wholesale price is because we're transacting at huge volume. So, yes, there's a difference in those prices. But that's no different than supermarkets and the difference between the wholesale price of milk and the retail price of milk. Yes, there is a difference. The important thing here is that people know what they're getting and they know what they're paying.

Mr THISTLETHWAITE: But the difference at the supermarket is that, if you go in and buy a litre of milk, you know how much you're paying for it and you pay for that. It says how much it is. But, if you do a foreign exchange transaction with a bank, the fee for the transaction's disclosed but the mark-up on the actual exchange isn't often disclosed, and that's where people get bitten.

Mr Elliott : With all due respect, no, we do disclose the rate of foreign exchange. When you go to the supermarket, they don't tell you how much money they're making on the pint of milk. They tell you what the pint, or the litre, of milk's worth. It's the same. We tell you what exchange rate you're getting. Yes, you're right: we don't tell you the difference between that and our wholesale price, but I struggle to see anywhere in the economy where that is the case.

Mr THISTLETHWAITE: Would you have an issue with disclosing that to the customer so that they're given, if you like, a total figure of how much—

Mr Hodges : They get the total figure already.

Mr Elliott : They are given the total figure. We tell you how many British pounds you are actually going to get after fees, and you can go and shop around. You can ask different banks; you can go online. It's your choice.

Mr THISTLETHWAITE: But it's like a lot of banking products. You're really taking advantage of the inelasticity of the product. In other words, if someone has $10,000 in an ANZ bank account and they want to transfer that to a UK bank account, you say, 'They can shop around and do it elsewhere,' but that would require, potentially, opening another account in another bank or another organisation, transferring the money there, for which they'll potentially incur a fee, and then transferring it overseas to avoid paying the higher cost. You're taking advantage of the inelasticity of the transaction in that people won't move—

Mr Elliott : I don't believe that we're taking advantage of it. We offer a really good service, as I said, but the reality is it's really simple, actually. I've used OzForex as an example. If you want to use their service, it's really simple to set up an account and transfer the money. There are no barriers to that. People have choice. That's a good thing. There are new competitors coming into the market all the time and new technology providers. That's good. It keeps us on our toes, and I'm sure that fees will continue to be competitive in the future.

CHAIR: I have just a couple of final questions. In relation to open data, the King & Wood Mallesons partner Scott Farrell is currently preparing a road map for the implementation of the open banking data regime. I just want to understand if you had been engaging with him, so to speak, or had any input into that process. I think, from memory, that last year you were supportive of this initiative. I just wanted to understand what you're doing about it at present.

Mr Elliott : Sure. We remain supportive. We take the really simple view that the data we're talking about belongs to our customers. It's our responsibility to make it accessible to them so that they can get a better deal, perhaps. In terms of Mr Farrell, I haven't met with him personally, but, to the extent that he may well be engaging with our team, we're totally open. What we're focused on here, as we've tried to be on a number of these issues, is not arguing about the intent. What we're trying to do is just make sure that things are practical and thought through and there are no unintended consequences. We're moving ahead.

CHAIR: Okay. The Treasurer recently announced a change in relation to digital currency in Australia and the taxation of digital currency, where previously there was a scenario where people might pay GST on the transfer into the digital currency and then also when they seek to use that digital currency to purchase a good or service—it's actually double taxation. That's being amended. I was just interested in your view on that issue and also more generally on digital currency. One of your international colleagues, Jamie Dimon at JP Morgan, had some fairly strong words about bitcoin, and I was just interested in whether ANZ has a view on digital currencies.

Mr Elliott : Not a particularly well-thought-through one, I'd have to say. The question about cryptocurrencies is: are they a good or are they a currency, a means of transfer? That has implications for tax, so that's fine. I think the question here is: is there a place for different means of exchange? Any exchange—the piece of paper I have in my wallet that has '$50' written on it—is based on trust. I accept that people will accept it and will exchange goods for it. If people are willing to take a cryptocurrency, good on them. Obviously it has to do with trust and the regulation that sits around it. So I think there is a role for it.

I think, personally, it's overdone in terms of its real role in the economy. There's little or no demand for it from customers, because the legal tender we have under the auspices of the RBA is perfectly good and works really well and is pretty low cost, actually, in terms of operation. But that doesn't mean that cryptocurrencies won't evolve, and there'll be new things that come out of it. Essentially, as you know very well, that's exactly where this whole blockchain idea has come from. It's come from this currency idea, and now it's morphed into: 'Gee, there may be ways we can actually change the way we operate businesses using blockchain technology.' So I think it's a fast-evolving space, and we keep an eye on it.

CHAIR: So presumably you don't have any exposure, so to speak, to digital currencies?

Mr Elliott : We don't buy and sell them or anything like that. We are certainly invested in blockchain as a technology, trying to learn, but not as a cryptocurrency, no.

CHAIR: Okay. Presumably that's not something that you would be likely to do—to in any way expose the bank to the fluctuations in digital currency?

Mr Elliott : No, we have no ambitions to do that.

CHAIR: Thank you. Just lastly, you paid $3 million in relation to this rigged foreign exchange issue for financial literacy courses along with Westpac earlier in the year. I want to ask the same question I asked Mr Hartzer. Because of that unlawful activity, have there been any consequences for executives at ANZ—leaving aside the individuals who were involved, for whom I understand there were consequences? For the executives to whom they reported, have there been any consequences?

Mr Elliott : Yes, in the sense that the executive to whom they reported is no longer with the bank either. Again, it's not reasonable or fair to stretch that to say that that was the reason for that executive to leave, but clearly there's been a change of management within that entire business. Things like that were a factor in those decisions.

CHAIR: So the decision to move that person on was after the bank became aware of these issues?

Mr Elliott : Actually, yes, it was after awareness. It was before the final settlement and agreement with ASIC.

CHAIR: Okay. That brings us to our closing time, so thank you for your attendance 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.

Resolved that these proceedings be published.

Committee adjourned at 16:15